Fuel ethanol subsidies will also look at food prices in addition to oil prices
In recent years, the fuel ethanol industry in China has faced significant financial challenges, with production companies losing several tons for every ton of sales. According to a report from Henan Tianguan Enterprise Group Co., Ltd. on December 4, the government plans to adjust its fuel ethanol fiscal subsidy policy again in 2008. This new policy will not only take oil prices into account but also consider food prices when determining subsidies.
Last year, the Ministry of Finance issued the "Implementation Opinions on the Development of Bio-energy and Bio-chemical Finance and Support Policies." The document outlined the establishment of a risk fund system and an elastic loss subsidy mechanism. When oil prices exceed the normal production reserve price of enterprises, the state will no longer provide loss subsidies. In such cases, companies are required to set up their own risk funds. However, if oil prices fall below the guaranteed reserve level for an extended period, the government will activate the flexible subsidy mechanism to compensate for losses.
Under the new flexible subsidy policy, the state will set a reference protection price based on domestic gasoline price fluctuations. If the price of fuel ethanol falls below this benchmark, the government will offer subsidies to help companies avoid losses. However, according to Tianguan Group, food prices—especially corn—still significantly impact production costs. Since the start of this year, global corn prices have surged, affecting the economic viability of fuel ethanol. Despite this, the outlook for fuel ethanol remains positive due to ongoing global energy shortages.
According to Tianguan Group’s analysis, the amount of subsidies provided to companies is expected to decrease over time as the government moves toward full marketization of fuel ethanol production. In 2007, the state subsidy per ton of fuel ethanol dropped to 1,373 yuan, a reduction of 255 yuan from 2006 and 500 yuan from 2005.
Since the introduction of ethanol gasoline in China, fixed-point fuel ethanol producers have received financial support due to the mismatch between gasoline and ethanol pricing. Fuel ethanol prices are set at 90% of the national gasoline ex-factory price, multiplied by a coefficient of 0.911. However, as international oil prices rose, domestic oil price adjustments lagged behind, while corn prices increased sharply. As a result, producing one ton of fuel ethanol now costs hundreds of yuan, making it difficult for companies to remain profitable without subsidies.
Currently, the main subsidized fuel ethanol producers in China include Jilin Fuel Alcohol Co., Ltd., Henan Tianguan Group, Anhui Fengyuan Biochemical Co., Ltd., and Heilongjiang China Resources Alcohol Co., Ltd. These companies continue to rely on government support as the industry transitions toward a more market-driven model.
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