I got this pdf from a smith barney friend today. I erased the 4 0f 6 pages of "disclosure" statements......here's the meat of the pdf....FWIW. - JT
CITIGROUP PORTFOLIO STRATEGIST February 23, 2006
See Appendix A-1 for Analyst Certification and Important Disclosures.
Chemicals
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P.J. Juvekar
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Ethanol — An Antidote to America’s Oil Addiction?
_ We have written a 30-page report exploring the
technology and opportunities behind ethanol and
biodiesel and their impact on the chemical industry.
We think Monsanto will be the biggest beneficiary,
and it remains our U.S. Top Pick for 2006.
_ Ethanol demand is projected to increase from 4
billion gallons today to 8 billion gallons by 2012.
The powerful momentum behind this growth leads
us to believe it could be a “game changer” in
energy markets.
Ethanol Is a Potential Game Changer for Our Names
Is ethanol the antidote for America’s “oil addiction”? If
not an antidote, at least it is a “nicotine patch” to help
kick the habit. We list our key takeaways below.
Ethanol Demand Set to Surge to 8 from 4 Billion Gallons — Based
on the recent energy bill mandate and our own analysis,
we estimate that U.S. ethanol consumption is likely to
surge to 8 from 4 billion gallons in the 2006–12 period.
E85, the 85% ethanol blend, is already offered at 556
U.S. gas stations, mostly in corn-growing states. An
increasing number of car models are offering the ability
to use an ethanol/traditional gasoline flexible fuel
combination. The powerful farm lobby and existing
U.S. agricultural subsidies also seem likely to ensure
ethanol growth.
There is also set to be a huge build-out in ethanol
production capacity over the next few years, to 6.4 from
3.6 billion gallons. Finally, the desire to curb U.S.
dependence on Middle Eastern oil as a matter of
national security is likely to play a critical role in
ethanol growth that should not be understated.
Currently, the U.S. imports roughly 6% of the gasoline
it uses. Roughly half of that could be replaced with
ethanol, according to our economists.
More Auto Companies Are Offering Flexible Fuel Models — We are
hearing increased buzz about ethanol as a primary fuel
source (in addition to its use as an oxygenate). As of
2003, the last year for which data are available, the
National Ethanol Vehicle Coalition estimated that more
than 2 million flexible fuel vehicles had been sold in the
United States. E85 vehicles (those that can run on 85%
ethanol blends, traditional gasoline, or a combination) are
now offered by the Big 3 auto manufacturers, as well as
by many international auto manufacturers. Indeed, 2005
was a year in which many of these vehicles made the
transition to become household names.
Figure 1. Projected Ethanol Demand Growth
(millions of gallons)
-
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
1980 1981 1982 1983 1984 198519861987 1988 1989199019911992 199319941995 199619971998 19992000 2001 2002 20032004 2005E 2006E 2007E 2008E 2009E 2010E 2011E 2012E
Source: Renewable Fuels Association and Citigroup Investment Research
Figure 2. Ethanol (E85) Models, Light Duty Vehicles
Daimler Chrylser General Motors - Chevrolet
Dodge Caravan Avalanche
Dodge Durango Impala
Dodge Grand Caravan Monte Carlo
Dodge Ram Pickup Silverado
Dodge Stratus Suburban
Ford Tahoe
Crown Victoria
F-150 General Motors - GMC
Grand Marquis Yukon
Lincoln Town Car Yukon XL
Taurus
Taurus Wagon
Source: Alternative Fuels Data Center
Brazil Has “Scored the First Goal” in Ethanol — Brazil stands
out as a model for ethanol production and usage, with
more than 20% of its transport fuel market derived from
ethanol, compared with a global average of just 1%.
Brazilian ethanol is produced from sugarcane, which
can be converted to ethanol for about $1 per gallon
(30% more cheaply than converting ethanol from corn).
There is currently no ethanol trade between the U.S. and
Brazil, but if U.S. trade restrictions change, there could
clearly be U.S. import demand.
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This article is excerpted from our weekly, Portfolio Strategist, February 23, 2006
Insights Industry
CITIGROUP PORTFOLIO STRATEGIST February 23, 2006
See Appendix A-1 for Analyst Certification and Important Disclosures.
Figure 3. Projected Ethanol Demand Growth
(millions of gallons)
2 00 4 2 0 05 E 2 0 0 6 E 2 0 07 E 2 0 0 8 E 2 0 09 E 2 0 1 0 E 2 0 11 E 2 0 1 2 E
E t h an ol p ro d uc t i o n ( m m g a l) 3 ,4 1 0 3 , 9 0 0 4 ,0 0 0 4 , 7 0 0 5 ,4 00 6 , 1 0 0 6 ,8 00 7 , 4 0 0 7 ,5 00
C o r n / E t h a n o l C o n v e r s i o n F a c t o r 2 .7 1 2 .8 0 2 .8 0 2 .8 0 2 .8 0 2 .8 0 2 .8 0 2 .8 0 2 .8 0
C o r n u s a g e ( m m b u s h e l s ) 1 , 2 6 0 1 ,3 9 3 1 , 4 2 9 1 ,6 79 1 , 9 2 9 2 ,1 79 2 , 4 2 9 2 ,6 43 2 , 6 7 9
A t C u r r e n t Y i e l d L e v e ls
A s s u m e d Y i e l d ( b u s h e l s / a c r e ) 1 4 8 1 4 8 1 5 0 1 5 0 1 5 0 1 5 0 1 5 0 1 5 0 1 5 0
E t h a n o l C o r n A c r e a g e ( m i l l io n s ) 8 . 5 1 9 . 4 1 9 . 5 2 1 1 . 1 9 1 2 . 8 6 1 4 . 5 2 1 6 . 1 9 1 7 . 6 2 1 7 . 8 6
T o t a l U S C o r n A c r e a g e 8 1 8 1 8 1 82 82 82 83 83 83
E t h a no l % o f U S C o r n A c r e a g e 1 1 % 1 2 % 1 2 % 1 4 % 1 6 % 1 8 % 2 0 % 2 1 % 2 2 %
A t E n h an c e d Y i e l d L e v e l s
A s s u m e d Y i e l d ( b u s h e l s / a c r e ) 1 4 8 1 4 8 1 5 0 1 5 5 1 6 0 1 6 5 1 7 0 1 7 5 1 7 5
E t h a n o l C o r n A c r e a g e ( m i l l io n s ) 8 . 5 1 9 . 4 1 9 . 5 2 1 0 . 8 3 1 2 . 0 5 1 3 . 2 0 1 4 . 2 9 1 5 . 1 0 1 5 . 3 1
T o t a l U S C o r n A c r e a g e 8 1 8 1 8 1 82 82 82 83 83 83
E t h a no l % o f U S C o r n A c r e a g e 1 1 % 1 2 % 1 2 % 1 3 % 1 5 % 1 6 % 1 7 % 1 8 % 1 8 %
Source: Citigroup Investment Research, Renewable Fuels Association, and U.S. Department of Agriculture (USDA)
Impact on the Corn Market and Agriculture Companies — The
proposed ethanol growth would translate into roughly
10 million acres of corn being used for ethanol today
rising to roughly 18 million acres in 2012, out of a total
83 million acres of planted corn. We think this growth
will arise from switching soybean acreage to corn and
from increased yield as a result of new biotech
technologies such as double and triple-stacked corn, as
well as from corn with high starch content (which is
good for fermenting into ethanol).
The beneficiaries include corn seed companies that have a
strong biotech effort: Monsanto (MON–$82.52; 1M;
Target Price $90), DuPont (DD–$40.99; 1M; Target Price
$49), and, to a smaller extent, Dow Chemical (DOW–
$42.82; 2M; Target Price $51). Monsanto, rated remains
our Top Pick in Agriculture. Monsanto has a high-lysine
corn hybrid, which imparts a higher starch content that is
then converted to ethanol. Additionally, Monsanto’s prime
focus is on yield-enhancing technologies to elevate corn
production. As a result of this biotech revolution, corn
yields have risen to roughly 150 bushels per acre in 2005
from 125 bushels per acre in 1996.
Figure 4. U.S. Corn Yields
(bushels per acre)
120
130
140
150
160
170
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005E
Actual Yields Trendline
Source: Citigroup Investment Research and USDA
Products such as Roundup Ready Corn Root Worm
traits boosted yields by as much as 30 bushels per acre
during last year’s drought in Illinois. DuPont has a
high-starch hybrid that is already commercial, as well as
two ethanol-related biotech traits in its R&D pipeline,
although both are in their infancy. One is in the early
development phase (three to six years away) and the
other is in discovery (six to 13 years away).
MTBE and Ethanol: Chicken or Egg? — Currently, 20 states
have imparted full or partial methyl tertiary butyl ether
(MTBE) bans. Initially, we expect that the phaseout of
MTBE by these states will accelerate the use of ethanol.
However, not all MTBE will be replaced specifically by
ethanol, as companies like Lyondell and Huntsman are
working on alternate products like ethyl tertiary butyl
ether (ETBE) and iso-octene to replace MTBE. But, as
alternative fuels like ethanol become popular, we think
they will accelerate the eventual demise of MTBE. The
MTBE saga has continued for much longer than we had
anticipated, but now political and environmental
momentum are gathering against it. Commercially, some
refiners, such as Valero, have already announced that
they will stop using MTBE in reformulated gasoline.
Figure 5. State MTBE Bans
Source: Citigroup Investment Research and American Coalition for Ethanol
— February 15, 2006
This article is excerpted from our weekly, Portfolio Strategist, February 23, 2006 |
