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Supply glut scuppers GTL

Created:
9 July 2008
Written by:
Graeme Davies

US ethanol refiner GTL Resources may have broken into profit for the first time, thanks to a strong first full year of operation at its refinery in Illinois, but margins have come under sustained pressure from rising corn prices and the ongoing slump in the ethanol price.

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GTL operates an active hedging policy, which is helping to mitigate the worst effects of the soaring cost of feedstock. It's also actively trying to reduce energy costs at its plant, but latest results show that it hasn't been able to keep pace with rocketing input costs, as we suggested might be the case when we advised readers to sell shares in May.

Our worry that the correlation between ethanol and oil prices was breaking down was also confirmed, thanks to a huge expansion in supply from mid-west America. This means that even the better operators - and GTL certainly ranks among these in terms of its output, efficiency and close proximity to the Chicago metropolis - are struggling to keep margins in positive territory.

TIP UPDATE

Sell

Despite the subdued ethanol price, GTL is boldly pushing on with an expansion of capacity in the belief that the glut of extra supply will wane later next year. Shares have fallen by a third to 22.5p since our earlier advice (Sell, 33.5p, 15 May 2008) and remain a sell until market conditions improve.

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