DuPont (NYSE:DD) has had its eyes on the biofuels market for long. Being an indirect participant in the market so far, acting as a supplier of seeds to farmers that sell corn crop to ethanol producers, the company has experienced the strong growth seen in the renewable fuels market over the last decade. As the company inches closer to commercializing its cellulosic ethanol and biobutanol products, we take a closer look at the market opportunity and strategic importance of the industry for DuPont and its plans to tap this opportunity.
DuPont generates revenues by supplying high-performance materials and chemicals, electronic materials, high-performance coatings and agricultural products to industries and consumers worldwide. Most products manufactured by DuPont are used as raw materials by other industries, making it a predominantly B2B (business-to-business) based company with the exception of the agriculture and nutrition divisions.
Our $64 price estimate for DuPont is almost in line with its current market price.
What Are Biofuels?
Biofuels are derived from biomass (living or recently living organisms) – these have been around for a long time now, but cheap gasoline and diesel prices kept them away from large-scale commercial use during the 20th Century. However, higher oil prices led to a steep growth in biofuels production during the past decade. Global biofuels production grew more than 400% between 2002 and 2012 to more than 60 million tons of oil equivalent or 28 billion U.S. gallons. 
Geographically, biofuel production is rather concentrated, with the U.S. and Brazil accounting for ~68% of the global biofuels production. European countries make another 16% of the global supply. While corn-based ethanol is the most popular biofuel in the U.S., sugarcane-based ethanol in Brazil and biodiesel derived from rapeseed oil is widely used in the Europe. 
How Big Is The Market Opportunity?
The global biofuels market is currently valued at around $90 billion.  High crude oil prices, government mandates on the use of biofuels due to increased focus on reducing carbon emissions as well as improving energy security, and technology advancements driving cost reductions are some of the key factors driving the rapid growth in the biofuels market. More than 50 countries, including some developing countries as well, have now adopted biofuels blending mandates and targets such as the Renewable Fuel Standard in the U.S. The demand for biofuels will only increase as more and more countries adopt such measures. 
In the U.S., biofuels make up more than 7% of the total transportation fuel consumption.  Almost all gasoline in the U.S. today is blended with 10% ethanol (E10), the maximum level approved for use in all cars and light trucks.  Assuming that the share of these renewable sources of energy would grow to similar levels in the global market for transportation fuels as well, we can conservatively estimate the global demand for biofuels to more than double over the period of next 10 years. It should be noted that this estimate does not take into account the effect of potential technological advancements in the industry that could lead to large-scale commercialization of second-generation biofuels, and boost demand even further.
On the other hand, declining gasoline consumption in the developed world due to improving fuel efficiencies and the growing use of electric and natural gas fuelled vehicles, are some of the key downside risks to the above estimate. Moreover, potentially lower crude oil prices due to growing supplies from non-OPEC countries and slower than expected demand growth from the emerging markets could also impact the economic feasibility of biofuels negatively.
What’s DuPont Doing To Tap This Opportunity?
Entry into the biofuels market makes sense for DuPont, given its expertise in the agricultural products market that is the main source of feedstock for biofuels production. Furthermore, the company can also leverage its expertise in the biomass fermentation enzymes market, as these products play a vital role in increasing the efficiency of biofuel production process. Not only this, sufficient exposure to the advanced biofuels market can also help the company effectively hedge against slower demand for corn-based ethanol, which could potentially lead to lower prices for corn seeds sold by its Pioneer division.
Therefore, DuPont is planning to break into the second-generation biofuels market through two major projects. The first one is based on converting corn stover (leaves and stalks of corn left in the field after harvest) into fuel grade ethanol. The key advantages of this approach over corn-based ethanol production are that it provides much higher reduction in greenhouse gas emissions, and does not impact the food cycle as much. The production pathway finalized by DuPont uses Danisco enzymes to break down the cellulosic biomass into its component sugars followed by fermentation and distillation processes. A commercial plant based on this technology with the production capacity of 30 million gallons per year is currently under construction by the company in Nevada, Iowa, and is scheduled for start-up in mid-2014. 
The second project is a joint venture with BP called Butamax Advanced Biofuels, which is aimed at commercializing corn-based iso-butanol. Higher energy content and volume blending ratio with gasoline, and the ability to leverage the existing infrastructure such as corn-based ethanol plants, pipelines, storage tanks and fuel stations are some of the key advantages of Butamax biobutanol over ethanol. DuPont recently announced setting up a joint venture with BP to retrofit an existing ethanol plant in Minnesota to start the commercialization process for this product. However, EPA approval for commercialization of the fuel is still pending. 
We believe, that if DuPont is able to successfully break into the advanced biofuels market with an economically viable solution, it could boost the company’s future growth prospects significantly.Notes:
- Global Biofuels Production, bp.com [↩] [↩]
- Global Biofuels Market Could Double To $185 Billion by 2021, cleantechnica.com [↩]
- Renewable Energy In Transport, iea.org [↩]
- U.S. Bioenergy Statistics, ers.usda.gov [↩]
- Biofuels Issues and Trends, era.gov [↩]
- DuPont Cellulosic Ethanol, biofuels.dupont.com [↩]
- Butamax, butamax.com [↩]