DuPont’s Biofuels Opportunity And Plans

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DuPont (NYSE:DD) has had its eyes on the biofuels market for a long time. 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 past several years. 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 annual sales revenue of around $36 billion 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. Its consolidated adjusted EBITDA margin stood at around 20% last year. We currently have a $70/share price estimate for DuPont, which is around 3% below its current market price.

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What Are Biofuels and What’s Driving The Growth?

Biofuels are renewable fuels 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 and regulatory changes have led to a steep growth in the global demand for biofuels since the year 2000. According to BP Plc.’s (NYSE:BP) latest statistical review of world energy, global biofuels production has grown at more than 16.3% CAGR between 2000 and 2013, and stood at around 65.3 million tons of oil equivalent in 2013. 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 lower production costs, are some of the key factors driving the rapid growth in the global 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. [1]

Currently, biofuels make up more than 7% of the total transportation fuel consumption in the U.S., as 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. If we assume that the share of these renewable sources of energy would grow to similar levels in the global transportation fuels market, we can conservatively estimate the global demand for biofuels to more than double over a period of the next 10 years. And this estimate doesn’t even 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. A recent report by Allied Market Research forecasts the global second-generation biofuels (advanced biofuels) market to reach $23.9 billion by 2020 from just $1.4 billion currently. However, declining gasoline consumption in the developed world due to improving vehicle fuel efficiencies and the growing use of electric and natural gas-powered vehicles, are some of the key downside risks to the above estimate. Moreover, a sustained decline in global crude oil prices due to a robust non-OPEC supply growth and a slower than expected demand growth from the emerging markets could also impact the economic feasibility of biofuels negatively. [2]

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 a much higher reduction in greenhouse gas emissions and it 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. The company is currently constructing a commercial plant based on this technology in Nevada, Iowa. The plant with a production capacity of 30 million gallons per year is expected to start-up by the end of this year. [3]

DuPont’s 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. In October 2013, DuPont’s joint venture with BP announced its decision to retrofit an existing ethanol plant in Minnesota to start the commercialization process for this product. The first phase of the retrofitting project was completed in August last year and the company’s CEO, Paul Beckwith, announced that the project would start producing iso-butanol by the end of this year or early next year. We believe, that if DuPont is able to successfully break into the advanced biofuels market with an economically viable solution, it could significantly boost the company’s future growth prospects. [4]

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Notes:
  1. BP Statistical Review of World Energy June 2014, bp.com []
  2. Second Generation Biofuels Market Expected To Reach $23.9 Billion By 2020, biofuels-news.com []
  3. DuPont Biofuels Solutions, dupont.com []
  4. Butamax and Highwater Ethanol Complete Phase 1 of Biobutanol Retrofit Project Including Installation of Novel Corn Oil Separation Technology, butamax.com []