Peter Gray, Head of KPMG Corporate Finance's Energy and Natural Resources Team quoted in Project Finance

June 30, 2007

In the June 2007 edition of Project Finance, KPMG Corporate Finance had an opportunity to contribute to Denise Bedell's article, "When bushel comes to shove. The boom times are over for US ethanol. With corn prices rising and construction prices up, equity is becoming increasingly scarce for new projects."

Peter Gray,  Head of KPMG Corporate Finance's Energy and Natural Resources Team, was interviewed with respect to his thoughts as to how new ethanol projects  will be affected with the rising corn and construction prices.

Bedell writes:  Peter Gray, managing director at KPMG Corporate Finance, adds: “Projects without ready access to corn will see tightening margins and will have a tougher time accessing the markets.”

Gray says that the trend toward increasing scale and size in ethanol projects has brought in the bigger banks. “The big banks have greater scrutiny on deals than traditional agricultural lenders and regional banks. They take a completely different approach than large project finance banks,” he says. Larger projects have been the cause of supply that is beginning to outstrip demand, and will affect investors’ appetite for risk. “This will lead to fundamentally tightening margins and could mean further increasing of corn prices.”

Gray says that given current market conditions, the agricultural lenders have an advantage in terms of their degree of market sophistication and understanding of the sector. “They have been involved in ethanol financing for a longer period of time,” he says. “They have more experience in commodities hedging for feed and corn prices, and they have a better ability to analyse and accept risk for the biofuels industry.”

Gray at KPMG says that the market has been too focused on the ethanol space. “The degree of support has been fairly focused on one area of the biofuels arena, and that has had significant ramifications. We are seeing it already in increased corn prices and increasing construction costs. And the big oil companies are not really getting behind this, aside from Marathon,” he notes. “The next period will be one of consolidation. At the end of that we will see ethanol come through as a much more viable industry.”

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