cs - global eth mkt

8/10/2019 Cs - Global Eth Mkt

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DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYSTCERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to dobusiness with companies covered in its research reports. As a result, investors should be aware that the Firm may have aconflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor inmaking their investment decision.

CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION Client-Driven Solutions, Insights, and Access

11 July 2014Global

Equity Research

Global Ethanol MarketsConnections Series

Demand Looks Set to Accelerate Bottom Line: In this Connections Series, our global team argues ethanol

demand is about to accelerate. Even in the US, the growing availability offlex fuel vehicles could lead to calls for higher ethanol blends later in thedecade, assuming longer term corn prices are favorable versus gasoline andthat infrastructure investments are made. Right now, US ethanol macroconditions are tastier than a corn dog at the Iowa State Fair (August 7-17 th).Corn prices are low and gasoline prices are elevated. In the US, thisfollowing wind could push GPRE higher over the next few months (we raise

our target to $40/sh). Celanese is attractively priced with longer term ethanolpotential. In Europe, we believe rising enzyme sales and the BioAg JV isalready priced into Novozymes shares. Our preferred enzyme play is DSM(Outperform $57/sh TP). In Brazil, our preferred name is Sao MartinhoSMTO3, but improvement is policy dependent.

Global ethanol demand to grow at CAGR of c5% over the next decadeto reach 35bn gal by 2022: After a review of ethanol policies across majorcountries, we expect global demand to grow to 35bn gal in 2022 from ~23bngal in 2013 due to higher flex fuel vehicle (FFV) adoption in US & Brazil andhigher ethanol blending mandates across RoW. We could be conservative.

US Has Potential to Grow Ethanol Demand: As flex fuel vehicles increasein the auto fleet, the US could accept more ethanol (on paper up to asubstantial 30bn gals vs 13.3bn today). 2 nd gen economics are not

competitive with 1st

gen yet trial data over the next 12 months remains keyto assessing the 2G competitive position. It is likely any near term upsideethanol demand surprise in the US would be supplied from corn.

Rising Global Demand Could Lead to Higher Corn Prices Later in theDecade: Ethanol demand is set to rise and supply could come from anumber of sources sugar cane, beets, corn, fossil fuels (Celanese), 2 nd gen technology. If global demand rises too fast, then the pull on corn couldaccelerate. Ethanol plant construction would be the lead indicator.

RINS, Were Still Expecting the EPA to Bow to Blend Wall Reality: Without changes to auto warranties the 10% blend wall is real. The currentRINS price of $50cts/gal implies the EPA mandate will create stress. Withoutstress, RINS should price closer to 0-20 cts/gal (depending on corn prices).

More Ethanol, Just What the Global Gasoline Market Needs: Engineefficiency is improving, natural gas vehicles are taking share, the globalcontent of crude is become more gasoline (naphtha) rich and ethanolproduction is rising. It is hard to get overly bullish on gasoline margins.

The Credit Suisse Connections Seriesleverages our exceptional breadth ofmacro and micro research to deliverincisive cross-sector and cross-borderthematic insights for our clients.

Research AnalystsEdward Westlake

212 325 [email protected]

Patrick Jobin212 325 0843

[email protected]

Mathew Waugh44 20 7888 0194

[email protected] Paternostro

55 11 3701 [email protected]

Christopher S. Parkinson212 538 6286

[email protected]

John P. McNulty, CFA212 325 4385

[email protected]

Robert Moskow212 538 3095

[email protected]

Chris Counihan44 20 7883 7618

[email protected]

Maheep Mandloi212 325 2345

[email protected]


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11 July 2014

Global Ethanol Markets 2

Focus ChartsExhibit 1: Global ethanol demand forecast Exhibit 2: Overall and 2G ethanol production forecast

4 4 56 7

810

13

1720

22 22 2223 24 25 26

27 2829 30

3235

0

5

10

15

20

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30

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40

2 0 0 0

2 0 0 2

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A n n u a

l e t h a n o

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US Brazil ROW

22 22 2223 24 25 26 27

28 2930

3235

0.0 0.0 0.1 0.1 0.2 0.4 1.01.5 2.6

4.7

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2 0 1 0

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A n n u a

l e t h a n o

l d e m a n

d -

b i l l i o

n g a

l l o n s

Total Ethanol Demand 2G ethanol production forecast

Source: EIA, Credit Suisse estimates Source: Thomson Reuters, Company data, Credit Suisse estimates

Exhibit 3: US ethanol demand forecasts with some FFVs Exhibit 4: Brazil ethanol demand forecasts

12.7 13.013.1 13.0 13.1 13.1

13.513.9 14.1

15.4

16.9

9.6% 9.9%10.2%10.2%10.3%10.4%

10.8%11.3%11.6%

12.9%

14.4%

7%

9%

11%

13%

15%

17%

8

9

10

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14

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18

2 0 1 2

2 0 1 3

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E t h a n o

l a s

% o

f t o t a l m o

t o r g a s o

l i n e

d e m a n

d

U S E t h a n o

l d e m a n

d , b

b g a

l l o n s p e r y e a r

US total ethanol demand (LHS) Effective blend ratio (RHS)

7.9

9.310.5 10.7 10.9

11.2 11.411.7 12.0

12.3 12.6

6.04.9 4.7

5.46.0 6.3

6.6 7.07.3 7.6

8.0

-

2.0

4.0

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8.0

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14.0

2 0 1 0

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2 0 1 9 E

2 0 2 0 E

B r a z i

l E t h a n o

l / G a s o

l i n e

d e m a n

d , b

n g a

l

Anhydrous Hydrous Gasoline

Source: Thomson Reuters Source: EIA

Exhibit 5: US Corn and ethanol prices have declined Exhibit 6: leading to higher US E thanol exports

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

$2.0

$3.0

$4.0

$5.0

$6.0

$7.0

$8.0

$9.0

Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

Corn US2, $/bu (LHS) Ethanol NY Harbor, $/gal (RHS)

(60)

(40)

(20)

-

20 40

60

80

100

120

140

Jan-10 Jul-10 Jan-11 Jul-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13

m m

g a

l p e

r m o n

t h

US Ethanol net exports

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates


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11 July 2014


Global Investment IdeasIn this report, we review the global ethanol market. We outline the investment thesis forrelevant stocks based on our updated ethanol forecasts. We show potential prices forRINS in the US depending on the mandate decisions taken by the EPA. We highlight thenegative impact which rising natural gas vehicles, ethanol, the rising naphtha content ofcrude and energy efficiency could have on the gasoline market over time. We discuss theoutlook for US corn prices (they could stay low for a while).

Equity Impacts By RegionUS Ethanol Producers

GPRE (N, TP $40): Large scale ethanol producer with diversification opportunities

Right now, US ethanol macro conditions are tastier than a corn dog at the Iowa State Fair(which you can visit August 7-17 th). Corn prices are low and gasoline prices are elevated,a condition that could remain for a while. In a separate note, as a result of marking tomarket the corn price outlook, we increase our GRPE Target Price to $40 and increaseour 2014/15/16 EPS estimates to $3.95/$4.32/$2.60 from $2.98/$1.88/$1.89. While thecollapse in corn drives the current excitement, GPRE has used self-help (corn oil, potentialalgae investments) to structurally improve the value extracted from a bushel of corn.GPRE has also diversified to more stable businesses protecting the base equity value.Depending on global adoption of ethanol, US producers have earned the right to now addcapacity. We believe the high corn prices over the last two years are behind us given (1)healthy growing conditions leading to improved yields, (2) increased acreage, and (3)easing global supply/demand constraints. Our DCF value of the current assets is around$35/sh. This is based on strong margins through 2017 and then mid-cycle thereafter. Ourtarget price includes some optionality for bio-algae, growth in the agri business andpotential for capacity growth in ethanol. We retain our Neutral rating due to the inherentvolatility in the crush environment (our mid-cycle EBITDA margin is lower than today) butacknowledge the high probability of an overshoot to the upside. The table overleafillustrates the strong sensitivity of GPREs equity value to the crush spread.

Exhibit 7: Comparing ethanol EBITDA/gal Exhibit 8: Comparing EV/gal

-$0.40

-$0.20

$0.00

$0.20

$0.40

$0.60

$0.80

$1.00

$1.20

Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3E Q1E Q3E2010 2011 2012 2013 2014 2015

E t h a n o

l E B I T D A $ / g a

l

Futures Spot Implied EBITDA/galGPRE (Ethanol + Corn Oil) VLOREX^ BIOF*

GPRE Terminal EBITDA$0.22/gal

$1.91

$2.12 $2.19

$1.29

$0.46

$2.00

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

Current Target GPRE-BIOF

Hankinson

GPRE REX Recent Transactions New Build

E V $ / g a

l l o n

Source: Company data, Credit Suisse estimatesNote: GPRE actual data till Q1'14, CS forecast thereafter, includesethanol & corn oil business; REX fiscal year ends Jan 31; *BIOF's

plants were acquired by GPRE in Nov'13

Source: Company data, Credit Suisse estimates

Ed Westlake

Patrick Jobin


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11 July 2014


Exhibit 9: GPRE value per share is highly sensitive to ethanol profitability (EBITDA/gal)and valuation multiple (EV/EBITDA)

Value per share EV/EBITDA $ 40.08 4.0x 5.0x 6.0x 7.0x

$ 0.10 $ 4.9 $ 8.5 $ 12.1 $ 15.7

$ 0.20 $ 14.2 $ 20.1 $ 26.1 $ 32.0 $ 0.30 $ 23.5 $ 31.8 $ 40.1 $ 48.3 $ 0.40 $ 32.9 $ 43.5 $ 54.1 $ 64.7 $ 0.50 $ 42.2 $ 55.2 $ 68.1 $ 81.0

Ethanol

EBITDA/gal


GPRE NOTE

ADM (N, TP $50): Ethanol outlook is good; cautious on Agricultural Services

The environment for US ethanol now looks favourable to producers for at least the next 12months; however, we continue to view the US ethanol industry as vulnerable to volatility in

grain prices, fuel demand, and low barriers to entry. Export demand is strong andinventories remain tight, albeit less so than three months ago. Seasonal imports fromBrazil this year have been very minimal owing to greater domestic demand which helpedto sustain excellent industry margins year-to-date. When margins are high it is notuncommon to see incremental production come on-line, but our sources suggest thatcapacity looks limited and smaller producers often find it difficult to sustain the increasedoutput. Ethanol is currently among the cheapest fuels globally and those economics willcontinue to drive worldwide demand. The pending decision from the EPA to reduce theRFS remains an overhang.

We are neutral on ADM because we think the stock already implies a big step-up inearnings and the market fully appreciates the ethanol upside. In addition, while graincommercialization has improved since 1Q, we are concerned that Agricultural Services will

struggle to achieve its normal earnings range as farmers have increased their negotiatingpower by expanding on-farm storage and improving their balance sheets.

Latin America Ethanol Producers

SMTO3 (N, TP R$34): The most efficient S&E producer in Brazil

So Martinho is likely to benefit from a booming ethanol market in Brazil, but demand willcome only if price parity (gasoline vs. ethanol) favors the use of ethanol by flex-fuel cars, ascenario that is not the case today because of gasoline price controls. The trigger for thesector in Brazil would be either government incentives for the ethanol market (change inethanol mix into gasoline from 25% to 27.5%, tax incentives and cheap financing) or astructural change in Petrobras's gasoline price policy. So Martinho has one of the lowest

production costs in Brazil, an excellent asset base (land, industry, and logistics facilities),and a highly skilled management team and, as a consequence, is one of the fewcompanies within the S&E sector which generates cash in the current unfavorablescenario for sugar and ethanol prices. Although SMTO has one of the most efficient S&Eproduction rates in Brazil, current unfavorable sugar prices, and risks to ethanolprofitability in the long term due to the lack of a government policy for fuel prices justify ourNEUTRAL rating on the name. We still think inflation risks limit further gasoline price hikes,even though gasoline price parity between the domestic and international markets remainshigh.

Robert Moskow

Viccenzo Paternostro
https://plus.credit-suisse.com/u/pa2fh7https://plus.credit-suisse.com/u/pa2fh7https://plus.credit-suisse.com/u/pa2fh7


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11 July 2014


Inflation Risks vs. Petrobras's Balance Sheet Dilemma to Set the Tone. AsPetrobras's refinery currently runs at full capacity, the company has to import both dieseland gasoline, paying international prices and selling the fuel in the domestic market at aloss. This is definitely not sustainable and, under normal market conditions, the companywould simply have to increase prices to recover its competitiveness. However, we do notexpect the government to allow Petrobras to increase gasoline and diesel prices in theshort term because of inflation risks. Inflation is currently above the top of the target range

(6.5%) and, as gasoline represents ~3.9% of the IPCA inflation index, any gasoline pricehike would put more pressure on inflation. We think such a hike is unlikely in the shortterm, especially before the presidential election. We believe this dilemma is likely to beresolved after the election (Oct-Nov/14) and a potential gasoline price hike will benefitethanol producers. As SMTO is a pure S&E producer and generates cash even under thecurrent unfavorable scenario, the company would be the most benefitted by an ethanolprice hike.

Our R$30 target price is not assuming any ethanol price increase and does notincorporate the company's recently announced acquisition. A 5% hike in ethanol pricewould end up raising our TP by 15% and a preliminary analysis indicates that thisacquisition adds ~R$5/share to SMTO's TP.

US Chemicals

Celanese (Outperform, $71 TP)

We rate the shares of Celanese Outperform as its diversified platforms should see solidgrowth in the near to medium term. Within the Consumer businesses, the acceleratingtrend towards lighter weight auto vehicles should promote robust volumes. Current autopenetration stands at ~2kg per vehicle for existing Celanese applications with incrementalopportunities estimated at an additional 4-6kg per vehicle. Within the more industrialbusinesses, CE is likely to benefit from continued access to cheap methanol (relative toglobal peers) that will help its acetic acid platform an expiring contract that is expected toadd $100m of annual costs could also be offset by a cost cutting program that we believemay be announced on the 3Q call. In addition, the stock trades at a meaningful discount to

the peers and is one of the cheapest names in our coverage suggesting a lot of theupside potential is yet to be priced in. Our current 8x target 2015 trading multiple is a 20%discount to where the group currently trades suggesting both multiple expansion andhigher earnings estimates can further drive growth in the story. Regarding ethanol, weview the story about their carbon-based ethanol technology (using coal/nat gas/oil toproduce low costs ethanol) as a longer dated source of value (somewhat of a free optionat this stage). That said mgmt. has indicated that they will be back to investors with anupdate on the platform and their alliance with Petro China in 3Q which could generatemore interest/value in the stock.

Europe Chemicals

Novozymes (U/P, TPDKr210): 2nd

Generation (2G) ethanol enzyme opportunities arealready priced-in

Novozymes is a global industrial enzyme leader and is levered to the potential growth ofethanol markets. We believe the initial operating data from trial facilities suggests 2 nd generation (2G) ethanol technology (i.e ethanol from plant waste) is making continuedprogress towards commercial viability and the recently finalised BioAg alliance withMonsanto supports an accelerated growth trajectory in agricultural microbes. We estimatethe combined 2G/BioAg pipeline adds DKr35/share of risk-weighted optionality to ourDKr175/share "core" Novozymes valuation. However, we remain Underperform asprobability analysis suggests that 88% of future scenarios warrant downside to the currentshare price.

John McNulty

Mathew Waugh


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11 July 2014


'Core' Novozymes (DKr175/share): We value the 'core' Novozymes business (ex2G/BioAg) at DKr175/share. This is based on 1) a 2014E EV/EBITDA of 15.4x, and 2) a 2014E EBITDA of DKr3.6bn ex 2G/BioAg.

2G optionality (DKr20/share): This is based on 1) a $2bn 2G enzyme market by2022E, 2) Novozymes having 35% market share, and 3) $30cent/gallon enzyme costs.

BioAg optionality (DKr15/share): NVZ recently finalised the BioAg alliance withMonsanto. We believe this supports 25% CAGR in BioAg, driven by: 1) the accessiblemarket rising from 50mn to 200mn acres, 2) an accelerated portfolio expansion, and 3) a global leading/integrated platform.

Probability analysis: We stress test our base case to calculate probabilities of shareprice outcomes over 900 scenarios. We note that only 12% of outcomes indicateupside to the current share price, with a risk-weighted mean of DKr224/share and arange of DKr150-379/share.

NOVOZYMES NOTE

DSM (O/P, TP 57): 2G enzyme pro ductio n/JV with POET in 2G = free option.

Core Business: We estimate the implied EBITDA multiple of DSMs core Nutritionbusiness is c9x EBITDA - this is a 10-15% discount to comparable nutrition peers. We

believe both earnings risk and valuation risk is low given the improving outlook for DSMNutrition (pricing/volume led).

Free Option Value: We believe there are free options surrounding the DSM investmentcase. These include: 1) POET (2G ethanol), we currently ascribe no value with theLiberty plant starting up in Q2 we estimate this adds 2.5/share; and; 2) Caprolactamdivestment we estimate adds ~5/share.

2G or not 2G, is POET the answer? We estimate the potential market revenue for2G enzymes at $2bn by 2022. Our 2G market forecasts suggest POET can obtain a~17% market share over this period (assumes Project Liberty/POET's assetcontribution only).

Project Liberty (POET): We believe Project Liberty has the potential to: 1) generate

300mn revenues over the next 5 -8 years, 2) further licensing revenue potentialoutside of Liberty (gain share), and 3) secure DSM's position as a global 2G enzymeproducer (c17% market share). Importantly, our risk weighted DCF suggests this

provides c2.5/share value accretion.

Valuation: Our 57/share target price represents the average of our SOTP 56 andour DCF 58. Our target price implies a FY14 Nutrition EBITDA multiple of 9.2x.

DSM NOTE

Chris Counihan
https://plus.credit-suisse.com/u/pa2gz3https://plus.credit-suisse.com/u/pa2gz3https://plus.credit-suisse.com/u/pa2hPmhttps://plus.credit-suisse.com/u/pa2hPmhttps://plus.credit-suisse.com/u/pa2hPmhttps://plus.credit-suisse.com/u/pa2gz3


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11 July 2014


Global Ethanol Demand SummaryIn this joint department report we study the main ethanol markets and also provide abottom-up ethanol demand model.

Global ethanol demand increased from 7.7bn gallons in 2005 to 23bn gal in 2013 (CAGRof 15%) primarily due to (i) demand from Renewable Fuel Standard (RFS) in the US, albeit

with some regulatory uncertainty, and (ii) Brazil's 20%-25% ethanol blending mandate.Ethanol demand had stagnated in the past few years primarily due to higher corn prices,weak acceptance of higher blends and lack of infrastructure. We expect growth in US tobe capped by the 10% ethanol blend wall in the near term, and Brazil to maintain a 20%-25% mandate (subject to cane and sugar production/prices). However, in the long termflex fuel vehicles penetration in both countries and gradual increase in blending shouldincrease ethanol demand. This will be driven primarily by the economic viability of ethanolas a transportation fuel, especially in an elevated oil price environment. We also expectdemand from RoW to grow as they target higher ethanol blends for lower emissions, betteroctane and diversification from oil. We forecast global ethanol demand to increase to 35bngal by 2022.

Figure 10: Ethanol Demand Forecast - c35bn gallon ethanol demand globally by 2022

4 4 56

7 810

13

1720

22 22 2223 24

25 2627 28

29 3032

35

0

5

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2000 2002 2004 2006 2008 2010 2012 2014E 2016E 2018E 2020E 2022E

A n n u a

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US Brazil ROW


US ethanol demand limited by E10 till E15 infrastructure builds out: The US hasnow reached the 10% blend wall and there are a number of growing concerns surroundingthe ability to move toward E15 given, i) engine compatibility, ii) warrantee issues, and iii)available infrastructure. We believe a number of the short-mid term concerns arewarranted and we forecast the US to remain at the E10 blend ceiling for the next 6 years.

As the newer E15 complaint fleet & infrastructure grows through this decade, in the longterm we believe there remains enough political will/socioeconomic impetus to movetowards higher ethanol blends (E15) even though the current EPA stance seems toconcede to the near term challenges of higher blends. We also expect demand from flexfuel vehicles to grow due to more customer education and ethanol prices trading atdiscounts to gasoline (energy adjusted), akin to the Brazilian model. We forecast USethanol demand to increase from ~13bn gal in 2013 (or 9.9% of gasoline demand) to~14.1bn gal by 2020 and 16.9bn gal by 2022.

Brazil: The Brazilian fleet has been expanding 6% per year since 2004, the flex-fuel/ethanol fleet has been expanding at a faster pace (~29% CAGR 2004 12), while thegasoline fleet has been expanding by only 1% per year. Today, Brazil has ~33 millionvehicles (52% gasoline). In 2017, we estimate Brazil will have ~38mn vehicles. In our


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11 July 2014


view, future fleet growth will be based on flex-fuel vehicles since they provide aninteresting option for the consumer to choose the most economical way to fuel the car. Webelieve the flex-fuel fleet will grow 11% per year from 2013 to 2017 (~25mn vehicles in2015) and that the gasoline-only fleet will decrease 5% per year in the same period.

RoW: We build a bottom-up view of RoW ethanol consumption based on risk weightedtargets by country; we forecast RoW ethanol consumption moving from c4bn gallons p.a.today to 10bn by 2022. Dependent upon, 1) Europe reaching an average 7.5% blend rate(vs. 10% target), 2) India reaching c10% blend rate (vs. 20% target) and 3) China reachingc2bn gallons by 2022.

2G ethanol technology still needs to improve. The growth outlook in 2G ethanol,which by definition uses non-food cellulosic material (not starches or direct fermentablesugars), has slowed as the technology still needs to reduce capital costs and improveproductivity. To date only one ethanol plant has started production, Beta Renewable'scellulosic ethanol plant in Italy. We are tracking more than 3 other plants which expect tostart pilot commercial scale plants in the near term. We expect pilot plants to ramp-up overthe next few years and enter commercial large scale adoption as the technologies getvalidated. We expect global 2G ethanol volumes to increase to ~0.15 mm gal by 2017 & 5bn gal by 2022 from negligible volumes today, perhaps cannibalizing 1G demand to someextent, but highly dependent on cost curve improvements.

Decline in US corn prices has improved crush spreads: Corn prices have declinedfrom ~$8/bu in 2012 and $7.5/bu in early 2013 to $4/bu today. This helped ethanolproducers capture higher margins. Spot crush spreads (Ethanol ASP less corn, electricityand natural gas costs plus co-product revenues) increased from breakeven levels of$0.50/gal in 2012/early 2013 to ~$0.83/gal in 3Q13, $1.40/gal in 4Q13 and $1.61/gal in1Q14. Note this does not include any other production/material/SG&A costs or higher costof corn basis. This is one of the best environments for ethanol producers over the past fewyears, and is expected to remain favorable due to a healthy corn harvest (~165bushels/acre yields per USDA vs. drought stricken yields of ~123 bushels/acre in 2012).With the continued productivity gains in yields driven by farmer & seed productivity, thelong-term prospects for inexpensive and accessible corn in the US market remainsfavorable.

Lower corn prices have improved demand for US exports: The decline in corn priceshave resulted in gradual growth in US ethanol exports since 3Q13. The lower cost USethanol has seen strong demand from Canada, Philippines, UAE, India, South Americaand Europe. In addition to domestic ethanol demand of 13 bn gal, US ethanol producersexpect ~1 bn gal of ethanol demand in 2014. Lower corn/ethanol prices in US will helpposition Ethanol competitively against gasoline. US corn ethanol is at 30% discount togasoline today.


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11 July 2014


Exhibit 11: Corn & Sugar Prices

$0.01

$0.06

$0.11

$0.16

$0.21

$0.26

$0.31

$0.36

$2.0

$3.0

$4.0

$5.0

$6.0

$7.0

$8.0

$9.0

Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14

S u g a r p r i c e

, $ / l b

C o r n p r i c e

, $ / b u

Corn US2, $/bu (LHS) Raw Sugar, $/lb (RHS)

Source: Thomson Reuters

RIN prices not yet resolved. One of the most important questions we get is on thesustainable value of RINS in US. Without changes to auto warranties EPA will limit ethanolmandates around the 10% blendwall, leading to adequate RIN supply which can becarried over to 2015 and future years. As a result, RINS price should trade at theirtheoretical price (the difference between ethanol prices and energy equivalent gasolineprices). The current RIN price of $50cts/gal implies the EPA mandate will create stress.Without stress, the RINS should be closer to 0-20cts/gal (depending on corn prices).

Exhibit 12: Ethanol vs Gasoline Prices and the CrushSpread, $/gal

Exhibit 13: RIN Prices and Theoretical Future Value Range($/gal)

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

$3.5

$4.0

$4.5

J a n - 1

0

M a r -

1 0

M a y -

1 0

J u l - 1 0

O c t - 1

0

D e c -

1 0

F e

b - 1

1

A p r -

1 1

J u l - 1 1

S e p - 1

1

N o v -

1 1

J a n - 1

2

A p r -

1 2

J u n - 1

2

A u g - 1

2

O c t - 1

2

J a n - 1

3

M a r -

1 3

M a y -

1 3

J u l - 1 3

O c t - 1

3

D e c -

1 3

F e

b - 1

4

A p r -

1 4

$ / g a

l

Crush Spread, $/gal Gasoline RBOB NYH, $/gal

Ethanol NYH, $/gal

-$0.40

-$0.20

$0.00

$0.20

$0.40

$0.60

$0.80

$1.00

$1.20

$1.40

$1.60

J a n - 1

3

F e

b - 1

3

M a r -

1 3

A p r -

1 3

M a y -

1 3

J u n - 1

3

J u l - 1 3

A u g - 1

3

S e p - 1

3

O c t - 1

3

N o v -

1 3

D e c -

1 3

J a n - 1

4

F e

b - 1

4

M a r -

1 4

A p r -

1 4

M a y -

1 4

J u n - 1

4

J u l - 1 4

R I N s ,

$ / G E E

Biodiesel RINs (D4) Ethanol RINs (D6)D6 RIN - Corn@$4/bu D6 RIN - Corn@$5/buD4 RIN - SoyOil@$40c/lb D4 RIN - SoyOil@$35c/lb

D6 RIN - corn@ $4/bu

D6 RIN - corn@ $5/bu

D4 RIN soyoil@$40c/lb

D4 RIN soyoil@$35c/lb

Source: Thomson Reuters, Credit SuisseNote: Crush Spread = (Ethanol + DDGS) (Corn + Electricity + Gas)

Source: Thomson Reuters, STARFUELS, Credit SuisseNote: D6 RIN assumes breakeven IRR at DDGS $150/MT, gas$5/MMBtu


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11 July 2014


US Ethanol MarketUnder former US President George W. Bush, the Renewable Fuels Standard (RFS) wasrenewed in December 2007. Under this directive, US fuel companies are set minimumlimits on the amount of conventional ethanol that is required to be blended into gasolineeach year until 2022. The legislation also sets requirements on the production onadvanced biofuels (fuels that meet more stringent greenhouse gas thresholds thanconventional corn ethanol). The advanced category also includes a subcategory forsecond-generation (cellulosic) biofuels.

Figure 14 below details the full amount of ethanol production mandated by the EPA underthis Renewable Fuels Standard.

Advanced biofuel production has fallen short of the requirement, as few technologies existin the US to produce advanced ethanol from conventional corn. The EPA cut the 2014mandate from 18bn gallons to 15.2bn due to blend wall issues and lack of production foradvanced ethanol.

The EPA is also in the process of finalizing 2014 standards and is likely to propose a moremanageable ethanol requirement due to the near-term challenges blending more than10%. While policy support is never guaranteed and the policy backdrop (e.g. abundantlower carbon shale gas / food vs fuel) is complicated, we believe the EPA and policymakers broadly will ultimately continue with the underlying policy directive of increasingethanol consumption (both 1G & 2G) to reduce greenhouse emissions, increase energyindependence, and support the farming heartland.

Figure 14: Renewable Fuel Standards: Mandated US Ethanol Consumption (bn gallons)ear First generation

biofuelrequirement

Total Advancedbiofuel

requirement

Total renewablefuel requirement

Actual firstgeneration ethanol

blending2008 9.0 n/a 9.00 9.002009 10.5 0.60 11.10 10.602010 12.0 0.95 12.95 13.232011 12.6 1.35 13.95 13.902012 13.2 2.00 15.20 13.55*2013 13.8 2.75 16.55 13.32014 13.0 2.20 15.202015 15.0 5.50 20.502016 15.0 7.25 22.252017 15.0 9.00 24.002018 15.0 11.00 26.002019 15.0 13.00 28.002020 15.0 15.00 30.002021 15.0 18.00 33.002022 15.0 21.00 36.00

Source: EPA; *2012 actual production based on annualized number for the first 32 weeks of the year, 2014mandate revised in Nov'13

Data from the Renewable Fuels Association also shows that conventional ethanol capacityis already very close to the 15 billion gallon per annum target that the EPA has establishedas the requirement for 2015 to 2022. This suggests the scope for first-generation capacitygrowth in the industry is extremely limited unless additional capacity is built (which, in thecurrent crush environment, is likely being considered).


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11 July 2014


Figure 15: US Ethanol Production CapacityJan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

Total Ethanol Plants 81 95 110 139 170 189 204 209Production Capacity(mgy) 3,644 4,336 5,493 7,888 10,569 11,877 13,508 14,907Plants Under Construction 16 31 76 61 24 15 10 2Capacity Under Construction/Expanding (mgy) 754 1778 5635.5 5536 2066 1432 522 140States with Ethanol Plants 18 20 21 21 26 26 29 29

Source: RFA, Credit Suisse research; mgy = millions of gallons a year


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11 July 2014


Facing the Blend WallThe shortfall in the ethanol legislation is that it appears to set a mandatory supplyof ethanol that is in excess of the plausible level of demand for ethanol, absent asignificant, and immediate, introduction of 15% ethanol blends. Ethanol can beblended with gasoline up to a maximum level of 10% (this constitutes the so-called E10fuel, or what is often called the blendwall). We have now reached the 10% blend wall

further increases in blending require a move to E15.Figure 16: Ethanol blend Ratio Figure 17: Ethanol Production

8.4%

8.6%

8.8%

9.0%

9.2%

9.4%

9.6%

9.8%

10.0%

10.2%

10.4%

J a n - 1

2

F e

b - 1

2

M a r -

1 2

A p r -

1 2

M a y -

1 2

J u n - 1

2

J u l - 1 2

A u g - 1

2

S e p - 1

2

O c t - 1

2

N o v -

1 2

D e c -

1 2

J a n - 1

3

F e

b - 1

3

M a r -

1 3

A p r -

1 3

M a y -

1 3

J u n - 1

3

J u l - 1 3

A u g - 1

3

S e p - 1

3

O c t - 1

3

N o v -

1 3

D e c -

1 3

J a n - 1

4

F e

b - 1

4

M a r -

1 4

A p r -

1 4

M a y -

1 4

J u n - 1

4

B l e n

d r a

t e %

Blendwall E10

700

750

800

850

900

950

1,000

J u n - 1

0

S e p - 1

0

D e c -

1 0

M a r -

1 1

J u n - 1

1

S e p - 1

1

D e c -

1 1

M a r -

1 2

J u n - 1

2

S e p - 1

2

D e c -

1 2

M a r -

1 3

J u n - 1

3

S e p - 1

3

D e c -

1 3

M a r -

1 4

J u n - 1

4

T h o u s a n

d b a r r e

l s p e r

d a y

Source: EIA, Credit Suisse estimates Source: EIA

Looking ahead, US gasoline consumption is projected to decline over the next twodecades as more efficient engines are adopted. The wave of low cost shale gas that isdriving increased adoption of natural gas vehicles could also reduce growth in the gasolinepool that is the market for bio-fuel demand. This indicates that the ethanol market willdecline so long as public opposition, and lack of infrastructure for E15, prevents itswidespread adoption (both cellulosic ethanol and corn ethanol).

Breaking the Blend Wall mid/long termIn October 2010, following a review of engine efficiency and performance using higherethanol blends, the EPA granted a waiver to allow up to 15% (E15) blends to be sold forcars and trucks with a model year of 2007 or later. In January 2011 the waiver wasexpanded to authorize use of E15 to include model year 2001 through 2006 passengervehicles. The EPA decided not to grant a waiver for E15 use in any motorcycles, heavy-duty vehicles, or non-road engines (such as boats) because the testing data did notsupport such a waiver.

The waiver has been unpopular in various circles. In December 2010 several groups,including the Alliance of Automobile Manufacturers and the American Petroleum Institute, filed suit against the EPA. The suit has not been successful: the federal appeals courtrejected the claim and ruled that the groups did not have legal standing to challenge theEPA's decision to issue the waiver for E15.

However there is a growing discord with the move to higher ethanol blends citing 1) enginedamage/warrantee issues, 2) lack of infrastructure and 3) uncompetitive economics. Inresponse to these issues the DOE issued a series of white papers designed to addressthese issues and seek stakeholder feed-back. We review the key arguments set out in theresponses and conclude:
http://www.eia.gov/forecasts/aeo/er/index.cfmhttp://www.eia.gov/forecasts/aeo/er/index.cfmhttp://en.wikipedia.org/wiki/American_Petroleum_Institutehttp://en.wikipedia.org/wiki/American_Petroleum_Institutehttp://www.eia.gov/forecasts/aeo/er/index.cfmhttp://www.eia.gov/forecasts/aeo/er/index.cfm


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On a short-mid term timeframe (to 2019) we believe that the 10% ethanol blendceiling will remain a barrier to higher blending, this is premised upon; 1) lack ofincentives to build out higher blend pump infrastructure for independent fuel retailersto limit availability, 2) lack of definitive testing mean engine compatibility issues willremain at the forefront holding back consumer demand, and 3) lack of pricetransparency on ethanol content. We forecast 10% ethanol blending to 2019 asnegative sentiment dominates the market .

On a long term basis we believe there remains the political will/socioeconomicimpetus to drive the greater use of ethanol, given 1) RFS legislation was alwaysintended to build out an advanced fuels platform, 2) lower soft commoditiesenvironment should create competitive economics, and 3) move to lower carbon andalternative fuels Post 2017 we forecast c0.5% blend increases p.a. as pum pinfrastructure is buil t out and the num ber of f lex fuel vehicles on the roadnegates engine/warrantee issues.

Figure 18: US Ethanol Demand We assume relatively low Flex Fuel penetration relativeto the number of Flex Fuel Vehicles (FFV) on the road due to infrastructure constraints

12.7 13.0 13.1 13.0 13.1 13.113.5 13.9

14.115.4

16.9

0.15 0.20 0.23 0.27 0.40 0.561.10

1.82 2.142.52

3.179.6%9.9% 10.2%

10.2% 10.3% 10.4%10.8%

11.3%11.6%

12.9%

14.4%

7%

8%

9%

10%

11%

12%

13%

14%

15%

0

2

4

6

8

10

12

14

16

18

2012 2013 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E

E t h a n o

l a s

% o

f t o t a l m o

t o r g a s o

l i n e

d e m a n

d

E t h a n o

l d e m a n

d , b

b g a

l l o n s p e r y e a r

Total Ethanol Demand, bb gal of which ethanol demand for FFV, bb gal Effective blend ratio (RHS)

Source: EIA, Credit Suisse estimates


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11 July 2014


Hurdles to Long Term E15 in the USWe assess the hurdles which must be overcome in order to move toward a >10% blendrate (ethanol to gasoline) in the US automotive market. In the short term, unlessautomotive warranties change, then the blend wall is real. Over time, flex fuel vehiclescould create a potential blend market of 30bn gals (from 13.3bn gals today). This wouldrequire appropriate support for investments in fuel pumps and ethanol distributioninfrastructure.

Engine compatibility:We believe the primary hurdle which is likely to impede the move to greater than 10%blends in the short term is a ruling on the engine compatibility of E15.

Background : Higher blend ethanol is considered a new fuel and as such is subject to theClean Air Act which prohibits introduction unless the EPA grant's a waiver demonstratingthat the fuel will not cause vehicles to fail to meet emissions standards. E10 received thewaiver in 1978 and in 2010 the EPA granted a partial waiver for the use of E15 in vehiclemodels after 2000 (excluding non-automotive vehicles and appliances). However therehas been a growing case put forward to suggest that the initial studies were flawed and

that the use of E15 may harm approved vehicle engines.Argument for Compatibility: The Department of Energy carried out 2 years of researchprior to the waiver being granted. A review of the literature suggests the following:

The testing was rigorous with 86 vehicles tested over 120,000 miles using industrystandard test-cycles there is little argument surrounding the quality of the researchfrom the anti-ethanol lobby.

The study was government funded and therefore should lack bias.

However the focus of the research was on the emissions impact of E15 blends not theimpact on the physical function of the engine. The EPA cleared E15 on an emissionsbasis but insufficient research looked at the impact on engine function.

Argument for Engine Malfunction: The CRC (Co-Coordinating Research Council) whichis funded by the American Petroleum Institute have subsequently published a reportclaiming E15 causes Engine malfunction in 2 of the 8 engines they tested. A review of theliterature suggests a number of issues with the research, in our view:

The CRC used a methodology which tested 8 engines on E20 fuel in order to establishwhich would fail based on emissions, diagnostics, valves, compression and leakage. If theengine failed on E20 then an equivalent engine was then tested on E15. If that enginefailed another was then tested on E0. We have the following issues with thestudy/methodology:

Funding by the API creates a test bias,

We question the severity of the pass criteria given 1) one of the engines failed usingevery fuel including E0, and 2) Testing was not carried out on E10 blends therefore wecannot conclude if E15 is any worse than E10 (which is currently successfully used inthe majority of the US fleet).

We also question 1) the repeatability of the second hand vehicles used, 2) the lack ofstatistical significance given the low sample number (8 models, 28 engines in total),and 3) lack of peer review process.

The outcome of the CRC was failure in 2 of the 8 models tested due to issues with cylinderleakage/valve issues attributed to greater corrosivity and lower lubricating properties.

Credit Suisse View: In our view, both testing methodologies have flaws and neitherprovides an appropriate level of proof regarding the safe use of E15. We believe that the


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11 July 2014


DOE testing satisfies the waiver requirement and as such this will likely hold. Howevergiven the growing concern over Engine Damage it will likely be warrantee issues andinsurance problems which hold back the use of higher blends in non-flex fuel vehicles(fully approved for up to E85 use).

Higher blend vehicle availability:If we rule out the use of E15 in ordinary vehicles the argument is that flex fuel vehicles canpick up the slack. We highlight that in May 2011 the Open Fuel Standard Act (OFS) wasintroduced to Congress. The bill (currently in congress) would require that 30% ofautomobiles made in 2015, 50% in 2016 and onward to be manufactured and warranted tooperate on non-petroleum-based fuels, which include existing technologies such as flex-fuel, natural gas, hydrogen, biodiesel, plug-in electric and fuel cell. Given the limitedcomplexity involved with producing flex-fuel vehicles (and low cost), several auto makershave already been selling vehicles capable of running on higher blends of ethanol.

There are currently c14mn FFVs on the road in the US however only c0.6mn are usingE85 ethanol blend due to lack of pump infrastructure/consumer demand. c50% of newvehicle models are FFV and the production cost is only c$100-300 higher.

If all of these vehicles switched from E10 to E85 this would add an incremental 6bn

gallons of ethanol demand immediately and an additional 17bn gallons by 2022 which would bring total demand to 30bn gallon (just short of the 36bn gallon mandate).

However E85 is receiving little traction at the pump due to 1) perceived lower fuelefficiency (ethanol has c20% less energy per gallon therefore must trade at >20%discount to gasoline to be cost competitive currently at 30% discount), and 2) lack ofinfrastructure to support dispensing higher blend fuels.

Figure 19: Estimated number of Flex Fuel Vehicles (FFV) and potential ethanolconsumption under different blend scenarios

Number of FFVon Road (mn)

% of currentfleet

EthanolConsumption if

(E85)


(E15)


(E35)2013 14 6% 6 0.4 1.9

2016E 21 8% 8 0.5 2.72022E 45 18% 17 1.2 5.8


Infrastructure for higher blendsGiven that the increasing penetration of FFV creates the potential to blend higher levels ofethanol. We believe the greatest hurdle towards long term goals will be the installation ofthe necessary infrastructure to dispense higher blend ethanol. Specifically we highlight:

There are currently only c3000 E85 or E15 dispensing pumps in the US this severelylimits the ability to higher blend fuels,

We estimate that to reach the 2016 mandate as it stands would require the installationof 90k FF pumps (12% of total) estimated cost of c$1bn

We estimate that to reach the 2022 mandate would require the installation of 260k flexfuel pumps (36% of total) estimated cost of c$2.6bn
http://en.wikipedia.org/wiki/Open_Fuel_Standard_Act_of_2011http://en.wikipedia.org/wiki/Natural_gas_vehiclehttp://en.wikipedia.org/wiki/Hydrogen_vehiclehttp://en.wikipedia.org/wiki/Biodieselhttp://en.wikipedia.org/wiki/Plug-in_electric_vehiclehttp://en.wikipedia.org/wiki/Fuel_cell_vehiclehttp://en.wikipedia.org/wiki/Fuel_cell_vehiclehttp://en.wikipedia.org/wiki/Plug-in_electric_vehiclehttp://en.wikipedia.org/wiki/Biodieselhttp://en.wikipedia.org/wiki/Hydrogen_vehiclehttp://en.wikipedia.org/wiki/Natural_gas_vehiclehttp://en.wikipedia.org/wiki/Open_Fuel_Standard_Act_of_2011


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11 July 2014


Figure 20: Flexible gas pumps required to meet 1G and Cellulosic (2G) Mandate Flex Gas Pumps Required % of total pumps

2013 3,000 0.4%2016E 87,044 12%2022E 259,945 36%

Source: Credit Suisse estimates

We highlight that c90% of gas stations are independent with integrated oils owning only1% of the market. Approximately 50% are branded or affiliated with integrated oilcompanies. Key hurdles facing the installation of sufficient infrastructure:

Integrated oil companies have no desire to facilitate further ethanol blending and havesome influence over affiliated fuel retailers.

There are few incentives (some tax breaks in certain states) in place to upgrade yourfuel station as an independent owner and given the c$10-20k outlay we do not believethis will change without firmer incentives in place.

The chicken and the egg station owners do not want to upgrade until the demand isthere, the demand will not materialize unless the supply increases.

We note the Obama Administration set the goal of installing 10,000 blender pumpsnationwide by 2015. These pumps can dispense multiple blends including E85, E50, E30and E20 that can be used by E85 vehicles.

The USDA issued a rule in May 2011 to include flexible fuel pumps in the Rural Energy for America Program (REAP). This ruling provided financial assistance, via grants and loanguarantees, to fuel station owners to install E85 and blender pumps.

Chicago have also introduced an ordinance which seeks to require all self service stationsin the city to make available E15 gasoline in a bid to reduce fuel prices, additionalconsumer choice and reduce greenhouse emissions. The proposal is under considerationby the Committee on finance for Chicago.

However we believe further incentives are required in order to faci l i tate the uptakeof higher blend fuel pu mps at gas stat ions in the US.

Competitive pricing required to drive LT economicsHigher ethanol blends and more options for US consumers will likely alter thepricing dynamics of ethanol.

There is a secondary, yet very important, implication of ultimately introducing higher (andvarying) blends of ethanol. Blenders currently charge essentially the same amount for E10that 100% gasoline would sell for, taking the difference between less-expensive ethanoland gasoline as a margin. But in theory consumers should require a 29% lower price forE85 ethanol than gasoline given the lower energy content (reducing fuel efficiency) inethanol. Brazilian consumers already make these purchasing decisions and effectivelypurchase less ethanol if the price exceeds ~70% of gasoline.

In the US, the consumer has had few opportunities to price discriminate based on the levelof ethanol present in purchased fuel. If higher ethanol blends are introduced (E15, E20,E85 etc), and if consumers are given more choices by using mixing pumps, there will beincreased attention about the impact of ethanol on fuel pricing.

Ethan ols discount to gasoline would need to be sustained at current levels tocomp ete with pur e gasoline.
http://en.wikipedia.org/wiki/Obama_Administrationhttp://en.wikipedia.org/wiki/Rural_Energy_for_America_Programhttp://en.wikipedia.org/wiki/Rural_Energy_for_America_Programhttp://en.wikipedia.org/wiki/Rural_Energy_for_America_Programhttp://en.wikipedia.org/wiki/Rural_Energy_for_America_Programhttp://en.wikipedia.org/wiki/Obama_Administration


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11 July 2014


Figure 21: Energy Content of Ethanol BTUs per Gallon Energy Content Difference

Relative to GasolineGasoline 114,500 0%Ethanol (E10) 110,660 (3)%Ethanol (E15) 108,740 (5)%Ethanol (E85) 81,800 (29)%

Ethanol (E100) 76,100 (34)%Source: US Department of Energy, Credit Suisse research

Figure 22: Ethanol discount to gasoline

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

-60%

-40%

-20%

0%

20%

40%

60%

J a n - 0

0

F e

b - 0

0

M a r -

0 0

A p r -

0 0

M a y -

0 0

J u n - 0

0

J u l - 0 0

A u g - 0

0

S e p - 0

0

O c t - 0

0

N o v -

0 0

D e c -

0 0

J a n - 0

1

M a r -

0 1

A p r -

0 1

M a y -

0 1

J u n - 0

1

J u l - 0 1

A u g - 0

1

S e p - 0

1

O c t - 0

1

N o v -

0 1

D e c -

0 1

J a n - 0

2

M a r -

0 2

A p r -

0 2

M a y -

0 2

J u n - 0

2

J u l - 0 2

A u g - 0

2

S e p - 0

2

O c t - 0

2

N o v -

0 2

D e c -

0 2

J a n - 0

3

M a r -

0 3

A p r -

0 3

E t h a n o

l d i s c o u n

t t o g a s o

l i n e

%

Ethanol discount to gasoline Gasoline price (RHS) Ethanol price (RHS)

Source: Thomson Reuters, Credit Suisse estimates


18/35

Figure 23: Short/Mid Term Arguments surrounding US ethanol industry as highlighted in rebuttals to the DOE white paper on blend wall/compatibility issues Pro-RFS Arguments short/Mid Term Anti-RFS Arguments - Short/Mid Term Credit Suisse View - Short/Mid Term Credit Suisse

ViewMisfueling mitigation requires strict labeling No physical barriers to E15 mean misfueling is a big risk - as with

unleaded gasolineMisfueling will be an issue but this is notprohibitive

Neutral

EPA has the right to continue cutting/adjusting the mandate inNov each year

n.a. EPA has right to adjust on a 1 year forwardbasis - court ruling

Pro

RFS always anticipated higher blends Fuel demand is in decline - not anticipated in original mandate 2007 mandate always required higher thanE10

Neutral

E15 rigorously tested by DOE EPA is rushing ethanol to market and putting consumers at risk DOE testing was insufficient given thefocus on catalyst only

Anti

Oil companies delaying infrastructure Oils cannot get the ethanol to market as do not own the stations -90% of gas stationed are independent, integrated oils own only 1%and c50% of stations are branded - therefore not oil holdinginfrastructure back

Oil industry not directly responsible for lackof infrastructure but negative sentimentdoes impact market

Neutral

E15 is most tested fuel in EPA history CRC study showed that E15 damaged 2 or 8 engines tested engines Both CRC and DOE studies are flawed -further testing should be done

Anti

Oil industry funded research claiming engine damage (by CRC)ested only 3 cars -US department of Energy questions the

validity of the study

DOE study originally approving E15 was on catalyst system only Both CRC and DOE studies are flawed -further testing should be done

Anti

RINS are cost neutral to the oil industry - traded between oilplayers only - net neutral

RINS only neutral if physical demand can meet mandate Mandate can be adjusted on an annualbasis to ensure compliance is possible

Neutral

Pre-2001 vehicles have not been tested with E15 - so noproven risk

CRC study shows risk on E15 Duty to prove no impact on consumer Anti

E15 cost is $0-3000 per pump upgrade Upgrade cost for E85 is $20,000-$80,000 (total investment cost of$0.8bn to $3bn) - average gas station PBT is only $34,000

Dependent on existing infrastructure -however given correct incentives this

should not be a hurdle

Neutral

Underwriters Laboratories require testing with E15 - but 95% ofpumps sold in US (eg by Gilbarco, Dresser Wayne) are certifiedfor E15 or E25

Underwriters cannot certify installed equipment for E15 even if themodel is technically okay

n.a. Neutral

Tanks have been E15 tested and certified also for a long time Significant Upgrade costs for gas stations - Underwriter Laboratorieshave not listed a pump which is compatible with >E10 (legally)

n.a. Neutral

Ford and GM have 2012/13 model vehicles which can use E15 Most warrantees only cover up to E10 Industry moving toward E15 approved aslittle upgrade cost

Pro

Can except liability for fuel station owners Cannot give liability relief for misfueling concerns as tort law dictatesaccountability for dangerous products - violates 10th amendment

Tort law dictates liability cannot be waived Anti

Total Anti/Neutral-higher blends



19/35

Figure 24: Longer Term Arguments surrounding US ethanol industry as highlighted in rebuttals to the DOE white paper on blend wall/compatibility issues

Pro-RFS Arguments - Long Term Anti-RFS Arguments - Long Term Credit Suisse View - Long Term Credit Suisse ViewLower Carbon/Emissions High water use Higher ethanol blends support emissions targets Pro

Reduce oil dependency US can become energy secure by 2025 given newtechnology (shale)

Ethanol should eventually create a morecompetitive market dynamic

Pro

Anti-arguments are self-serving by oil lobby Not anti-ethanol - but E10 is the limit Greater choice to customer creates better marketdynamic

Pro

Cutting mandate impacts private sectorinvestment - bad precedent

Mandating ethanol means no free market Cutting the Mandate will destroy confidence infuture investment for innovation

Pro

Original intention was to create 2G long term Energy Landscape has changes since 2007 Energy Security, carbon emissions and marketforces arguments still valid for ethanol

Pro

Increasing competition in liquid fuels to drivefree market economics (anti OPEC)

Mandating ethanol means no free market Facilitate the infrastructure and the consumershould choose

Pro

Flex fuel vehicles cost j ust $100 more tomanufacture

Flex fuel vehicle production could decline given consumersentiment and fuel economy

Increasing numbers of flex fuel vehicles on the road Pro

50% of new vehicles are flex-fuel - so E10blend due to warrantee is temporary only

All car manufacturers have warned against the use of E15for the majority of vehicles

With 15mn FFV on the road using E10 this couldadd up to 5bn gallons of ethanol use if

infrastructure was in place for E85

Pro

Ethanol displaces need for octane enhancingadditives

n.a. Agree Pro

Mis-fueling has not been an issue with diesel Mis-fueling has been an issue with diesel Mis-fueling is an issue with diesel but this has notstopped diesel Pro

E85 in flex fuel vehicles could allow to fulfillmandate

E85 costs consumer more on an energy adjusted basis(20-30% less miles per gallon) - E85 not available on a

widespread basis - E85 has been rejected by the consumer

Yes given the increasing penetration of FFV E85use could meet mandate but cost competitive

depends on dynamics

Neutral

Cellulosic ethanol is lowest carbon liquid fuel inthe world (even natural gas) - supported by

tightening regulation

n.a. Pro

Total Long term View Pro-higher blends



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11 July 2014


Brazil Flex Fuel Vehicles DriveGrowthTo analyze the dynamics of ethanol demand in Brazil it is important to understand the fleetcomposition and the two main demand components. Ethanol demand in Brazil can bedivided into: (i) anhydrous ethanol (99% ethanol content; this is the ethanol blended withthe gasoline). This blend can range from 20% to 25% and is set by the government. Everytime consumers fill up with gasoline, they are in fact buying 75% gasoline and 25%ethanol. This ethanol demand is rather inelastic. (ii) Hydrous ethanol (95% ethanol, 5%water): This is the ethanol used by flex-fuel vehicles. Flex-fuel vehicles (launched in 2003)use technology that allows the car to run on either gasoline or hydrous ethanol.Consumers can use any of the two fuels at any time, depending on which makes moreeconomic sense. In general terms, if hydrous ethanol is being sold at any price below 70%the price of gasoline at the pump, consumer will use ethanol. The ratio is based on theenergy efficiency of the two fuels. This means that hydrous demand is much more elasticdepending on the price ratio at the pump.

To forecast total ethanol consumption, we must understand (i) how the fleet (pure gasolinevs. flex) is evolving, (ii) the current gasoline/ethanol price parity, and (iii) the percentage offlex cars running on gasoline or ethanol.

Figure 25: Fleet Breakdown: Gasoline vs. Flex/EthanolMn Cars/ % of Total Fleet

80% 79% 81%

70%

63%60% 60%

56%51%

46%

42%39%

35%32%

20% 21% 19%

30%

37% 40% 40%

44%49%

54%58%

61%65%

68%

2004 2006 2008 2010 2012E 2014E 2016E

Gasoline Flex / Ethanol

Light Vehicles leet (Mn units)


While the Brazilian fleet has been expanding 6% per year since 2004, the flex-fuel/ethanolfleet has been expanding at a faster pace (~29% CAGR 2004 12), while the gasoline fleethas been expanding by only 1% per year. Today, Brazil has ~33 million vehicles (52%gasoline). In 2017, we estimate Brazil will have ~38mn vehicles. In our view future fleetgrowth will be based on flex-fuel vehicles since they provide an interesting option for theconsumer to choose the most economical way to fuel the car. We believe the flex-fuel fleetwill grow 11% per year from 2013 to 2017 (~25mn vehicles in 2015) and that the gasoline-only fleet will decrease 5% per year in the same period.

The strong growth in the flex-fuel fleet has translated into a robust domestic market forethanol from 2004 to 2009 when ethanol prices were well below the 70% price parity withgasoline. Hydrous ethanol consumption soared (~22% CAGR from 2004 to 2010). In 2010,Brazilians consumed 15bn liters of hydrous ethanol and 7.5bn liters of anhydrous ethanol


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11 July 2014


(25% of gasoline volume). From 2010 to 2012, sugar prices peaked at 30 cents/lb, whichencouraged Brazilian producers to shift ethanol production to sugar, and ethanol pricesincreased, making price parity (ethanol/gasoline) favor gasoline consumption and leadingthe government to change the percentage of anhydrous ethanol mixed into gasoline from25% to 20%. Thus, consumption of hydrous ethanol dropped from 15bn liters in 2010 to10bn liters in 2012.

We believe the hydrous ethanol market could reach 16bn liters in 2017. As a consequenceof the growth in the flex-fuel fleet, hydrous ethanol consumption is poised to grow 51% infive years, increasing 9% per year from 2012 to 2017. Gasoline and anhydrous ethanolconsumption is expected to increase 3% per year in the same period. Due to poor weatherconditions, we forecast a reduction in sugarcane crushed of 3% (579Mt) in 2014/15 and a56% of sugarcane allocated to ethanol production.

Figure 26: Ethanol and Gasoline Consumptionbillion liters

5 5 6

9

1316

15

11 1012 13

14 15 16

23 24 24 24 25 25

30

35

40 41 42 43

44 45

0

5

10

15

20

25

3035

40

45

50

2004 2006 2008 2010 2012 2014E 2016E

AnhydrousHydrousGasoline

Source: Unica, ANP, Credit Suisse estimates

The effect the flex fuel fleet will have on ethanol demand is not easy to calculate and canchange dramatically. If prices are high the consumer shifts away from hydrous ethanol togasoline in flex-fuel vehicle. As we can see in the chart below, consumption of hydrousethanol is very sensitive to ethanol and gasoline prices. Flex-fuel vehicle owners usegasoline rather than ethanol in the intercrop season because of higher hydrous ethanolprices. Average prices in the intercrop season increased 17% in 2009/10 and 11% in2010/11, while average monthly volumes sold decreased 32% in 2009/10 and 28% in2010/11. Ethanol sales decrease sharply when ethanol price/gasoline price > 70% (asseen in Jan/10 and Jan/11).


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11 July 2014


Figure 27: Ethanol Price and Ethanol Consumption in SP Statemillion cubic meters

0

2

4

6

8

10

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13

Ethanol Volume Price Parity Max. Price Parity

Source: Unica, ANP, Credit Suisse estimates

In 2013, government took some measures to help Petrobras that also benefit ethanolproducers, out of which we can highlight (i) allow Petrobras to increase pump and refineryprice of gasoline at the beginning and at the end of the year, that would ultimately increasehydrous ethanol competitiveness over gasoline; (ii) increase in the mix of ethanol blendedinto gasoline from 20% to 25% percent in May; (iii) tax break (PIS/Cofins) on sales to try to

boost ethanol consumption; (iv) loans of R$4bn for sugarcane crop renewal, aiming toimprove yields (t/ha) to rates of 5.5% per year.

The government can still provide further incentives to improve the profitability of ethanol:(i) increase anhydrous blend mix in gasoline from current 20-25% to 27.5-30%; (ii) thereturn of CIDE tax that would add R$0.16/l of gasoline price in the pump, improving thecompetitiveness of hydrous ethanol; (iii) infrastructure investments to reduce logistic costs;(iv) incentives for bioelectricity by creating an energy auction dedicated for energy frombiomass with long-term contracts and with subsidized prices and (v) transparency in long-term gasoline pricing policy in order to encourage producers to invest in capacityexpansion. In our view the uncertainty regarding gasoline price (which is a cap for ethanolprices) is the main reason for the reduction of Greenfield projects.

On advanced ethanol production in Brazil, supply is expected to increase in short and long

term on the back of high investments in the sector. Fibria and Suzano, for example, havealready been investing in this segment through partnerships. GranBio, a biotechnologycompany, is about to start up its first plant of cellulosic ethanol and has other 4 projects inthe pipeline. The company intends to keep seeking for new partners and investing insecond generation ethanol production in order to reach an annual production of ~1bn litersby 2021.


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11 July 2014


Ethanol Demand in the RoWWe build a bottom-up estimate for ethanol consumption for major countries where weforecast 5 bn gallons ethanol blending by 2016 (Europe, China and Canada significantcontributors). In the long term we forecast 9bn gallons ethanol blending by 2022 withsignificant growth from China (target 10% by 2020 we assume 50% risk weighted),Europe (target 10% blending from c4% today) and India (20% blend target we assume25% risk weighted).

Significant mandates:

Europe: The EU currently has a 5.75% blend mandate in place and is scheduled tomove to 10% by 2020. There are however new proposals which could change the2020 target but add large incentives for the use of advanced biofuels produced fromnon-food sources (eg 2G). We highlight:

o An impetus on reducing the impact of land use for fuel production, ando A commitment to 2 nd and 3 rd generation biofuels

The proposal calls for improved biomass policy to maximize the resource efficient useof biomass in order to deliver robust and verifiable greenhouse gas savings and to

allow for fair competition between the various uses of biomass resources in theconstruction sector, paper and pulp industries and biochemical and energyproduction.

Given the level of uncertainty we ascribe a 50% probabil i ty to the 10% target by2022.

China: The country has a 10% biofuels blend mandate by 2020. We highlight thatsome Chinese provinces now require 10% ethanol blends (including Heilongjiang,Jilin, Liaoning, Anhui, and Henan). However, the country had just 5 ethanol plants inoperation as of 2013. Nevertheless, there has been significant drive toward ethanolconsumption in China especially to address the pressing pollution concerns w eascribe a 50% prob abil i ty by 2022.

India: has an E5 blend mandate in place and is scheduled to move to E10 as soon asproduction is in place. Recent newsflow suggests that the government is trying toincrease sugar import tariffs and ethanol blend rates to bolster domestic sugarproducers. The country has a long term goal (2017) of 20% for all biofuels given thelow (c1-2%) current blend rate and lack of infrastructure for production & blending itseems unlikely the country will reach these targets. 25% probabil i ty by 2020.

Canada: RFS for 5% ethanol (mid term) and 2% biodiesel. The is currently ongoingdispute with the Canadian Truckers Alliance over the recent 2% biodiesel blendmandate, however Canada is currently blending at or above the 5% ethanol target.

Exhibit 28: Global ethanol blend targets (ex US and Brazil) in billion gallons except percentages Region Ethanol

Consumption 2012

Gasolineby 2016

BlendTarget

(mid-term)

Probabilityof success(mid term)

Ethanolby 2016

Gasolineby 2022

BlendTarget

(long term)

Probabilityof success(long term)

Ethanolby 2022

Australia 0.1 4.8 2% 75% 0.1 4.6 4% 75% 0.1Canada 0.5 12.6 5% 100% 0.6 13.8 5% 100% 0.7China 0.7 33.0 2% 100% 0.5 41.7 10% 50% 2.1Columbia 0.1 0.6 10% 90% 0.1 0.4 10% 95% 0.0Europe 1.4 45.0 5% 90% 2.0 40.5 10% 50% 2.0India 0.5 9.7 10% 25% 0.2 18.2 20% 25% 0.9Other 0.9 117.7 3% 50% 1.8 138.7 4% 60% 2.9RoW Total 4.3 223.4 3.5% 68% 5.3 257.9 6.0% 57% 8.8



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11 July 2014


Ethanol versus Corn EconomicsNew Norm for Corn Should Benefit Ethanol MarginsFollowing significant growth in corn production during the "ag boom" of '07-'13 on the backof acreage expansion and improving yields, we believe we are entering a more"normalized" period over the next few years. The US is now ~2 years off peak cornplanting levels, but we still believe farmers will continue to shed acreage next season,albeit at a much more moderated pace (we see '15/'16 acreage in the 88mm to 90mmacre range). Following a near record '13/'14 production year of corn (roughly 13.9 bln bu),the US has crept its way back to a more "normalized" stock:use ratio (10% to 15%), whichwe believe will be the new "norm" for the next few years.

Exhibit 29: US Corn Stocks:Use Ratio & Price Per Bushel Exhibit 30: US Corn Planted Acreage (MMs of Acres)

$0 $1 $2 $3

$4 $5 $6 $7 $8

0%

5%

10%

15%

20%

25%

' 0 0 / 0 1

' 0 1 / 0 2

' 0 2 / 0 3

' 0 3 / 0 4

' 0 4 / 0 5

' 0 5 / 0 6

' 0 6 / 0 7

' 0 7 / 0 8

' 0 8 / 0 9

' 0 9 / 1 0

' 1 0 / 1 1

' 1 1 / 1 2

' 1 2 / 1 3

' 1 3 / 1 4

' 1 4 / 1 5 E

Stocks:Use Ratio Farm Price ($/bu)

$/buStocks:Use %

80

7679 79

81 8278

94

86 8688

92

9795

91-9288-90

70

75

80

85

90

95

100

' 0 0 / 0 1

' 0 1 / 0 2

' 0 2 / 0 3

' 0 3 / 0 4

' 0 4 / 0 5

' 0 5 / 0 6

' 0 6 / 0 7

' 0 7 / 0 8

' 0 8 / 0 9

' 0 9 / 1 0

' 1 0 / 1 1

' 1 1 / 1 2

' 1 2 / 1 3

' 1 3 / 1 4

' 1 4 / 1 5 E

' 1 5 / 1 6 E

Acres (mm)

Source: USDA, Credit Suisse Ag Science Team Source: USDA, Credit Suisse Ag Science Team

With a significant degree of early planting and near perfect weather in key corn growingstates through early July, the current growing season is poised to deliver a potentiallyrecord crop , which should ultimately lead to further soft commodity declines (corn $4/bu).

Assuming Moth er Nature doesnt throw a curve ball during the remainder of the '14/'15growing season, the US is set to remain a low-cost starch/sugar producer, with the USethanol producers standing to benefit significantly. Below we highlight the recent dramaticfall in corn prices ( Exhibit 31 ) driven by improving yield/productivity expectations off of still(Exhibit 32 ) near record corn acreage ( Exhibit 30 ).

Exhibit 31: Corn Prices Plummet on Bumper Crop Fear Exhibit 32: US Corn Yields Improving

350

400

450

500

550

600

650

D e c -

1 0

M a r -

1 1

J u n - 1

1

S e p - 1

1

D e c -

1 1

M a r -

1 2

J u n - 1

2

S e p - 1

2

D e c -

1 2

M a r -

1 3

J u n - 1

3

S e p - 1

3

D e c -

1 3

M a r -

1 4

J u n - 1

4

Corn Active Contract ($cents/bu)

2012 Drought 2013 Weather Concerns

2014 Bumper Crop Fear

020406080

100120140160180200

' 0 0 / 0 1

' 0 1 / 0 2

' 0 2 / 0 3

' 0 3 / 0 4

' 0 4 / 0 5

' 0 5 / 0 6

' 0 6 / 0 7

' 0 7 / 0 8

' 0 8 / 0 9

' 0 9 / 1 0

' 1 0 / 1 1

' 1 1 / 1 2

' 1 2 / 1 3

' 1 3 / 1 4

' 1 4 / 1 5

' 1 5 / 1 6

' 1 6 / 1 7

' 1 7 / 1 8

' 1 8 / 1 9

' 1 9 / 2 0

' 2 0 / 2 1

' 2 1 / 2 2

' 2 2 / 2 3

' 2 3 / 2 4

2012 Drought

bu/ac

Source: Bloomberg Source: USDA (WASDE & Long-Term Forecasts)


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Current Negative View on Corn a Near Term Positive for Ethanol:

Due to recent significant precipitation and moderate weather across the corn belt, werecently adjusted potential yields in several "key" corn belt states, generating a state-weighted aggregate yield of ~167 bu/ac (assumes "normal" weather for the balance of thegrowing season). Specifically, we are hearing that adequate rainfall has alleviated mostsub-soil moisture concerns we highlighted following our farm tours in May (details here ).With roughly 91.6mm corn acres planted (USDA estimate), we now estimate a stock:useratio of ~13% and an average corn farm price of $3.70/bu to $4.30/bu over the next year.

LT Growth in Ethanol Consumption Could Dramatically Improve Corn Demand:

As a rule of thumb, every bushel of corn can produce 2.7 to 2.8 gallons ofethanol. Therefore ~14 billion gallons of ethanol production requires ~5bln bushels of cornor ~36% of our estimated production this season (5-year average of 35.3%). On a long-term basis, if we take the view that the US could produce up to 30 billion gallons ofethanol, it would require an incremental 5.7 bln bushels of corn (this scenario wouldrequire ~10.7bln bushels for ethanol use). As it's unrealistic that the US could add the30mm-40mm acres (note: the high end of the range implies acreage additions in loweryielding areas) required to produce the necessary bushels, productivity per acre wouldneed to increase significantly.

Exhibit 33: 2014/15 Expected Corn Demand by End Mkt Exhibit 34: US Ethanol Production & Corn Consumption

Feed andResidual

39%

Ethanol & byProducts

38%

Food, Seed &Industrial

10%

Exports13%

0%5%10%15%20%25%30%35%40%45%

0

2,0004,000

6,0008,000

10,000

12,00014,00016,000

' 0 0 / 0 1

' 0 1 / 0 2

' 0 2 / 0 3

' 0 3 / 0 4

' 0 4 / 0 5

' 0 5 / 0 6

' 0 6 / 0 7

' 0 7 / 0 8

' 0 8 / 0 9

' 0 9 / 1 0

' 1 0 / 1 1

' 1 1 / 1 2

' 1 2 / 1 3

' 1 3 / 1 4

' 1 4 / 1 5

' 1 5 / 1 6

' 1 6 / 1 7

' 1 7 / 1 8

' 1 8 / 1 9

' 1 9 / 2 0

' 2 0 / 2 1

' 2 1 / 2 2

' 2 2 / 2 3

' 2 3 / 2 4

Demand Ethanol Ethanol % of Demand

Bushels (mm) % HarvestedUSDA LT Forecast

Source: USDA Source: USDA (WASDE & Long-Term Forecasts)

Arguably the US agricultural complex could meet the challenge with cost-competitive corndriven by continuously compounding yields by 3.5% to 4.0% over the next 10 years (allelse equal), which in our view is relatively unrealistic as well. However, given continuouslyimproving genetics (~1%+ yield benefit per annum in developed ag markets), newbiotechnology products, precision farming benefits and greater use of pivot irrigation, wecould always be proven wrong. But then again, Mother Nature will always have her say.

Longer Term: Corn Prices Could Rise, But EthanolDemand in the US Would Have to SurgeOur base case for ethanol demand is an increase of around 11bn gals over the next 7 orso years. Some of this increase in demand will be met by Brazilian sugarcane ethanol,some from RoW sugar based ethanol, some from fossil fuel based ethanol processes (e.g.Celanese from coal or natural gas, or from municipal waste), some from US corn, and asmaller contribution from 2 nd generation ethanol technology using non-food based sugars.
https://doc.research-and-analytics.csfb.com/docView?sourceid=em&document_id=x566835&serialid=9Slnd5Ukef5LXvkryNVT81s3NOlhIBZHf5cnOiCba60%3dhttps://doc.research-and-analytics.csfb.com/docView?sourceid=em&document_id=x566835&serialid=9Slnd5Ukef5LXvkryNVT81s3NOlhIBZHf5cnOiCba60%3dhttps://doc.research-and-analytics.csfb.com/docView?sourceid=em&document_id=x566835&serialid=9Slnd5Ukef5LXvkryNVT81s3NOlhIBZHf5cnOiCba60%3dhttps://doc.research-and-analytics.csfb.com/docView?sourceid=em&document_id=x566835&serialid=9Slnd5Ukef5LXvkryNVT81s3NOlhIBZHf5cnOiCba60%3d


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11 July 2014


In our base case scenario, where the adoption of ethanol as a fuel in US FFV vehicles isrelatively slow, then there appears enough supply runway from Brazil, from starchesoutside Brazil, and later in the decade from fossil and 2G sources.

If US corn ethanol producers decide to add to capacity for export markets, there could beprice competition in the short term due to infrastructure constraints and mandateprogression. However, in the longer term, there does appear room for more corn ethanolin the global gasoline pool, assuming the economics are favorable.

If consumers in the US do create stronger demand for ethanol in their flex fuel vehicles,the pull on corn could be substantially higher.

Exhibit 35: Various Supply Sources for Our Ethanol Demand Projections

0

5

10

15

20

25

30

35

40

2000 2002 2004 2006 2008 2010 2012 2014E 2016E 2018E 2020E 2022E

E t h a n o

l p r o

d u c t

i o n

& d e m a n

d , b

i l l i o n g a

l l o n s

US (corn) Brazil (cane) ROW (starch)

ROW (fossil) 2G Global Ethanol Demand


Exhibit 36: Overall Ethanol Blending In Global Gasoline Pool Still Room to Grow

303.4 303.9308.7

313.7319.6

323.4327.7

332.4337.6

343.4

349.7

7.2% 7.1% 7.0%

7.3%7.6%

7.7%7.8%

8.0%8.2%

8.4% 8.5%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

280

290

300

310

320

330

340

350

360

2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E 2019E 2020E

G l o b a

l E t h a n o

l B l e n

d R a

t i o

G l o b a

l G a s o

l i n e

D e m a n

d , b

n g a

l s

Global Gasoline Demand, bn gals Global Ethanol Blend Ratio



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11 July 2014


Exhibit 37: Its not just sugar based ethanol coal and natural gas can be ethanolbuilding blocks also

Source: Celanese

Exhibit 38: Indonesia and China Have Strong Interest in fossil based ethanol production

Source: Celanese

On a long-term basis, if we take the view that the US would need to produce 30bn gals ofglobal ethanol supply (ie high FFV penetration and strong global demand), the USagricultural complex could meet the challenge with cost-competitive corn driven by adding30-40 million acres and increased yields.

Its not just sugars fromcane and corn; gas and coalcan be ethanol feedstocks


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More Ethanol, Just What GasolineMarkets Need

Although gasoline markets in the OECD face the pressure of improving efficiency gainsand slowing growth in the overall vehicle fleet, there is lots of potential transport demand inemerging markets. Gasoline growth in China is almost 10% pa. As the BP StatisticalReview suggests, there could be decent growth in the gasoline and diesel pool (andoverall oil dem

cs - global eth mkt

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