Originally printed in the September, 2006 issue of Ethanol Producer Magazine

Tightening Chains of Supply
Ethanol plant builders say their waiting lists are growing—not only because of their own limited abilities to handle new jobs, but also because of the size and capabilities of the suppliers who serve them. It’s a critical period right now for vendors whose ability to meet the demands of the U.S. ethanol expansion has a major bearing on the near-term success of their own companies.
By Nicholas Zeman

Deadline pressure often brings results but, as almost everyone knows, it can also cause a lot of stress. Just ask any ethanol plant builder who has to secure and manage materials, services and equipment even after the plans have been drawn, the site selected and the crews mobilized. Not surprisingly, the shared perspectives of ethanol industry suppliers and service providers can provide valuable insight into the logistics and challenges of the present ethanol plant rush.

The first difficulty for any company engaged in the business of building ethanol plants has been a shortage of stainless steel. “My understanding was there were massive amounts of stainless steel being purchased by China in preparation for the World’s Fair,” says Rod Simms, project engineer for ICM. “Anyway, that’s the story we heard—and both the availability and the price of stainless have gone up substantially over the past three years.” This affects construction projects and equipment manufacturing considerably, Simms says, because many ethanol plant tanks and vessels are made from stainless steel.

One factor is that the surcharge for stainless steel has risen from 73 cents to $1.60 per pound since March, according to Jim Bokor Sr., president of Robert James Sales Inc. (RJS), a steel distributor based in Buffalo, N.Y. “Any piece of stainless steel has a surcharge, he said. “You can’t dodge that bullet.” The steel surcharge is a fee added to the overall purchase to cover the increased price of certain metals needed in the manufacturing process. “The demand for nickel in stainless steel is going up,” Bokor says. In addition, the consumption of stainless has spiked due to the current popularity of the material in household appliances. “It used to be that you didn’t see a stainless steel refrigerator except in restaurants, Bokor says. “Now everybody has stainless in their kitchens.”

The other problem is that there are some shortages of material at the mill end of the steel business. “The flat-roll [businesses that] manufacture the sheets are very busy, and a lot of the pipe mills are on allocation. … They’re not getting enough steel to produce what they want to produce,” Bokor says. “This causes deliveries to go way down.”

A Plant Per Week
In terms of industry expansion, ICM alone has gone from three or four plants a year to three or four plants a month, according to Simms. “So we’re looking at roughly a plant a week,” he says. This has created a peak in demand over a relatively short time for major equipment. “When you look at a rise like that occurring over the last three years, it’s a pretty rapid escalation, ” he adds.

These circumstances have put some pressure on unique pieces of equipment produced by a finite number of manufacturers. “The type of centrifuge [for example] that’s used to dewater distillers grains is only manufactured by two or three companies in the world,” explains Simms, adding that while there are other manufacturers potentially available, they’re not well known in the ethanol industry. The selection and evaluation of new vendors has become a major part of the design/build process. “This requires a substantial amount of what we call ‘bedding time’ to really determine if manufacturers (new to the ethanol industry) are capable of doing what the industry needs, and if we can get them up to speed on what the industry is looking for in certain areas,” Simms says.

The expansion has occurred so rapidly that the identification and evaluation of new vendors have been an important part of the construction process. While there may not be an actual shortage, Simms says circumstances have been dictated by the fact that it has taken time to identify and qualify new vendors. “Now you might need up to eight vendors, when in the past you’ve only needed two,” he says. “It wasn’t that they weren’t there, but no one necessarily knew who they were and hadn’t checked them out to the comfort level of spending several million dollars.”

Noticing a New Market
Renewable fuels have seen a surge of new vendors that have traditionally served petroleum and chemical industries, but are now noticing a new market. For instance, RJS noticed its pipe fittings and flanges would work in renewable refining. “Robert James Sales has an inventory that you would have to go to Houston to match,” Bokor says. “With $20 million in materials on hand, it [beats] everything on the East Coast or in the Midwest. You can build a lot of ethanol plants with $20 million, and we’ve been gearing up for this business for almost a year.”

Process engineers at the various design/build firms are looking for new vendors, and there are vendors looking for new customers. “Those two have to get together, and there has to be that traditional ‘how are we going to work together?’ dance that goes on, and when that is all done, maybe you have a new vendor on your list and maybe you don’t,” Simms says.

This process of evaluation that occurs between a design/build firm and new vendors is familiar to Bokor. “We’re doing great business with [plant builders] now, but it took them a long time to figure out that we were for real,” he says. “We kept saying, ‘We have it. We have it!’… Now they’re believers—Delta-T, Lurgi—[and] we’re getting calls from a lot of them. I think as time goes on we’ll get more.”

Design/builders may require a period of testing as well with certain pieces of equipment to ensure performance expectations. “While there are a number of pump vendors [for instance], until someone has actually used a particular pump in a plant somewhere and checked it out—made sure it performs as promised—you are reluctant to put them on the approved vendor list,” Simms says.

Bokor agrees that there are shortages across the spectrum from materials to manufacturers in an industry with such specialized and unique products. “Heat exchangers are taking forever to get,” Bokor claims. “The fabrication shops are busy. Everybody is busy. It’s a great time to be in the ethanol or biodiesel businesses.”

Forecasting
The task of placing orders and procuring services to meet construction deadlines is an important managerial function, which requires foresight, advanced planning and other considerations that may be overlooked. One of these major planning ordeals, for example, is the construction rail spurs.

“Many plants wait until the later stages of construction before they contract out the track work,” says Rick Volkmann of Volkmann Rail. “They’re not realizing how long it takes to build the track and get the materials.” Many of the big railroads are doing massive tie replacement programs, and the short lines have had low interest loans available to them, Volkmann explains, which have allowed for various construction projects. “The ties and the rail are both in very tight supply,” Volkmann says. Manpower has been an issue as well. ”It’s always hard to get good employees, especially since our work is physically demanding.”

These are the market circumstances that have limited the operations of Volkmann Rail, which said it has not had to turn down any customers yet from operating at maximum capacity but that it was certainly a possibility in the future. “We were quoting [on a new plant] this week,” Volkmann says. “They need it completed in April. So that would mean construction in Iowa through the winter to get it done in time because we can’t get the materials for at least two months to start.”

The lead-time on equipment has increased substantially, upwards of 50 percent in most cases. This means instead of placing an order eight months in advance, manufacturers now need 12 months to deliver. “The lead times are going up farther and farther, and what is happening is people in the business are just placing their orders earlier,” Simms says. “I don’t know of any plants that have necessarily been held up in the industry because of delivery of equipment, but certainly the number of vendors involved and the lead time on equipment has changed significantly.”

Extended planning can also cause problems due to the volatility of some of the commodities that are involved in ethanol plant construction, like the aforementioned stainless steel. “There were good contracts in place with certain distributors with long-term pricing, but now you can’t deliver, not today, not with what is going on,” Bokor says. “For somebody to tell me that I have to take a contract and guarantee the price for a year, I’d have to seriously think about it, and the price would be astronomical.”

A company operating on tight margins cannot afford to have funds suspended for eight or nine months, Bokor says. “We take firm price contracts for 30, 60, 120 days, six months,” he explains. “I’ll even do it for a year on some of the commodities, but I wouldn’t do it on pipe—it’s just too volatile.”

In the current market, it is extremely difficult to budget for a plant in advance because of rapidly changing prices. Of course, this difficulty runs parallel with the ability to order parts and secure services. “To get your permits for this or that takes time … and then they get a budget to build the plant,” Bokor says. “Then it’s three to six months before they decide it’s time to buy. Well, by that time, the budget prices are no good. They’re absolutely thrown out to the wind [because] prices have gone up.” EP

Nicholas Zeman is an Ethanol Producer Magazine staff writer, reach him at nzeman@bbibiofuels.com