I have been a critic of Pacific Ethanol’s (PEIX) business model for a long time. I criticized it a year and a half ago in an article I wrote for Financial Sense, arguing that it would be very difficult for them to compete with Midwestern ethanol producers. Add in the excess ethanol capacity spawned by government subsidies, which in turn drove corn prices up and crushed ethanol margins, and I couldn’t see how Pacific Ethanol would consistently make money.
Today, they announced they were halting construction of their newest ethanol plant:
NEW YORK (Associated Press) – Pacific Ethanol Inc. said Monday it has halted construction of an ethanol plant near Calipatria, Calif., because of weakened market fundamentals that have hurt the industry in recent months.
Ethanol prices have dropped because of oversupply as the industry expanded beyond demand. At the same time, prices for the product’s key feedstock, corn, have risen dramatically, squeezing profit margins further.
“Given current ethanol market conditions, we feel it is prudent and strategic to suspend construction until the market improves,” Chief Executive Neil Koehler said in a statement. He added that Pacific Ethanol is committed to completing the project and is moving ahead with construction of plants in Stockton, Calif., and Burley, Idaho.
Of course after every bit of bad news (and there has been a lot from them lately), there will be those who think this is a buying opportunity. Take this guy, for example. He was critical of an article I wrote about Bill Gates’ PEIX investment. He thought the plunge was a buying opportunity, and I was an idiot for not recognizing it. But if he acted on it, he is down over 40% since I wrote that article.
Remember, just because the share price had already fallen by 75%, that didn’t mean that it couldn’t fall farther. It could, and it did. And I still wouldn’t touch Pacific Ethanol, even though you might make some money on the volatility. I just don’t think they can be profitable long-term. They certainly don’t enjoy any kind of competitive advantage. They will continue to be, in my opinion, at a distinct competitive disadvantage.