23rd October 2006

Everyone's heard of the dot-com bust.

Now a ''dot-corn'' bust could be on the way, says the president of a Jacksonville company that dropped plans three weeks ago to build a corn-based fuel ethanol plant, citing prohibitively high costs.

''We wanted to do it, but at the end of the day it was too expensive,'' said R.B. ''Buzz'' Hoover, president of Gate Ethanol LLC. Its parent, Gate Petroleum Co., owns or supplies about 300 retail gas stations. ``The cost of ethanol equipment has gone out of sight.''

Ethanol, which is grain alcohol, is blended with gasoline as a fuel alternative to gasoline by itself. Using ethanol is viewed as a way to augment the nation's fuel supply and wean it from foreign oil.

''We had the dot-com boom in the early part of 2000. This is the dot-corn boom,'' Hoover said. ``Booms are usually followed by a bust. Once we saw the numbers, it was an obvious decision to make.''

Hoover thinks that the ethanol plant construction boom and resulting high equipment costs will be self-correcting.

''It may take a year,'' he said. ``Our crystal ball is not very clear. We are not willing to sit and wait it out.''

Matt Hartwig, spokesman for the Renewable Fuels Association in Washington, said there are 105 ethanol plants in operation in the United States and 44 under construction. In addition, there have been a number of announcements in recent months from entrepreneurs who want to build plants.

GROWING INDUSTRY

''Not all of those will come to fruition,'' Hartwig said. ``The industry is growing very rapidly. The demand on materials to build the plants has grown, as has the demand on the skilled labor it takes to build the facilities.''

As gasoline prices rose to more than $3 a gallon in the past year, interest in ethanol and other alternative fuels grew. Some industry experts suggest the current decline in gas prices won't kill interest in ethanol but may slow growth in new projects.

Last month, Iowa Falls, Iowa-based Hawkeye Holdings, the third-largest manufacturer of ethanol in the U.S., said it was delaying its initial public offering because of market conditions. Stocks of ethanol firms Aventine Renewable Energy Holdings of Pekin, Ill., and VeraSun Energy of Brookings, S.D., which went public this year, are trading at about half their highs, reached in June.

HIGHER PRICES

The boom in ethanol plant construction, along with higher steel prices, has elevated prices for items such as multimillion-dollar heat exchangers, which now cost about four times what they did a few years back, Hoover said.

''The other thing you see is that there are some people who are using investor money to build some of these plants,'' he said. ``It may be that they are not exercising the same prudence that we are.''

In the spring of 2005 Gate officials initially were told it would cost $75 million to build a 30 million-gallon plant on 90 acres near White Springs. Then they decided a 50 million-gallon plant would be more cost-effective, and its price tag would be $145 million, Hoover said.

Then that rose to $160 million.

Two weeks ago, when Gate executives learned the plant would cost $200 million, they pulled the project.

''When we first got into it, the rate of return was going to be greater than what we could have achieved with a convenience store. That potential disappeared,'' Hoover said.

For $200 million, Gate could build about 100 convenience store and gas station combinations, a business it knows well.

UNCERTAIN BUSINESS

The ethanol business is more uncertain, with worries such as the price of corn accelerating, Hoover said.

But other Florida companies are moving forward with their projects.

Bradley Krohn, president of Tampa-based U.S. EnviroFuels LLC, agreed that capital costs of building a plant, including equipment, have increased. The firm plans to build its first ethanol plant at Port Sutton, near Tampa, and another at Port Manatee.

''We have managed to control the capital costs to a certain extent, which is allowing us to go forward. We are close to groundbreaking,'' Krohn said of the Port Sutton plant, expected to cost $80 million. Construction is expected to begin in two to three months.

''It's very challenging to get to the construction phase in Florida. It's a difficult state to do this,'' Krohn said. The plant has four of the six permits needed before construction can start.

Krohn said that the recent decline in gas prices is slowing the growth of the development of new ethanol projects.

''There is predicted to be a short-term oversupply of ethanol when all these plants come online in 2007,'' he said. ``Eventually that becomes absorbed.''

Don Markley, chief operating officer of Fort Lauderdale's Losonoco Ltd., said the firm's plans to build a $150 million cellulosic ethanol plant in Florida are on schedule, despite increases in equipment prices. The company expects to build nine plants in the United States.

`WITHIN THE BUDGET'

''We are comfortable we can get our engineers and contractors to build a plant within the budget,'' he said.

Krohn thinks that ethanol production will continue to increase as more Americans understand the need to decrease dependence on foreign oil.

''Ethanol is not the only solution,'' he said. ``It is not the silver bullet. It's one piece of the big puzzle.''