* Capacity utilisation rises following fall in grain prices
* Ethanol prices start to weaken, tough outlook for Q1 2014
* U.S. imports arriving in EU despite imposition of duties
By Nigel Hunt
LONDON, Nov 18 (Reuters) - European Union bioethanolproducers are boosting output as the cost of grain falls to itslowest in several years but there are concerns that the increasein profitability will not last long.
Industry sources said prices of the motor fuel, derived fromeither grain or sugar crops, have begun to weaken in response toa seasonal decline in demand while renewed imports from theUnited States have also cast a cloud over the sector.
"Whilst we've seen margins helped by falling grain prices,we're also seeing a drop in ethanol (prices) as we head into thewinter season," Rick Taylor, commercial director at VivergoFuels, said.
"We expect it to be a tough environment for the firstquarter of 2014," he added, noting it was too early to predictthe outlook for the rest of next year.
Vivergo Fuels owns and operates one of Europe's largestbioethanol plants in eastern England. The company is a jointventure between BP, AB Sugar and DuPont.
Industry sources said the two main drivers behind the risein profitability have been falling prices for maize and otherfeed grains as well as anti-dumping duties imposed by the EU onimports of U.S. bioethanol earlier this year.
"Due to lower grain prices the capacity utilisation of theethanol plants was able to be increased," one of Germany'slargest bioethanol producers, Verbio, said in a statement.
Verbio said its bioethanol output in the third quarter ofthis year rose 37 percent from a year earlier to 49,770 tonnes.
UK biofuels producer Ensus also announced in late Septemberit was restarting its bioethanol plant in northeast England.
The company had taken the plant offline earlier this year,citing adverse market conditions.
"It is a bit of a seesaw effect," said Xavier Astolfi,deputy CEO of France's Cristal Union, one of the largest EUbioethanol producers.
"When grain prices are very high you have units closing inthe UK, but when the pressure falls slightly these units restartand competition comes back. There are cycles and we have to playwith it," he said.
Each EU member state has created its own set of rules forthe biofuel sector. France has a quota-based system thatencourages local production, while Britain and Germany haveadopted a more free-market approach.
LOWER MAIZE PRICES
Maize prices have fallen this year, weighed down by a recordharvest in the United States, with CBOT futures hitting athree-year low earlier this month.
French ethanol producers stressed that the expected jump inU.S. ethanol output due to the large maize crop would weigh onworld prices and pressure the European market despite theanti-dumping duties set this year.
Some breaches in the system have been observed, mainly inScandinavia, and a drop in the dollar against the euro increasedU.S. exporters' earnings in dollar terms, dulling the impact ofthe 5 euros per hectolitre dumping duty, they said.
"With the higher maize crop and the drop in prices, dormantU.S. plants are going to restart and the pressure on importswill again be high within the EU," Sylvain Demoures,secretary-general for French ethanol producers group SNPAA,said.
Some U.S. imports are coming into the EU in the form ofblends that are not subject to the same level of import duty.
"There are still imports entering the EU originating fromthe U.S. that do not pay the proper duty, like E93 (93 percentethanol) imports into Finland and recently E48 imports in theUK," said Rob Vierhout, secretary-general of ePURE, whichrepresents the European ethanol industry.
"These imports, though limited in volume, have a strongdownward effect on the price of ethanol for fuel," he said.
Another threat to the EU market could come from an envisagedcapping of biofuel blending in the United States, although thatremained uncertain at this stage.
The Obama administration proposed on Friday slashing federalrequirements for U.S. biofuel use in 2014, bowing to pressurefrom the petroleum industry and attempting to prevent apotential fuel crunch next year.
"It could have consequences in the mid-term. If Brazil hasno outlet left in the U.S., the natural one will be the EuropeanUnion, so we remain relatively careful," Astolfi of CristalUnion said.
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