* 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 bioethanol producers are boosting output as the cost of grain falls to its lowest in several years but there are concerns that the increase in profitability will not last long.
Industry sources said prices of the motor fuel, derived from either grain or sugar crops, have begun to weaken in response to a seasonal decline in demand while renewed imports from the United 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 the winter season," Rick Taylor, commercial director at Vivergo Fuels, said.
"We expect it to be a tough environment for the first quarter of 2014," he added, noting it was too early to predict the outlook for the rest of next year.
Vivergo Fuels owns and operates one of Europe's largest bioethanol plants in eastern England. The company is a joint venture between BP, AB Sugar and DuPont.
Industry sources said the two main drivers behind the rise in profitability have been falling prices for maize and other feed grains as well as anti-dumping duties imposed by the EU on imports of U.S. bioethanol earlier this year.
"Due to lower grain prices the capacity utilisation of the ethanol plants was able to be increased," one of Germany's largest bioethanol producers, Verbio, said in a statement.
Verbio said its bioethanol output in the third quarter of this year rose 37 percent from a year earlier to 49,770 tonnes.
UK biofuels producer Ensus also announced in late September it 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 EU bioethanol producers.
"When grain prices are very high you have units closing in the UK, but when the pressure falls slightly these units restart and competition comes back. There are cycles and we have to play with it," he said.
Each EU member state has created its own set of rules for the biofuel sector. France has a quota-based system that encourages local production, while Britain and Germany have adopted a more free-market approach.
LOWER MAIZE PRICES
Maize prices have fallen this year, weighed down by a record harvest in the United States, with CBOT futures hitting a three-year low earlier this month.
French ethanol producers stressed that the expected jump in U.S. ethanol output due to the large maize crop would weigh on world prices and pressure the European market despite the anti-dumping duties set this year.
Some breaches in the system have been observed, mainly in Scandinavia, and a drop in the dollar against the euro increased U.S. exporters' earnings in dollar terms, dulling the impact of the 5 euros per hectolitre dumping duty, they said.
"With the higher maize crop and the drop in prices, dormant U.S. plants are going to restart and the pressure on imports will 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 of blends that are not subject to the same level of import duty.
"There are still imports entering the EU originating from the U.S. that do not pay the proper duty, like E93 (93 percent ethanol) imports into Finland and recently E48 imports in the UK," said Rob Vierhout, secretary-general of ePURE, which represents the European ethanol industry.
"These imports, though limited in volume, have a strong downward effect on the price of ethanol for fuel," he said.
Another threat to the EU market could come from an envisaged capping of biofuel blending in the United States, although that remained uncertain at this stage.
The Obama administration proposed on Friday slashing federal requirements for U.S. biofuel use in 2014, bowing to pressure from the petroleum industry and attempting to prevent a potential fuel crunch next year.
"It could have consequences in the mid-term. If Brazil has no outlet left in the U.S., the natural one will be the European Union, so we remain relatively careful," Astolfi of Cristal Union said.