The European Union's bioethanol industry looks set to expand production later this year, with U.S. imports expected to fall sharply following the closure of a tariff loophole, industry sources said.

The EU revised its regulations, effective April 3, to close a loophole that allowed ethanol/petrol blends with less than 30% petrol to be classified as a chemical product rather than denatured ethanol and attract a much lower duty rate.

Industry sources said, however, it could be several months before market conditions in the EU improve significantly.

"There is a latency period after publication by the EU because a certain number of importers had authorisations in stock...From July we should not suffer these imports that bypassed customs duties," Vice-chairman of French alcohol and bioethanol producers group SNPAA, Bernard Chaud, said.

Bioethanol, a substitute for gasoline, is generally produced from grains and sugar crops.

U.S. bioethanol exports into the 27-member bloc surged to a total 11.2 million hectoliters in 2011 compared with 4.55 million in 2010 and 851,000 hectoliters in 2009, U.S. International Trade Commission data showed.

"Once the classification rules will take full effect we will see US imports going rapidly to zero," said Rob Vierhout, Secretary-General of the European Renewable Ethanol Association, adding a significant amount of U.S. product had been put into storage in Rotterdam in anticipation of the change.

Chaud said a rise in capacity use in Europe, from around 80% last year, would benefit plants which had halted or sharply cut output, like the Ensus refinery in Britain or Abengoa in Rotterdam, and new projects in Britain and Hungary.

Market conditions to improve

Ensus owns one of Europe's largest bio-refineries with the capacity to make about 400 million to 450 million liters of bioethanol a year from about one million tons of feed wheat.

The company said this week it has begun work to speed up the restart of its plant, which was temporarily shut down in May 2011. Ensus cited competition from imports, particularly from the U.S., as a factor in the decision to halt production.

"In anticipation that market conditions will start to improve, the maintenance and general engineering activities have been stepped up at the Teesside bio-refinery," the company said in a statement.

Ensus is owned by two U.S. private equity funds, the Carlyle Group and Riverstone.

Another major UK biofuels producer, Vivergo Fuels, is expected to start up a major new biorefinery in eastern England in late Spring.

"We're encouraged by this regulation as it helps to re-establish a level playing field for European bioethanol producers. I hope it also gives the confidence for further investment in this sector," David Richards, managing director of Vivergo Fuels said.

Vivergo Fuels is part-owned by BP, which has a 45% stake. Associated British Foods also owns 45% of the venture and DuPont owns 10%.

The biorefinery, which will be one of the biggest in Europe, is designed to turn 1.1 million tons of feed wheat each year into 420 million liters of bioethanol and 500,000 tons of mid-protein animal feed.

Germany's bioethanol industry association BDBE expects a favourable impact from the EU decision to stop the import loophole, said association spokeswoman Carola Wunderlich.

The industry has capacity to produce some 930,000 tons annually but in 2011 was working at only about 60% of capacity, she said.

"We have the capacity to supply more bioethanol and we think this decision by the EU will help us to do this," said Wunderlich.

In Spain, the decision could boost the outlook for exports.

"Where it (the loophole) did have an impact was on sales to other EU countries, because it obviously tended to drive prices down," said Manuel Bustos, director of biofuels association APPA Biocarburantes.

Spain has four bioethanol plants - three of them owned by multinational Abengoa - with a capacity of 460,000 tons a year, and they export 46% of output.