THE FUTURE DEMAND AND PRICES OF THE GLOBAL INDUSTRIAL WOOD PELLETS MARKETS
In a white paper released by business intelligence FutureMetrics LLC, it estimates the industrial wood pellet tonnage demand and spot prices based on optimistic scenarios in which cofiring or full-firing wood pellets in large pulverized coal (PC) power plants develops in Japan, Korea, the U.S. and Canada. The spot price estimates are based on a model of industrial wood pellet price behaviour.
Demand for Industrial Wood Pellets
The policy drives industrial wood pellet markets, which has had a tremendous impact on traditional markets in Europe, especially, England. But the white paper pointed out that the growth in those markets is expected to plateau by 2021, hence, the question where will demand growth come from in the next decade.
Earlier this year, FutureMetrics pointed out that the potential growth in Japan could have a demand exceeding 10 to 15 million metric tons annually by 2030. Korea, too, may offer significant pellet demand if the policy defining the proportion of power from renewables continues and wood pellets are used to offset coal demand. According to the white paper, if Korean policy persists, demand could be close to 8 million metric tons per year by 2024.
Canada could also become a significant demander of industrial wood pellets as well. Recently, the country announced a national carbon pricing system to price carbon at $50 per metric ton by 2030. Currently, Alberta produces about half of its power from coal and two of its PC power plants are relatively new. Some of the older plants that will be phased out by 2030 may begin cofiring to avoid the carbon tax. FutureMetrics believes that the new plants in Alberta are “strong candidates for full conversions similar to those at Drax and Lynemouth in the U.K. For the U.S., FutureMetrics believes that the Clean Power Plan would have the ability to enable the industrial wood pellet market if it survives current challenges.
According to FutureMetrics, “sustainability and preservation of the working forest resources is the absolute limit to the size of the industrial wood pellet market.”
In another recent white paper, FutureMetrics had analysed an optimistic industrial wood pellet demand forecast, which exclude China. It shows the average growth from 2010 to 2025 to be over 3 million metric tons per year, tripling industrial wood pellet demand from now to 2025. This forecast relies on markets developing in Japan, Korea, the U.S. and Canada, which are the countries indicated with the most potential growth after 2021.
While there are many reasons why some or even all of those four countries would not reach the levels shown in the chart, but with durable policies and solid support schemes needed to provide dispatch-able non-intermittent thermally generated renewable power are put into place, the industrial wood pellet sector could follow that trajectory.
Prices for Industrial Wood Pellets
The cost to produce a tonne of wood pellets is strongly connected to the average cost of the woody biomass feedstock. The cost of delivered biomass feedstock is strongly connected to the cost of transportation which is significantly driven by diesel fuel cost. Delivered cost per tonne varies by location, and by harvest and transport infrastructure. Over time, production costs per tonne of pellets fluctuate primarily with changing wood costs (diesel fuel, and demand for the same feedstock in the region around the pellet plant) and the moisture content of the incoming wood (higher moisture content yields lower output of densified dried pellets per tonne of input).
The cost of wood pellets delivered to the end-user power plant depends on the cost to produce plus the cost of pellet transportation (truck/rail/shipping/handling).
Most industrial wood pellets are produced for a specific buyer. These offtake agreements typically have negotiated prices that are sustainable for both parties. That is, prices that are not too high so as to destroy the generator’s margins and not too low to disallow profitable operation by the producer. The contracts typically include price adjustors and terms defining currency risk. The adjustors provide a mechanism for mitigating risk for both the producers and buyers from changes in critical inputs such as wood costs and ship costs. Each pellet mill and offtake agreement will have unique characteristics and different pricing arrangements. Although most pellets are currently traded through bi-lateral contractual agreements and trading for industrial wood pellets on the spot markets is limited, the spot price does provide information on supply and demand relationships and foreign exchange effects. For example, when the markets are oversupplied, prices on the spot market are lower.
In the chart, it shows the historical and forecast spot prices delivered to Amsterdam, Rotterdam, or Antwerp in US dollars at exchange rates to the Euro calculated for each month in the series. The recent fall in spot prices is due to excess production capacity in the industrial pellet markets and, to some degree, to dampened demand for heating pellets due to several warm winters and therefore some heating pellet production available to the industrial sector. It has also been a function of a strong dollar versus the Euro and Pound.
According to FutureMetrics, the forecast assumes that the supply/demand disequilibrium that currently exists is corrected after several large pellet consuming projects come on line. Lynemouth, MGT, Langerlo, and Drax unit #1 going to full firing are expected to consume about 4.15 million metric tonnes per year by 2019 or so. The forecast also assumes that production capacity, at normal capacity factors, will not exceed demand and that the heating markets absorb normal quantities (i.e., normal winter temperatures).
In addition, it is assumed that the market will return to prices associated with production costs in the major producing jurisdictions and that the dollar/Euro/pound exchange rates converge to values defined by purchasing power parity. Historically that price in terms of CIF ARA has been between $155 and $175 per tonne. The forecast also assumes inflation at 1.5% per year and that ocean shipping rates will increase over current rates by about 2.0% per year from now to 2020.
While there are many assumptions behind the forecasts for both demand and spot prices, many will not come true as it is hard to predict the exchange rates in four years. Supply could exceed demand or vice versa. FutureMetrics also believes that it is quite probable that spot prices will increase in the coming years and more likely than not they will return to around the long-run average by 2019-20.
The spot market matters because if the industrial pellet market has aspirations of becoming a true commodity market, spot and forward prices have to support producers and satisfy buyers.