Langerlo's demise will not turn the tide on the tightening industrial supply/demand balance
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May 23, 2017
In late April 2017 Graanul Invest’s Langerlo Power Station filed for bankruptcy, putting the final nail in the coffin of its planned coal-to-biomass conversion. With a deadline for completion in mid-2018, and now having failed under the ownership of three companies, the project appears doomed.
The collapse of the Langerlo conversion wipes around 1.6Mt/y of wood pellet demand from the industrial pipeline, at a time when the market is only tentatively starting to regain balance after a lengthy period of oversupply and rock-bottom prices.
However, with several million tonnes of industrial demand expected to come on stream elsewhere within the next 18 months, there appears to be little distress over the absence of Langerlo from the pipeline. In fact, Engie's hopes of extending support at its existing Les Awirs and Max Green biomass conversions in Belgium could be given a boost in light of Langerlo's demise.
In particular, Asian demand growth is gaining momentum, with several Japanese projects looking to sign long-term offtake contracts over the coming months. North American producers have warned that European buyers seeking term contracts may lose out to Japanese buyers if they are not quick to secure agreements. Even for US Southeast producers, the security of a 20-year offtake contract with a credit-worthy counterparty – which the Japanese buyers are offering – is an attractive enough prospect to compromise on the near-term gains of a cheaper freight rate to Europe. European political support is currently only guaranteed until the mid- to late-2020s. Policies may be renewed, but at this stage nothing is certain beyond then.
In addition, the South Korean market appears to be opening up once again to non-Asian suppliers. The country has seen imports from Canada increase significantly in 2017 so far, totalling 70kt during the first quarter (making Canada the third largest supplier). In comparison, South Korea imported just 35kt from Canada during the whole of 2016. Though a trade dispute between the two countries was resolved in late 2015, falling prices throughout last year meant that only Vietnamese and Malaysian producers could afford to meet the requirements of the gencos’ tenders. However, with tenders growing in frequency and volumes, and prices starting to rise due to increased freight costs in Asia – it seems that buyers are now looking further afield for supply.
The Dutch market continues to present issues regarding sustainability. The verification protocol is yet to be finalised, and anecdotally the draft regulations made it impossible for suppliers to meet requirements. Nevertheless, both Uniper and RWE are pressing ahead with plans to cofire. Both companies have confirmed investments to make the necessary modifications and fire up by the end of 2017 (RWE’s Amer) and 2018 (Uniper’s Maaslavkte), breaking the stalemate between utilities and NGOs at the sustainability negotiating table. Exactly how they plan to work around the requirements is unclear, but as of April 2017 no long-term contracts had been finalised.
Development on the supply side remains sluggish outside of Asia. Prices remain lower than the historical average. In the past few months more industrial capacity has been idled (due to high supply costs) than has been brought on stream. The idled capacity is being replaced – slowly – with lower-cost tonnage. Net growth in global pellet capacity in 2015-2016 amounted to +2.3Mt/y compared with more than +7Mt/y in 2014-2015.
Meanwhile, global industrial demand is expected to grow +2.9Mt/y in 2017, and by a further +5Mt/y in 2018. While there is certainly room for higher capacity utilisation at many mills focused on the heat markets, it is not always possible for these mills to supply to industrial buyers cost-effectively. Consequently, by next year, we expect that additional volumes will need to be sought in the industrial market.