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Can wood pellet supply keep up with Asian demand?

by Rachael Levinson Jul 26, 2018

As we have discussed in our series of blogs on the Asian biomass market, demand is growing rapidly in the region. This poses the question, will there be enough biomass supply to meet it? Here I will look at the supply-demand balance for wood pellets in the region and the outlook for the coming years.

As Fiona explained in her latest blog our estimates indicate that industrial pellet demand in Asia could reach 4.9Mt in 2018, an increase of +49% on 2017. And South Korean and Japanese pellet demand is expected to continue to grow beyond that. We estimate it could rise to 13Mt in 2027. Several factors will impact whether all that demand materialises, with perhaps the most important being the availability of biomass.

Data from our Q2 2018 Outlook for Wood Pellets report shows that globally there is 44Mt/y of wood pellet production capacity (heating and industrial) and almost 6Mt/y of that is industrial capacity in Asia, Australia and western Canada. For a more in-depth breakdown of supply capacity and projects in the pipeline by country please refer to our Asia Pacific biomass report.

Currently there is enough supply to match demand in the region but what is clear from our figures is that more investment is needed if supply is to keep up with demand. As discussed in my blog here, Japanese utilities are now considering upstream investment to secure the supply they will need. In addition, the offer of 10 to 15-year offtake contracts from Japanese users, which have secured Feed-in-Tariff subsidy, will attract investors to back new supply capacity. So far, the trend has been that Japanese utilities have signed supply contracts with well-established industry players such as Engie, Pinnacle and Enviva (often through the Japanese trading houses) but perhaps we will see more newcomers to the industry as buyers widen their net.

A further question is whether capacity can be brought online fast enough? The South East Asia market has demonstrated that it can build new capacity rapidly. The clearest example is Vietnam which grew its exports to South Korea 100 times over in the space of six years, sending over 1.5Mt to Korea in 2017. Most pellets sent for export are collected from several small mills, usually less than 20kt/y.  Malaysia, Thailand and Indonesia have also expanded their capacity quickly and continue to do so. Again, supply is dominated by lots of small mills. Russia has also seen swift growth in its supply capacity by building pellet mills at existing sawmills, saving time and costs by utilising existing infrastructure and having easy access to raw materials. Russia mainly supplies the European heating market, but recent expansions have been with an eye on the Asian market. (Subscribers can read more in Forest Energy Monitor #87, p.7). Suppliers have emerged to support the South Korean spot market, but few have long-term offtake contracts.

In contrast, the Canadian market has expanded to help meet growing Japanese demand. Japanese buyers have favoured the security of Canadian supply but the larger scale of plants in North America (often over 300kt/y), to take advantage of economies of scale, means progress is a little slower. Normally significant funds must be raised which needs extensive due diligence and secure offtake contracts, plus the planning processes can take longer than in other parts of the world. Although western Canada has over 1Mt/y of projects in development, Japan will not be able to rely solely on Canada if it needs to find significant supply quickly.

There is over 18.4Mt/y of industrial capacity in various stages of development globally. If all were to come online, industrial capacity would grow +84% from today but all of that must be developed by 2026 if forecast levels of demand are to be realised. However, the short-term situation for the industry will be more challenging. Demand and supply appear to be very finely balanced in 2019 and, according to our calculations, there could be a deficit in supply in 2020, meaning the planned projects must be developed quickly.

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