Wood pellet producers with an interest in the Asian biomass market should be keeping a keen eye on the developing palm kernel shell (PKS) market. The fuel will have a significant impact on future wood pellet demand in the coming years.
The importance of PKS in the North East Asian biomass market is growing (see my previous blog), particularly in Japan. But why should the outlook for PKS be of interest to wood pellet producers?
Our research shows that almost 60% of planned Japanese biomass power projects over 20MW plan to use some PKS. Even more projects intend to use an unspecified form of woody biomass, which could potentially include PKS. However for the majority of Japanese plants planning to use at least some PKS it is only a minority fuel source, with most relying on wood pellets for 50-85% of their biomass supply. Many have chosen to lock in long-term pellet contracts to make up the majority of their fuel portfolio because of their need to partner with reliable, bankable suppliers. They then plan to purchase their remaining biomass volumes on the spot market, whether in the form of PKS, wood pellets or local wood chips (imported wood chips will also grow in importance, see our report on the seaborne wood chip market for more details).
The availability of PKS, once the large pipeline of Japanese projects comes online, will therefore be a determining factor behind wood pellet consumption in the region. Reduced PKS availability or higher prices would likely push up demand for wood pellets. And on the flip side, increased PKS supply could decrease pellet spot demand and may encourage Japanese power projects to sell their more expensive contracted pellet supply into the spot market and replace it with cheaper PKS.
The supply of PKS and its availability for export is determined by a host of regional issues, including weather conditions, palm oil demand, local use and logistics. Until now, PKS supply has greatly surpassed exports but uncertainty surrounds how much could be available for export if demand rises to expected levels.
Although pellets dominate the long-term contract market, in recent years we have seen growing evidence of the commoditisation of PKS. The involvement of Japanese trading houses is helping to provide secure, bankable counterparties for PKS trades. Could their participation reduce the Japanese market’s reliance on new long-term wood pellet contracts?
Our new report, The global market for PKS, helps bring clarity to an opaque and fragmented market and answer some of the key questions faced by biomass market participants in the region. Can PKS supply keep up with expected demand? How much PKS is available for export? What impact would the of the introduction of sustainability criteria by the Japanese government have on supply?
It is not just pellet producers who should be keeping an eye on the PKS market, but also vice versa. It is clear from our analysis there is a correlation between wood pellet and PKS prices. Given PKS's role as a secondary fuel, used by power plants to supplement local wood chips or wood pellets, we suggest the price of PKS is unlikely to rise above the level paid for local chips or wood pellets. It is therefore imperative that PKS producers keep up-to-date with wood pellet and wood chip market movements and prices to ensure they remain competitive.
The Asian industrial biomass market – particularly its relative fuel flexibility compared to the wood pellet-dominated European market - will create an interesting trading environment as demand grows in the coming years. Those players who keep well informed of developments in all fuel types will be best placed to capitalise on this opportunity.