2017 was a year of change in the global wood pellet markets, heralding the start of a shift in fortunes for many market participants following the overcapacity and rock-bottom prices which characterised 2016. The next twelve months look set to be more dynamic still, with rapidly increasing demand in Asia drawing ever-more attention from both wood pellet suppliers and end users. However, there remain significant unanswered questions about the trajectory for the Asian biomass market, and it is still unclear what impact this trend of rising Asian demand will have on existing European consumers and North American suppliers.
Research from Hawkins Wright’s Outlook for Pellets report shows that global wood pellet demand (for both industrial and heating purposes) increased by 3.7 million tonnes in 2017. This +13% year-on-year growth compares to the +6% rise in demand seen in 2016 and illustrates the foundation on which fortunes in the market have begun to turn around. The bulk of this increase is attributable to industrial users in the UK and Asian power sectors, which together accounted for 2.9 million tonnes of extra demand in 2017, an increase of +23%. Such figures dwarf the rise in demand for heating pellets, which grew by a comparatively modest +5% in 2017.
The delayed commissioning of new sources of industrial demand in Europe – namely EPH’s Lynemouth conversion and RWE’s Amer cofiring unit – slightly dampened demand growth in Europe towards the end of 2017. But the same cannot be said for the Asian market, where consumption in South Korea and Japan rose by 1.3 million tonnes in 2017. As we observed in our market outlook commentary this time last year (see here), the commissioning of KOEN’s Yeongdong conversion was a gamechanger for the Asian market, creating the largest single source of wood pellet demand in the region. The company’s conversion of unit #1 means that the station now consumes almost 600,000 tonnes of wood pellets each year. This will potentially rise to 1.4 million tonnes from 2021 if the planned conversion of unit #2 from coal to pellets goes ahead.
This trend of rapidly increasing industrial demand in Asia may turn out to be the defining feature of the market from 2018 onwards. This will be supported by a pipeline of new biomass power projects in Japan which is even larger than that in Korea, suggesting that industrial demand in Asia could rival that in Europe by the mid-2020s.
This highlights an important question – where will the biomass come from? Until now, almost all of Korea’s demand has been satisfied by spot volumes purchased through short term tenders. However, as demand rises, the ability of the market to supply such tonnages without investing in new supply capacity will become increasing difficult. The challenge posed to Korean buyers using this procurement model is well illustrated by KOEN’s hugely ambitious tenders for 1.5 million tonnes of wood pellets to be delivered over two years to its Yeongdong plant - the largest volumes ever requested by a Korean genco. The stipulated delivery terms are more challenging still, with the first tender asking for 600,000 tonnes per year of wood pellets to be delivered in 20ft containers (equivalent to over 2000 containers every month). The scale of this logistical and economic challenge helps to explain why the gencos’ tenders are increasingly going unfulfilled. Have we reached the limit of the market’s ability to supply such large spot volumes?
Meanwhile, many Japanese biomass power projects are in the process of finalising their fuel supply strategies. Some are still weighing up the choice between wood pellets, chips, PKS and other forms of biomass. Sustainability, security of supply, and affordability are the key factors affecting this decision. The outcome of these choices will determine where and to what extent new investments in wood pellet production capacity are made. The question of what proportion of Japanese demand can be satisfied by local resources will be key to the scale of the impact this new market will have on existing players in Europe and North America.
With wood pellet availability in the spot market already extremely tight at the start 2018 it will be interesting to see how biomass procurement trends in Asia will affect traditional European-North American trade flows over the coming months/years. This will be even more important given Drax Power's very recent announcement that it plans to convert a fourth unit to biomass. Watch this space...
A version of this article also appears in the January/February 2018 issue of Bioenergy Insight magazine.