Blog Post

Japanese eye investment in wood pellet plants to secure biomass supply

My colleague Fiona and I have just recently returned from the CMT Biomass Pellets Trade and Power conference in Tokyo. As always, it was a really interesting and busy few days but what really caught our attention was the changing attitudes of Japanese buyers towards biomass supply and the significantly increased interest in upstream investment.

It is evident that a significant portion of the biomass power projects under development in Japan are now at a stage where they must lock in at least part of their required supply in order to secure financing. For a couple of years Japanese trading houses and utilities have been communicating with wood pellet producers but it is just this year we have seen a rush of long term contracts being signed. Enviva, Pinnacle and Engie have all signed new supply contracts with Japanese offtakers this year.

Already Canada has established itself has the preferred supplier for the Japanese market, largely due to its relative proximity and existing trading relationships with Japan, backed by secure, sustainable wood pellet supply. Canada sent almost 400kt of wood pellets to Japan in 2017, accounting for 74% of Japanese imports.

What was noticeable at the conference was the shift in strategy. The Japanese trading houses and utilities are starting to realise supply is restricted and now know they must lock down supply, especially if they plan to focus on just one or two regions such as Canada or Australia. One conclusion a lot of them seem to be reaching is that to guarantee supply they must invest upstream in pellet mill projects. It is something we saw in the European market; UK utility Drax built two pellet mills in Louisiana and Texas and purchased German Pellets’ Louisiana plant. German utility RWE developed the Georgia Biomass plant when it was using pellets in the Netherlands and the UK, while French utility Engie bought a minority stake in Canadian producer Pacific Bioenergy.

In the Japanese market, Sumitomo has shown itself to be ahead of the curve when it comes to investing upstream. It invested in Pacific Bioenergy, a pellet producer located in British Columbia, Canada, last year and a couple of years ago partnered with Brazilian sugar producer Cosan to develop sugar cane bagasse pellets.

But is there enough feedstock and production capacity in Japanese buyers’ preferred regions to meet the demand? It is something we have examined extensively in our new multi-client report – A Strategic Assessment of Asian Pacific Biomass Demand and Supply to 2030. While we have concluded there are limits to Canadian and Australian supply, there is still room for some expansion in the regions.

In addition, the US South seems like the next logical step if investors are looking for bankable, sustainable, secure supply. Wood fibre availability has so far not been an issue in the region but freight costs from the US Gulf, and more so from the US Atlantic coast, could perhaps prove problematic to the competitiveness of these supply regions. Most Japanese plants lack the infrastructure to accept Panamax and Supramax ships; this means that using larger vessels to help mitigate costs will be tricky unless someone invests in a dedicated wood pellet port terminal to handle them.   

What we may see is more investment in South East Asia and eastern Russia, but the two regions come with their own political and credit risks, as well as logistical and infrastructure constraints.

We can be sure that the Japanese trading houses and utilities will continue to actively pursue upstream investments as they work to secure long-term sustainable biomass supply. And it is likely they will continue to show a preference for credit worthy North American and Oceanic suppliers.

To read more about how North American and Australian wood pellet supply will play a role in the Asia Pacific market please see my article in the May/June issue of Pellet Mill Magazine, available now at www.biomassmagazine.com/pellet-mill-magazine/.