What Next for the Atlantic Pellet Market?

Although there is currently an overcapacity in the Atlantic pellet market, it's expected to clear up slowly, and as the three major European biomass conversion projects come online, they may help bring the market back to balance.
By Hannes Lechner | September 11, 2016

Following expectations of optimistic growth in the European industrial pellet market in recent years, the industry mood has since cooled. Many independent pellet project developers have been left disappointed and have abandoned projects as a result, while some existing smaller producers are starting to feel the pressure. Demand development largely stalled in 2015 and 2016, with investment decisions being delayed.  On the other hand, new pellet mill capacity continued and continues to come online, such as the two 450,000-metric-ton mills operated by Drax Power and the 450,000-metric-ton mill operated by The Navigator Company group.

The result is a long market with a current overcapacity of about 3 million metric tons in the Atlantic market, which is expected to clear up slowly. Premium pellet markets in North America and Europe were also not strong enough to absorb significant volumes, providing little relief for industrial pellet producers. In addition, Russian producers are increasingly supplying into the European premium pellet market due to favorable exchange rate developments and potentially low input feedstock costs. Pellets from this region are reportedly also of very good quality.

The insolvency of the two U.S. subsidiaries of German Pellets is the starkest sign of the challenging market situation, even though other factors may have contributed to these insolvencies. Other, mostly smaller, producers are also feeling the pressure from the current market situation, and we would not be surprised to see further consolidation in the market over the course of this year.

It’s not all doom and gloom. There is some light on the horizon with the conversion of Lynemouth Power Station in Great Britain (1.6 million metric tons per annum starting in 2019), which is now under way, and MGT Power (1.3 million metric tons per annum starting in 2019) reportedly being close to securing the required third-party financing. The announced conversion of the Langerlo power station in Belgium could bring additional demand of 1.7 million metric tons per year, but timelines for this project are unclear and demand is not likely to come into the market until the end of 2018.

Whilst these three projects would help to bring the market back into balance again and remove the existing overcapacity, it is our understanding that the majority of these volumes are already fully contracted out to established market leaders in the wood pellet sector, some of whom have further expansion plans, limiting the opportunities for smaller producers or independent project developers.

The only real game changer for the European market would be an unlocking of demand from the Dutch cofiring market, which is expected to add up to 3.2 million metric tons of demand per year. In the last SDE+ auction round, RWE and ENGIE were awarded subsidy contracts for their Amer 9 and Maasvlakte 4 plants, respectively. Whether they will actually implement their cofiring plans, however, depends on outstanding decisions regarding the general future of coal stations in the Netherlands. The Dutch government announced that they are considering plans to close all coal stations by 2020, with a decision on this topic expected before the next elections in March.

The big question for U.S. suppliers is if they will be successful in increasing their market share further or if producers from other regions will be able to compete more successfully. Project developers in Russia and Brazil have the advantage of good availability to sustainable biomass resources and attractive exchange rates that allow them to offer competitive price levels. It is yet to be seen if investors will be quick to capitalize on this advantage, or if the exchange rate and other business-related risks are perceived as too high, deterring any future investments. In this case, U.S. suppliers and project developers may still have a good chance to successfully establish themselves in this growing industry sector.

Author: Dr. Hannes Lechner
Senior Principal, Pöyry Management Consulting
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