Asia Pacific Market – From Flatlining to Boom?

The Asia Pacific market could hold potential to develop into the next hot spot of the global pellet industry, and Pöyry Management Consulting shares that demand levels may be on the rise again.
By Hannes Lechner | November 15, 2016

Over the past five years, South Korea has become a sizeable import market for wood pellets. Its biomass cofiring operations now need between 1.5 million to 1.8 million metric tons per year.

However, demand growth has stagnated for the past 32 months in South Korea and demand from Japan remains marginal, with imports of just 230,000 metric tons in 2015 and an expected 400,000 metric tons in 2016. The majority of pellets supplied into South Korea originate from Vietnam and Malaysia and price levels appear to have hit a new low, at $95 to $100 per metric ton delivered.  Pellets delivered into Japan are mainly being supplied from Canada, with average delivery prices reaching $207 per metric ton.

Does Asia Pacific really hold the potential to develop into the next hot spot of the global pellet industry?

We see increasing interest from our clients trying to develop supply chain solutions in the Asia-Pacific region, usually a strong signal that demand levels may be on the rise again. The outlook from Pöyry's Global Pellet Market Model shows that biomass import demand is expected to grow considerably, especially in Japan, driven by a pipeline of more than 2.9 GW of consented and generously supported biomass plants. Of course, not all of these projects will import their fuel, and not all of it will be wood pellets, as wood chips and agricultural residues (such as palm kernel shells) can be viable and attractive alternatives. Nevertheless, we do see Japanese wood pellet demand reaching 5.4 million metric tons by 2030, and potentially even room for up to 7.9 million metric tons if wood pellets can secure a higher share of the biomass market. South Korea also has further room for growth, driven by increasing biomass cofiring activities. Strategic plans from power generators indicate that wood pellet imports are likely to reach between 3.6 and 10.2 million metric tons by 2024 and remain stable thereafter out to 2030, adding to the overall demand in Asia Pacific.

It should be kept in mind that the level of uncertainty in the Asia-Pacific pellet market is still rather high. Each development needs close monitoring and supply chain participants must be highly adaptable or secured through robust long-term agreements. Factors such as the interplay between biomass cofired power production costs and those of competing alternative renewable technologies will affect the South Korean Renewable Portfolio Standard and hence demand. The Japanese market generally offers more stability through feed-in tariffs with a 20-year life span, but final investment decisions for many projects are still to be made, let alone decisions on their fuel supply chains.

As a result of a combination of highly competitive tender processes, low container-freight rates, and only limited requirements for pellet fuel quality and raw material sustainability, prices for wood pellets delivered into South Korea have reached a historic low of $95 per metric ton. While this appears to make pellets competitive, we believe such low price levels are unsustainable in any expansion of the supply basis in Asia Pacific. Vietnam will not be able to substantially increase pellet production based on low- or zero-cost sawmill residues and other countries with higher production and logistics costs will set new market-price levels.

To meet the growth in demand will require a substantial expansion of the supply base, offering interesting opportunities for a range of stakeholders in the wood pellet supply chain. Indonesia, Malaysia and Thailand are attractive sources of supply where production capacity can be expanded drawing on a mixture of roundwood from fast-growing forestry plantations, residues from wood processing industries, and other residue sources such as rubberwood plantations. Far East Russia could also emerge as another supply base due to its surplus of sawmill residues and its forestry biomass. However, issues around political instability and counterparty risk will need to be taken into account, and substantial investments will have to be made to develop this supply basket.

It is unlikely that the development in Asia Pacific will offer real opportunities for suppliers from the U.S. Southeast, due to their uncompetitive delivered-cost structure even when operating at their marginal cost level. In contrast, suppliers from Western Canada may be competitive, and if they are, U.S. suppliers may benefit by gaining a higher share of the Atlantic market.

Asia Pacific undoubtedly offers many good opportunities for new suppliers and challenges for buyers due to increasing competition. How the market dynamics will play out is yet to be seen and, just as the Atlantic market evolved, it will certainly surprise people.

Countries that are currently viewed as supply sources may develop their own demand for industrial wood fuel.  The expected increase of financial incentives offered to Indonesian biomass plant developers, in addition to an increase of supported plant sizes, is just a recent example. The introduction of obligation or support schemes for biomass cofiring in China or Australia is purely speculative at the moment, but also has the potential to throw the market into a completely different direction.

Long-term supply and price security will be crucial for buyers and, in some cases, direct upstream investments or joint ventures might be the only way to achieve this. Suppliers will need to hedge their bets. Constant and vigilant market monitoring and the assessment of new developments through analysis of market scenarios will be key for all market participants.

Author: Dr. Hannes Lechner
Senior Principal, Pöyry Management Consulting
+44 7876 348 262