Sizing Them Up

A close look at export data for wood pellets, fuel ethanol and biodiesel reveals a varying reliance on export markets for U.S. producers.
By Tim Portz | March 27, 2017

The combined export value of wood pellets, ethanol and biodiesel for U.S. producers has flirted with $3 billion since 2012, and depending upon how the final numbers shake out for last year, 2016 may very well be the year this milestone is surpassed. For both wood pellets and fuel ethanol, export numbers have never been higher than they are right now, and all three sectors are eyeing foreign markets as a means to significantly grow their businesses.

An analysis of the same data reveals key and informative differences. While foreign markets are an important part of the overall market picture for fuel ethanol and biodiesel producers, exports account for less than 10 percent  of annual production while, from a volumetric perspective, wood pellet production in the U.S. is heavily reliant on foreign markets.

Now, the looming question is, what impact will a Trump administration, which campaigned on a promise to revisit the nation’s trade agreements, have on the export opportunities for each of these industries?

Global Market Leaders
In both the fuel ethanol and wood pellet categories, the U.S. can boast the largest production capacity and the largest share of the global export market. In both cases, U.S. exports outstrip the closest competitor by a wide margin. Wood pellet export volumes for U.S. producers were well over 4 million tons, while Canada has yet to surpass 2 million tons of exports. Brazil is the world’s second leading producer of fuel ethanol, and while production and export volumes there vary from year to year, in 2015, its export volumes were about half of what U.S. producers achieved. Additionally, Brazil is a prominent market for U.S. ethanol producers taking over 100 million gallons in 2015.

The wood pellet industry differs from the fuel ethanol industry in that there are far more global producers of significance, and there is much more parity among them in terms of their size and share of the global market. Estimates place the global market for wood pellets, whether or heat or power production, at roughly 28 million metric tons, the largest demand center being the European Union. As the world’s largest producer, the U.S. satisfies perhaps one-fifth of the total annual demand. Countries including Sweden, Austria and Germany—while less significant in the global marketplace—produce and consume significant quantities of wood pellets. Sweden alone produces nearly 2 million tons each year but consumes the vast majority of that volume domestically.

The fuel ethanol industry is dominated by U.S. producers. Production capacity in the U.S. is double that of Brazil, its closest competitor, and together these two represent 85 percent of installed production capacity worldwide. U.S. fuel ethanol producers can produce 4 billion more gallons than the rest of the world combined. In 2015, the single largest exporter of fuel ethanol after the U.S. and Brazil was France, which exported just over 200 million gallons, compared to nearly 500 million and over 800 million gallons of exports for Brazil and the U.S., respectively.

U.S. biodiesel producers are facing much stiffer global competition than their wood pellet and fuel ethanol counterparts. In 2015, the U.S. trailed the Netherlands, Germany, Argentina, Spain and Indonesia in exported volumes. The Netherlands and Germany both do robust export business in biodiesel, and each of them surpassed $1 billion in revenues from biodiesel in 2015. U.S. producers exported nearly 90 million gallons in 2015, worth more than $250 million dollars.

Economic Dependence
An examination of where wood pellet, fuel ethanol and biodiesel exports go also reveals some key differences between the categories. Exports for both wood pellets and biodiesel are largely dependent on one buyer—the U.K. for wood pellets, and Canada for biodiesel. In 2015, shipments of wood pellets to the U.K. generated 85 percent of the total export value, while Canada represented over 90 percent of the export value for biodiesel producers.

The fuel ethanol export market is far more distributed, with the largest foreign buyer, Canada, representing just 25 percent of U.S. exports, according to data from the Renewable Fuels Association. Over 50 different countries received fuel ethanol exports from the U.S., and Brazil and China both closely followed Canada. In its 2017 industry outlook, however, the RFA noted that China has recently raised import duties on U.S. ethanol, and the association expected that this would “sharply curtail exports to that nation.”

The wood pellet export market is different from both biodiesel and fuel ethanol, in that not only is the export market quite reliant on one country, it is also largely dependent upon one facility inside of that country. For now, the overwhelming majority of wood pellets delivered to the ports in the U.K. will be burned at the Drax Power Station. The power station, initially designed to burn exclusively coal, is capable of producing nearly 4,000 MW of power. Three of Drax’s units have been converted to burn wood pellets only, and the annual demand from those boilers surpasses 6 million tons of wood pellets. The growth of the global pellet market, as well as U.S. wood pellet exports, tightly correlate with each of Drax’s converted boilers coming online. This rapid conversion sparked investment in both production capacity in North America, and port infrastructure in the U.S. and the U.K. Drax will soon be joined by another facility in the U.K., as the efforts to convert the Lynemouth power station are underway. While significantly smaller than Drax, Lynemouth will still require more than 1.5 million tons of wood pellets annually, likely cementing the U.K. as the largest importer of wood pellets well into the foreseeable future.

Prior to a strengthening dollar in 2015, U.S. producers were eyeing and winning pellet export opportunities on the spot market. Italy, Europe’s largest importer of wood pellets for residential heating, bought over $40 million worth of U.S. pellets between 2012 and 2014, but sales plummeted to below $500,000 in as the dollar strengthened against the euro.

Race for Second
For now, the U.S. and Canada occupy the top two spots in global wood pellet exports. Export data from 2015 suggests, however, that strong competition continues to emerge, particularly from Baltic nations like Latvia and Estonia. In 2015, Latvia nearly surpassed Canada in exported volumes with 1.6 million tons exported. Latvia has posted strong export growth since 2012, when its export volumes had not yet exceeded 1 million tons. Since then, Latvia has added about 250,000 tons to its export total each year. Similarly, Estonia has doubled it pellet export business since 2012, and with Latvia, has firmly cemented the Baltics as a formidable presence in the European marketplace. In the U.K. alone, Latvia and Estonia have grown their pellet business nearly 10-fold since 2012 when they exported just over 80,000 tons to the country. In 2015, their combined volumes exceeded 650,000 tons.

Russian export volumes fell immediately between Latvia and Estonia in 2015, just missing the million ton threshold. Home to the world’s largest inventory of wood fiber, Russia has the feedstock available to compete with both Canada and the U.S., but its wood pellet industry is constrained by the country’s vastness and limited infrastructure. Pellets produced in Siberia are thousands of miles from ports near St. Petersburg. Additionally, some pellet-buying countries have shown a reluctance to do business with Russian producers,  and in 2015, the U.K., the world’s largest single buyer, took just 12,000 tons of pellets from Russia, barely enough to fill a handy-sized cargo vessel. The largest buyers of Russian pellets in 2015 were Denmark and Sweden, taking 380,000 and 150,000 tons, respectively.

Finally, Vietnam has elbowed its way onto the global scene, and has been very disruptive in South Korea, a market Canadian producers have been eyeing for years. Pellet export volumes out of Vietnam and into South Korea ballooned in 2014 to nearly 600,000 tons from just 130,000 in 2013. Volumes in 2015 were down slightly, but remained above 500,000 tons for the year. For now, South Korean buyers are unwilling to enter into long-term pellet offtake contracts, and instead are utilizing tenders. This approach has essentially limited involvement in the South Korean market to ultralow-cost producers in Vietnam. The industry inside that country is dominated by small producers who convert residuals from furniture manufacturing into volumes that are then aggregated by brokers, who fill empty containers bound for return to South Korea. Tenders are often filled at per-ton prices that are lower than the cost of production for Canadian and U.S. producers. Canadian exports to South Korea reached their peak in 2014 at 150,000 tons. The following year, volumes fell to just 50,000 tons, and 2016 appears to have finished at about the same volume.

All Eyes on Asia
North American pellet, fuel ethanol and biodiesel producers alike all covet the promise of incredible market growth offered by the huge populations and rapidly expanding economies across Asia. In some instances, the growing standard of living alone creates a demand opportunity. In other instances, countries with aggressive climate goals like Japan offer opportunity.

China is already an important trade partner for U.S. ethanol producers, who watched volumes balloon to 176 million gallons in 2016. However, industry forecasters anticipate dramatically lower volumes in 2017, as a consequence of China’s increased import tariffs for ethanol.

For wood pellet producers in Canada, 2016 offered hope that the beginnings of a strong and growing Japanese market may finally have arrived. In 2012, pellet volumes from Canada to Japan exceeded 100,000 tons, but retreated to well-below 100,000 until last year, when the country shipped nearly 275,000 tons. There is hope that a period of sustained growth will follow. For now, U.S. producers are on the outside looking in, with regard to Japan delivering just a couple of hundred tons, likely specialty barbeque pellets, into the country.

While Asia offers great promise, the region also has existing and potential competitors in every category. Canadian producers know all too well how a regional competitor can turn a promising new market into disappointment almost overnight. For now, though, Japanese buyers have shown a preference for Canadian pellets, and producers there are hopeful it will continue to grow, and ultimately resemble the market they once thought South Korea would provide.

Finally, underpinning many of the foreign opportunities for these renewable fuel commodities are the energy and environmental policies of foreign governments or the trade agreements those countries have in place in the U.S. For example, it is very unlikely that China will import anywhere near the gallons of fuel ethanol that they did last year, all because of trade posturing and tariff hikes. The fuel ethanol industry is positioned to weather that in two ways. First, the export market represented just 7 percent of total shipments for ethanol producers. Second, ethanol shipments are well-distributed globally.

The other side of that same coin is the export market for U.S. wood pellet producers. Not only is the industrial market completely reliant on exports, for now, it is nearly total reliant on demand from one country, and one real buyer within that country. The consequences of a retreat from the U.K. decarbonization policies that created the industrial pellet industry in the U.S. would be dramatic.

It comes as no surprise then that the trade associations charged with protecting and growing the markets for wood pellets, fuel ethanol and biodiesel continue to press forward into new markets, hoping to establish and grow new opportunities for their producers. For products with robust domestic markets like fuel ethanol, export opportunities are simply the icing on the cake, and the best chance at incremental growth. Other industries like industrial wood pellets were built solely to satisfy foreign demand, and its continuation, growth and expansion is vital to the long-term viability of the industry.

Author: Tim Portz
Executive Editor, Biomass Magazine
tportz@bbiinternational.com
701-738-4969