On The Horizon

The U.S. Industrial Pellet Association's annual gathering in Miami drew attendees from across the globe, representing all facets of the supply chain.
By Anna Simet | December 11, 2019

The USDA is fully on board with sustainable U.S. wood pellet exports. It is committed to biomass energy in general, largely because of the jobs it provides, domestic energy generation it supports, and its environmental benefits. That’s according to Daniel Whitley, associate administrator of the USDA Foreign Agricultural Service, who outlined the FAS’s mission of increasing ag product exports and decreasing barriers, at USIPA’s annual conference in Miami in early October.

 Currently, he said, the FAS has offices in 95 countries, and the U.S. has 45 percent of the global market share of ag export products. “And we’re always looking for ways the FAS and industry can partner.”

Whitley highlighted wood pellets and ethanol as two of the fastest-growing U.S. ag exports, and described current trade environments in Europe, China and India. He described the European trade markets as difficult, as Europe is adamant in not including ag in negotiations, and as for the U.K., the FAS is working toward a free trade agreement, a scenario that would only work if the U.K. is not bound to European standards. “We know it’s a big market for you all, and a free trade agreement would shore up that market share that you have,” he said.

Whitley said FAS is interested in a deal that includes correcting China’s behavior regarding intellectual property theft, but “the problem with negotiations is that it’s all or nothing, and we can’t complete it unless all teams make a deal.”

On India, Whitley said it is a difficult and complex trading partner representing hundreds of commodities. “We’ve had a tough time and think they need to open their markets ... we’ve made some progress, and there may be some news in the coming weeks about a small deal.”

As an end note, Whitley pointed out that every $1 billion in ag exports supports 9,000 jobs, meaning U.S. wood pellet exports alone represents 16,000 jobs.

Analyzing the Supply Chain
For power producers abroad, the past year was a roller coaster. Elaborating, Fabien Mehu, head of biomass trading at Engie, described the difficult pellet-sourcing market as “not even a shortage, but dried out.”  Panelists agreed on the need to strengthen the supply chain, particularly the addition of more fuel storage facilities.

Rick Taylor, head of fuel at Drax, said that while the market has since balanced, things change quickly. “In hindsight, it’s easy to see what happened, but it’s not easy to see it as it’s happening,” he said.
Panelists continued to discuss respective operations, consumption, market conditions and energy strategies—in particular, phasing out coal. Orsted is finishing commissioning of its final coal-to-biomass conversion, said Soren Alsing, Orsted head of fuel, which may bring Denmark to the point of leveled off demand. “There might be a little more industrial demand, but most left are small-scale conversions or wood chip users,” he said.

Orsted’s demand for chips and pellets varies quite a bit, Alsing said, ranging from 2.5 million to 3 million tons combined, up to 1.5 million of which is wood chips.

Panelists also agreed the importance of conveying a simple, clear message to the public about what the industry is doing when it uses biomass as an energy source. “We struggle as an industry when it takes us three or four pages to respond to a headline—we need to make it snappy and keep sharing what we’re doing, and that it doesn’t make sense to use whole trees,” Taylor said. “We have to keep telling the story, and be clear when sharing our convictions about what we’re doing.”

Current, Future Markets
Global pellet supply and demand is very tight, as production capacity has failed to keep up with demand, according to John Bingham, Hawkins Wright. Demand growth rate grew by about 11.9 % in 2018, he said, while supply capacity only grew by about 7.2%.

Pellet prices hit record heights in the first quarter of 2019 amid supply shortages, Bingham said, though the market has since been relieved and prices have dropped to $160 to $170 level (per ton). “That trend will continue through the third quarter with dampened demand from European utilities, technical issues at Lynmouth and planned maintenance at Drax.”

However, global structural shortages won’t be resolved until new pellet mills are built, or pellet consumption is curtailed. For the European market, demand will increase over the next two years as projects that have been financed come online, but will loosen up when subsidy support schemes are scheduled to stop—in 2027 for Drax and Lynemouth.

Hawkins Wright predicts global demand for 2019 to top out between 15 million and 16 million tons, Bingham said. As for the five-year outlook on major import countries, he said industrial demand in Europe will plateau and possibly decline, while Asian demand will grow rapidly. “By the mid-2020s, wood pellet demand in Japan and South Korea are expected to exceed that of Europe,” he said, emphasizing that supply remains a challenge, though producers are working to accommodate, with Pinnacle Renewable Energy and Granuul Invest alone having 2 million metric tons of planned industrial growth. Net capacity additions have slowed since 2016, he said, “largely due to the collapse of pellet prices—it took the wind of out the sails for many. Further growth in production is needed to meet this growing demand.”

Other potential countries for growth include Germany, which has plans to withdrawal from coal by 2038, requiring the closing of 43 GW of capacity, and the U.K., due to its stalled nuclear program that leaves a hole in its supply mix.

On production, southeast Asia’s industry has been growing rapidly, a market that has been traditionally made up of many smaller mills, but has recently seen development of large-scale mills. “Malaysia, Thailand and Indonesia produces more than 1.1 million tons in 2018 based on their exports, up from 620,000 MT in 2017,” Bingham said.

Bingham emphasized that he believes that there are ways biomass can thrive without subsidies. “Subsidy-free isn’t something to be afraid of ... they aren’t meant to always be there. There is life after subsidies, and it can be embraced and worked through.”

Japan, South Korea
FutureMetrics’ William Strauss rounded out the conversation on market supply and demand, focusing on Japan and South Korea market dynamics. As for South Korea, its support scheme is based on traded RECs, the demand and supply of which is dictated by power generators. Strauss said a dramatic drop in renewable energy credit, or REC, prices has had ripple effects—prices have collapsed, and they are about half of what they were a year and a half ago.  “There are too many being generated and not enough purchased ... low REC prices means utilities are burning less fuel, and wanting to pay less for it.”

As a result, South Korean imports from Vietnam have dropped, an industry that has been built on the back of the South Korean market. Excess supply in Vietnam has created pressure on Canadian exports to Japan, Strauss added, where Canada has lost some market share, as excess supply from South Korea is finding a home in Japan. He expects that to change, due to Japan’s soon-to-be-released sustainability criteria, which he said he believes Sustainable Biomass Partnership certification will be sufficient to comply.

On growth, Strauss said it’s highly possible there may be more full coal-to-biomass conversions in Japan. Right now, there is about 58,000 MW of coal capacity, operating or in the pipeline.

There are hundreds of small or independent biomass power projects, operating or planned, according to Strauss. 70 have received FIT approval and are very likely to be built, starting in 2020 or later, totaling about 3,104 MW, he said. Based on an assumed capacity factor of 80 percent, 38 percent assumed efficiency and 40 percent of the fuel as biomass, that would account for 4.7 million tons of new pellet demand. “We think these are pretty reasonable assumptions,” he said. As for palm kernel shell  imports, according to Strauss, when Japan’s sustainability criteria is in place, pellets will have to replace them.

Strauss ended his discussion pointing out there are structural hurdles for pellet imports to Japan—in particular, the fact that the country’s pellet imports are spread across many ports that cannot accept large vessels. “Solving logistics constraints is one challenge,” he said.

Producer Insight
Several pellet producers discussed the past year, as well as operations, growth, strategy and challenges during one of the conference’s final panels. Though the company has long-term off-take contracts in place with customers from Japan, Thomas Meth, Enviva executive vice president for sales and marketing, acknowledged the difficulties accessing in the Japanese market, where financers have a big say in how feedstock is secured for 20 years. The U.S. Southeast has created a lot of comfort for Japanese financers, he said. “There are still quite a few projects looking for supply ... and some non-feed-in tariff projects emerging. The driver seems to be that there are increasing signals that there are nuclear plants not coming online, or back online ... there’s quite a runway to develop projects, the question is how do we mobilize the biomass from the U.S., and how do we create a story that isn’t just about the U.S.?”

Barry Parrish, director of procurement and sustainability at Georgia Biomass, said it’s the plant’s ninth year of production, and the first year of nearly reaching capacity. He attributed this to gaining an understanding of parts reliability and being able to predict when they will wear out, replacing them before they do, as well as using more residuals and less energy, particularly on drying materials. “We’re looking forward to the best year yet,” he said. 

Zilkha Biomass Fuels CEO Larry Price said its Selma, Alabama, plant is making black pellets from a steam-explosion technology and is experiencing growing marketplace success. “We have good partners working with us to help us solve problems,” he said, adding that Zilkha is looking at three new mills in the Southeast, but recognizes that “there is lots of wood on the West Coast that needs a home.”

Richard Peberdy, vice president of sustainability at Drax, discussed the company’s pellet manufacturing and export assets, emphasizing the complicated nature of the pellet-to-power process, and experience needed to perfect the process. “The pellet is just one part of the supply chain,” he said. “It takes time and money, and there is a lot to learn with every stage of logistics.”

Author: Anna Simet
Editor, Pellet Mill Magazine