Assessing the Global Supply Landscape

Hawkins Wright weighs in on what might be in store for the broader wood pellet industry.
By Anna Simet | November 29, 2021

The long 2020-’21 heating season, higher energy prices, pandemic implications and policy will all play a role in what is expected to be a tight biomass market for the duration of the impending winter. That’s according to global consulting firm Hawkins Wright, which in mid-October conducted a webinar to discuss biomass market trends and implications, and  what might be in store for industry stakeholders. To begin, Rachael Levinson, Hawkins Wright Biomass Research Manager, discussed spot market prices and the company’s monthly report on developments in the wood chip and pellet markets.

Spot Prices
The Forest Energy Monitor publishes a range of biomass prices on a monthly basis, including estimates of industrial European spot pellet prices. Numbers are based on information provided from a range of contacts, brokers, trades, utilities and producers, Levinson says. “We don’t just plug numbers into a spreadsheet. The industrial wood pellet market is still relatively illiquid compared to other commodities, so we find it’s important that we use our own years of experience, and those of our contacts to establish what’s really happening in the market, and ensure that price represents the spot market at that time.” Heating pellet prices are based on data from local trade associations and a range of wood fiber prices from a number of the company’s sources.

“It has been being quite an interesting year, we’ve seen a huge shift in the market from the oversupply we saw in 2020 to right now, a period of tightening in Europe’s spot market, which has rapidly raised prices,” she says. “One of the major reasons for that shift in the market was that the 2020-’21 winter was a lot longer than in previous years—the low temperatures lasted later into spring than usual, and that helped extend the operating period for some of the industrial heating plants.”
 In addition, this past spring saw a surge in European power prices, and some utilities are positioned to benefit. For example, Orsted A/S based in Denmark. “Orsted operates several combined-heat-and-power (CHP) plants and sells heat to local district heating networks, and the power they produce is almost a byproduct of the heat sales,” Levinson explains. In spring 2021, we saw these increased power prices in Europe, and some of the more efficient CHP plants could profit primarily on power sales rather than heat sales. That further extended their operating period, and of course, increased their pellet demand.”

The unexpected flurry of spring spot activity cleared out much the pellet stocks that resulted from the oversupply of 2020, and it continued during the summer months when activity normally dies down. There are two reasons for that, Levinson says. “That activity prompted a lot of other European utilities to think ahead to this coming winter, expecting demand to pick up quite a bit, so some started preparing early to ensure they were well covered going into this winter ... those high power prices in Europe, in combination with the bullish sentiment in the wider energy complex—higher carbon prices and higher coal and gas prices—really increased profitability for many of the power-producing wood pellet users in Europe. Demand for pellets was strong throughout the summer, as they were operating as much as they could outside of any planned maintenance.”

As winter approaches, demand is expected to pick up considerably, with many plants returning to service in the next several weeks. Levinson again referenced Orsted, which has already brought its Avedore unit back online from its usual summer maintenance, with the second unit expected to return to service in November. “Also, Drax has had an extended, planned outage at one of its units since August, and that will be back online in November.”

 MGT Power, the new U.K. power plant that industry has been waiting to commence operations for a couple of years, is expected to begin operations in the next month or two. “Of course, wood pellet consumption will [initially] be low, but we do expect it to ramp up over the winter period, and that will help lift demand significantly,” Levinson says.

As for the supply side of the market, there have not been too many hindrances, she says, other than some wild fires in British Columbia during the summer, and a hurricane in the U.S. South, both of which delayed some shipments but did not have a material effect on the spot market. The most concerning issue at present is the spot market and very low stocks going into the winter, Levinson reiterates. “The last time the spot market in Europe was really tested like this was the 2018-’19 winter, but the situation now is fairly different, so I’m not sure we can draw too many conclusions from what happened then—this time around we don’t have the supply issues that we did ahead of that winter,” she says. “Also slightly different is the high-paying capabilities of some European utilities right now, meaning the price that utilities can pay for the wood pellets and still be profitable. Because power and carbon prices are very high at the moment, that means paying capabilities are at levels that we’ve never seen before, so it will certainly be an interesting winter.”

 Moving onto the European residential market, the tightening in the industrial market is being mirrored in the residential market. Levinson said just this year has seen huge boiler sales in countries including France, Austria and Germany, a trend that will inevitably increase wood pellet demand this winter. “In addition, high fossil fuel prices will lift demand in some countries—for example, in Italy, a lot of the users there have wood pellet stoves as well as a gas or oil heating system,” she says. “If fossil prices are high, those homeowners are more likely to rely more on their pellet stoves for heat than in years during which gas and oil were relatively low-priced. We do have very low stocks for this time of year going into this winter, so if it comes early or is particularly cold or long, that could come as quite a shock to the market.”

Meanwhile across the world, Asian spot prices have shown quite a bit of recovery this year, Levinson says. “The Asian market had a few more supply issues than we’ve experienced in the European market—for example, in Vietnam, the lockdown impacted furniture production, which is a major source of fiber for pellet producers there, and high freight prices and container shortages have added to producers’ problems.” In the past couple of months, there have been more tenders from state-owned power generation companies (GENCOs), including tenders seeking 315,000 metric tons of domestic and imported pellets for delivery by the end of the year, a tight deadline that Levinson says will really test the market. “This winter is certainly going to be interesting—it’s something to keep an eye on,” she says.

Following Levinson, Fiona Matthews, Hawkins Wright associate director of bioenergy, discussed trends in the wider global energy markets that have implications on the biomass market, beginning with the natural gas market.

Other Market Trends, Influences
“Recently in the U.K., gas price surges and supply issues have been in headlines—in September, the tightness in the global gas market led to a rise by 29% month on month, to around 56 euros per megawatt-hour,” Matthew says. “Drivers are pretty complex, with a key one being the post-covid rebound, with stronger economic activity driving higher gas demand. European consumption is the highest it has been in five years, but demand is also very high in Asia.”

 The European market has struggled to compete with Asia for LNG cargoes, Matthews continues. “Politics is a factor—it’s clear that Russia has been exerting its power, and Putin has been toying with flows of gas into European gas market. Russia is also rebuilding its own inventories ahead of the upcoming winter season. Low inventories and high prices of LNG have limited the volumes that can been injected into storage. The consequence for the biomass market is the resulting surge of power prices that follow, from the gas price rise. Higher power prices have significantly improved the profitability of biomass power plants.”

Matthews also pointed out the attention higher gas prices have brought to decarbonization and the need to rely on other technologies beyond natural gas to provide grid stability and grid balancing services. “Recent events have very much helped the case of large-scale bioenergy carbon capture and storage projects (BECCS), such as the one being developed by Drax.” Drax Power Station, located in North Yorkshire, uses wood pellets for fuel in four of its six units. A pilot BECCS project began operations at the site in 2019, with a second demonstration unit installed in 2020.

Fiber costs have major influence on pellet producer profitability, Matthew says, and there are a range of issues that may have an impact. As mentioned by Levinson, in August, the Forest Energy Monitor evaluated COVID-19 lockdowns in Vietnam and its implications on furniture production. “Waste is the main source of raw material for pellet producers in Vietnam, which can have a huge impact on the pellet market in Asia,” she says. “Chip availability in Latvia is important to chip-fired boilers in the Baltics and pellet producers in the region, and in 2020, we experienced a period oversupply of chips in the Baltics region and across Europe. This was largely due to the excess of bark beetle-damaged wood in the markets. In 2021, we started to see a slight tightening of this market, which is starting to shift for a number of reasons.”

 One of those reasons is harvesting rates in the Baltics, mostly drive by high-value saw log demand. “Any sort of dip in demand for saw log shave has an impact on harvesting rates in the region,” she says. “The longer, colder, wetter conditions that we experienced this past winter was actually detrimental to the bark beetle and reduced the number of reproductive life cycles, so we’re seeing that infestation levels are not as high, and less damaged wood is in the market.”

Another point Matthews makes is the reduced supply of wood chips from Belarus to Latvia, the result of some regulation changes. “Latvia introduced radiation testing for wood products and Belarus introduced an export tax on wood products, and both reduced the flow of chips from Belarus to Latvia,” she says. “The political situation in Belarus and the introduction of EU sanctions has persuaded many chip buyers in Europe to look elsewhere, scared off a bit from buying from Belarus, which has had an impact on that flow.”

As the European economy begins to recover from the pandemic, there is more demand for chips from competing industries such as panel board manufacturers, which has an impact on energy chip buyers.
Finally, Moving on, Matthews discussed the interplay between biomass energy fiber supply and other forest product industries, such as sustainable aviation fuel (SAF). “The U.S. has proposed an SAF target of 3 billion gallons by 2030, and currently produces around 45 million gallons,” she says. “This is a significant uplift in production ... it is much more costly to produce than fossil jet fuel, and so the federal government has said it will provide funding to meet targets, and has introduced a new tax credit for SAF.”

While most SAF is produced using waste and vegetable oils, animal fats, and more recently, MSW, other feedstocks will be needed if industry is going to scale up to displace a noteworthy percentage of fossil jet fuel, according to Matthews. “As a result, there is growing interest in producing SAF from woody biomass, and this is the angle relevant to wider biomass industry—the prospect of having to compete with another user of some types of wood feedstocks in certain regions,” she says. “There are few projects of interest, including Velocys’s SAF biorefinery in Mississippi, not too far from Drax’s pellet mill, which would require about 1 million tons of chips and roundwood, and has a goal to come online in 2025. Other companies operating in this field, including Lanzajet and Nova Pangaea in the U.K., both of which plan to produce SAF from waste wood.”

The EU has proposed an SAF mandate of 2% aviation fuel in 2025, increasing to 5% in 2030, 32% in 2040 and 63% in 2025 with additional subtargets in other categories, Matthews adds. “Based on forecasted demand of the mandate, it would mean 1 million (metric) tons of SAF in 2005, 3.5 million in 2030 and 30 million in 2050. This potential scale makes it so interesting as a competitor for some feedstocks of biomass.”

Author: Anna Simet
Editor, Pellet Mill Magazine