Wood: The Next Global Commodity?

As demand increases, wood pellets could be the next global commodity.
By Lisa Gibson | June 22, 2011

In light of the increase in demand for wood pellets, it is no surprise that predictions are outlining woody biomass as the next commodity to be traded on the open market.

Biomass demand for bioenergy applications is expected to increase, especially in Europe and particularly for wood pellets. “It’s clear that with incentives in place and the policies in play, that bioenergy is going to be an increasingly important part of the renewable portfolio in many European countries, especially U.K.,” says Cormac O’Carroll, president of Pöyry Management Consulting in London.

O’Carroll emphasizes that for woody biomass to become a commodity, demand needs to be big enough to support a commodity trading platform. And it looks as though the hundreds of megawatts proposed in the U.K. will help that along. The country can only provide itself with 10 million to 12 million metric tons of sustainable biomass each year, falling short of the 50 million metric tons that will be necessary if the multiple proposed biomass plants are developed there. O’Carroll predicts, however, that only a portion of those proposed projects will come to fruition. “Clearly, if even a substantial portion of them goes ahead, there will need to be significant imports of biomass to supply these plants,” he says. “Then they can come from North and South America, certainly, and I think quite a few pellet plants being developed in America are focusing on Europe and in particular the U.K.”

Demand is one important driver of commodity derivative market development, but other factors come into play also, such as volatile market pricing that allows hedging. “When we look at pellet pricing, we see that it is quite volatile,” O’Carroll says. Liquidity is another important element, as well as the number of people trading the material. “There are a lot of pellet plants out there and a lot more planned,” he says. “There are also a lot of pellet consumers on the bioenergy side and more and more entering the business.”

If wood pellets were to become a commodity, it would make the market more efficient and would make moving forward with bioenergy investments much easier, especially from the perspective of power utilities, O’Carroll explains. “They’re used to having a working commodities market for their feedstocks, be it gas, oil, coal.”

For the forestry industry, it could shift the environment surrounding biomass agreements from its traditional bilateral focus. “With the emergence of bioenergy, certainly, we see a lot of the forest industry players and forest owners starting to rethink their approach a little bit and starting to think about longer-term contracts and even starting to think about how they might take advantage of the increasing commoditization of biomass,” O’Carroll says. For forest owners, commodity status for wood would mean another market for their products, but industries using wood now, such as pulp and paper, would most likely not benefit. “They may not like to see much of a commodities market develop in biomass because that potentially makes their life more difficult,” he says.

But the scarcity of supply to satisfy growing demand points to woody biomass becoming a global commodity in the near future. O’Carroll predicts it within the next few years.