2014 PFI conference considers market outlook

The pellet market outlook dominated presentations at the Pellet Fuels Institute annual conference held July 28-29 in Orlando, Florida. Several speakers highlighted the expected growth in the European market, the potential for Asian market growth and, most importantly, the possibility for residential heating pellets to find new export markets.

“There is limited demand growth in the domestic market,” PFI executive director Jennifer Hedrick said in her opening remarks. “Supply and demand are starting to realign and promotion of home boiler systems is starting to expand demand.” Last year’s challenging weather has prompted changes in the pellet industry, she added, with producers, marketers and retailers “planning accordingly for the year ahead.”  

John Shimek with Hearth & Home Technologies seconded Hedrick’s comments in a panel during the first morning of the conference discussing the appliance manufacturer and distributor perspective. “This year has taken off,” he said. “The buy early and buy now message has really worked.” He reported that consumers are buying both pellets and pellet appliances early. “We’re doing everything we can to keep up.”

Global pellet production has been growing at about 2 million metric ton (mmt) per year, according to John Arsenault, Wood Pellet Association of Canada, who spoke in the panel focused on the global market. Europe, by far, is the largest producer of pellets globally at 12 mmt, he reported, with the U.S. and Canada together producing about half that. Russia is the third largest pellet producer with 2 mmt. China is a big question mark, he added, but is estimated at 2 mmt, with the rest of Asia's production estimated at 1 mmt and the rest of the world at 0.6 mmt. Arsenault added that China is expected to move towards renewable fuels, and a recent inquiry form China was looking at 2 mmt. "The EU will continue to dominate with heat and power sectors growing at similar rates," he predicted, "and Asia is showing promise after a slow start. North America will grow slowly."

On the consumption side, European industrial use of 9 mmt is now exceeded by domestic use for heating at 10 mmt.  North American accounts for less than a quarter of world demand, at 4 mmt with Asia at 1 mmt, mostly from South Korea and Japan. The U.S. is the largest exporter of wood pellets into Europe at 2 mmt with Canada just behind at 1.92 mmt and Russia at 701 mmt.

As a European-based trader in pellets, Arnold Dale, Ekman & Co., explained that in 2013, 1.4 mmt of new pellet demand was created in the residential market through the purchases of pellet boilers and stoves. While the Italian market is gaining attention for its rapid growth, "it's one of the markets that is not easy to break into," he said. Bagged pellets dominate, at 90 percent of imports, he said. The largest importer brings in just under 200,000 metric tons per and very few take around 100,000 ton. "All other importers are small in size and they are also very demanding and time consuming."

There is another growing demand sector in Eastern Europe, Arnold added, that is sometimes overlooked. "The European Pellet Council misses the data from the Eastern Europe countries who are not members," he explained, saying that the Ukraine is installing boilers "like crazy" as is the case across Eastern Europe, "and we have no data for it."

A show of hands in the closing panel of the conference indicated just a half dozen pellet producers in the room have exported pellets to date. PFI is comprised mostly of pellet producers currently serving the domestic residential heating market. Navigating the export pellet market requires a good understanding of the multiple steps between the producer and buyer.

Seth Walker, a bioenergy economist with RISI, cautioned that the economics right now are still marginal for shipping container lots of bagged pellets to Europe. Using Italy as his example, due to its rapidly growing market for bagged pellets, he walked through the economics. “On the surface, $350 to $400 per metric ton for pellets in Italy looks good,” he admitted. He compared three supply chains from North America, looking at shipping pellets in bulk vessels to be bagged in Italy, shipping bulk pellets in containers and shipping bagged pellets in containers.

The costs to be considered include the EU value added tax of 10 percent, the wholesaler margin of roughly $75 per ton, inland transportation from the port of about $15 per ton, bagging costs of about $18 per ton (whether bagged before shipping or near the final destination), plus shipping costs. In the end, Walker said, the net revenue realized by the pellet mill is not as impressive. He estimated net revenues for the producer at about $153 per ton for bulk vessel shipments, $126 per ton for bulk in containers and $129 per ton for bagged containers. “Shipping costs make the economics of small scale container shipment unattractive,” he said, adding that there are opportunities for cost savings. “If you do volumes, you get better rates from shippers,” he said. Exchange rates for dollars versus euros also play a big part.

“While at current price points it might not make sense,” concurred Jouko Sipila, AgCom/International Feed, “but future demand might impact price. The U.S. pellet market is too dependent on one market,” he added, saying that diversification would make the industry less dependent on U.S. weather. AgCom/International Feed specializes in containerized shipments of ag commodities, shipping more than 20,000 containers a year. The Minnesota-based company just recently joined PFI.

Sipila encouraged pellet producers to build relationships with foreign buyers for when conditions are right for a favorable transaction for both sides. “One thing that gets overlooked is the shipping markets – pricing can vary greatly. It has a lot of volatility depending on where products are being shipped.”  There are companies to help manage the relationships with shipping companies and buyers, he said in describing many of the steps. Containerized shipping can be a helpful tool, he added, because producers can create a daily flow of sending containers to port rather than having to store large quantities for bulk shipments. It helps with managing shipping risks from bad weather or breakdowns and offers flexibility in delivering to multiple ports within a country. For pellets, containerized shipments would also help in minimizing fines. A containerized pellet is only handled twice – at loading and unloading.

Freight forwarder Adam Mook, with Logistics Plus, finished out the discussion on exporting logistics by reviewing more of the technical details involved. In addition to negotiating contracts with a buyer on price, quality and any other certifications, the seller needs to understand the regulations and customs process at the importing country’s ports. Other details to know are who is responsible to pay for such things as shipping, loading and unloading charges, carriage to the end location, customs clearance, cargo insurance, import duties or taxes. Sellers also need to know what documentation is needed and be clear on how payment is to be made.

Other sessions during the conference covered the progress with the PFI pellet standards program, new web-based tools for the industry and a discussion of safety considerations for pellet producers.