Southeast Asia’s Low-Cost Pellet Player

Vietnamese producers are gobbling up market share in emerging Asian markets. Offering the world's lowest prices, market observers wonder how long it can continue.
By Tim Portz | November 17, 2015

Right now, a truck carrying a 20-foot shipping container is making its way through the streets of Quy Nhon in south-central Vietnam.  Every so often, it stops in front of a small, nondescript factory and takes on a marginal load of wood pellets, perhaps 1 to 2 tons, and moves on to more stops, until the container is full.  It’s then that the container will be taken to the docks at the port in Quy Nhon, aggregated with other containers carrying similar cargo, and eventually loaded onto a container ship bound for South Korea.  Each month, around 90,000 tons of wood pellets are collected and exported in this manner from Vietnam. This system, as unorthodox as it may seem to North American producers, has effectively shut them out from one of the fastest-growing new markets in the global pellet trade.

“Pellet production in Vietnam started because of the South Korean power market requiring industrial grade pellets for boilers and also animal bedding about five or six years ago,” Tan Nguyen, representative director at CellMark, tells Pellet Mill Magazine. “At that time, Vietnamese producers didn’t even know what the pellets were going to be used for.”

While production may have begun in Vietnam six years ago, South Korea wasn’t importing significant volumes until mid-2013, when monthly volumes began flirting with the 50,000-ton mark. In 2014, import volumes grew monthly, and by the end of the year, South Korea had imported nearly 2 million tons and had the full attention of wood pellet manufacturers around the world, including Vietnam.

Forests Products Powerhouse
Vietnam is just over 1,000 miles north to south, and is long and thin with portions of the country not more than 35 miles east to west. The S-shaped country forms the eastern side of the Indochina peninsula, and with an area of nearly 130,000 square miles, is just slightly bigger than New Mexico. With 35 million acres of forest, if it were a state, Vietnam would trail only Alaska in terms of forest inventory. This vast resource, located next to many hundreds of miles of coastline dotted with shipping infrastructure, has helped Vietnam secure its place as one of the world’s most dominant players in the forest products sector. In a report offered by the Vietnam General Department of Forestry, the sector was said to have grown 40 percent year-over-year from 2005-2010. Since then, the sector’s growth has slowed, albeit only slightly, and is still growing over 20 percent each year.

Vietnam is a major exporter of not only wood fiber intermediates, like wood chips for paper production, but also finished goods like furniture. According to a report written by the Center for International Forestry Research, Vietnam is the second largest furniture exporter in Asia, trailing only China. This $2.5 billion-per-year industry requires a massive amount and variety of roundwood, more than Vietnam can provide from its own stocks. Vietnam imports 80 percent of the wood used in furniture manufacturing, some 4 million cubic meters, with China, Laos and the U.S. being the biggest suppliers. These roundwood inventories, whether from domestic or foreign sources, are converted into furniture products in a widely distributed manufacturing sector with nearly 3,000 different operations. A report written by the European Forest Institute suggests that nearly half of these manufacturing operations are relatively small, employing less than 15 people. It is from these small operations and the wood waste streams they produce that the Vietnamese wood pellet industry was born. “With Vietnam being an enormous furniture exporter, pellet production offered an opportunity to solve the wood waste problem,” Nguyen says. “Furniture manufacturers used a very small amount of their waste for their own boilers, and for the most part, the cost of the remaining raw material was just the logistics costs.”

Nguyen notes that about 90 percent of the wood pellet facilities in Vietnam are standalone affairs, most of which are located within 20 to 30 kilometers (12 to 19 miles) of several wood processing operations in southcentral and southern Vietnam.

Seth Walker, a bioenergy economist, characterizes the industry in much the same way. “What we are hearing is these pellet producers aren’t necessarily even running small factories, but they may be located next to someone’s house,” he says. “They may produce a ton a day.”

Low, Low Prices
While certainly a departure from the evolution toward larger facilities that characterize the industry in North America, this distributed, microproduction model has allowed Vietnamese producers to become the world’s low-cost pellet option. Walker tells Pellet Mill Magazine that customs data from South Korea indicates that the Vietnamese are typically winning tenders for their volumes between $110 and $120 per delivered ton. “You’re talking about collecting residuals from the furniture manufacturing industry mainly and other low-grade material being mixed in,” Walker says. Additionally, Vietnamese producers and brokers enjoy a significant shipping advantage, as there are financial incentives to return shipping containers to South Korea to keep that country’s electronics manufacturing sector humming.

These ultra-low prices have resulted in quality problems as producers work to drive out cost and maintain profitability. In some instances, materials other than wood waste streams have ended up being used to make pellets. “The tenders from the South Koreans put extreme downward pressure on the wood pellet price. The cost of raw materials was not going down as fast as pellet prices, and some producers chose to include rice husks in their finished product so they could win the orders,” Nguyen says.

Henry Fahman, chairman and CEO of PHI Group, a diversified energy and natural resources company operating in Vietnam, has been watching this industrywide race for the lowest price for well over a year. “The wood pellets producers in Vietnam were faced with a situation of strong competition for feedstock, at the same time prices for pellets were falling,” he says.  “Some of the producers, because they couldn’t control their feedstock, had to take whatever residues or feedstocks they could get their hands on. As a result, there was no consistent quality. Some of those pellets found their way into South Korea and created a very unfavorable perception of the product quality of the pellets coming out of Vietnam.” 

The quality of wood pellets landing in South Korea got so bad that in the spring of 2015, the South Koreans acted and imposed new import restrictions. The objectives of the restrictions were to ensure that the raw materials within the pellets were legally sourced and 100 percent wood fiber. Initially, wood pellets exported to South Korea had to be made from feedstocks procured from forests that had been certified by a global forest certification program like the Forest Stewardship Council or the Programme for the Endorsement of Forest Certification. North American suppliers found these requirements not only onerous, but illegal in some cases because of complex trade agreements. Vietnamese volumes continued to flow, along with the required documentation, which, in many instances, were later discovered to be falsified. The regulations surrounding the importation of wood pellets into South Korea have been in flux for most of 2015, and North American trade groups, most notably the Wood Pellet Association of Canada, have been working in concert with the South Koreans to remove these trade barriers. WPAC’s efforts appear to have gained some traction, and a new verification process will be evaluated. Whether these new developments and regulation tweaks will lift prices remains to be seen.

Tough Sledding
Canadian producers aren’t alone in their frustration with a market that once seemed so promising, but, at least for now, doesn’t seem to offer opportunity for economic return. The shakeout within the country has already begun. “Vietnam had more than 200 companies operating in the pellet sector, but that number has been reduced to less than 80 because of the challenges of low prices and unbalanced business,” Nguyen says. Similarly, Fahman, whose company announced in August that it had entered into joint ventures with two wood processing facilities to install wood pellet operation, has for now tabled his plans to build pellet capacity in the country. “You are faced with this situation whereby the price you are paying for feedstock is too high and the selling price to Korea is not enough to cover your margins, so if you open your shop you are losing money,” he says.  “Most of the producers have closed down, and now I’m trying to help them with new strategies, by either opening a new market channel or provide them with better-priced feedstock.” 

Opinions differ on whether this situation will eventually lead to a rebound in the prices for wood pellets in tenders coming out of South Korea. Arnold Dale, vice president of bioenergy at Ekman, remains skeptical.  “The Vietnamese are not very happy with the prices, yet at the same time, they’ve got no one else to sell to and they seem to be willing to take the pain,” he says. “I can’t see anything changing.”

Walker suggests that there just isn’t an appetite within South Korea to pay higher prices for wood pellets. “When imports were highest and prices were highest, the utilities backed off on issuing tenders, probably because they didn’t want to be paying $180 per ton for pellets,” he says. “So I think there is some price sensitivity there. I think they are happy to use pellets at $120 per ton. I don’t think there is a lot of interest to move up the cost curve, and I don’t think the political will is there for additional government support for higher prices.”

Dale isn’t surprised that developers like Fahman have slowed or altogether halted the development of larger production facilities inside the country. “I really can’t see how they are going to get it to make sense, because these little production units that are making pellets out of any available material and putting it into a container and getting it off to South Korea aren’t going to go away,” he says. “They are the dominant force. So if you build a 60,000- or 100,000-ton pellet plant with state of the art equipment, and you make a perfect pellet, I just cannot see that you’ll be able to sell it for what it’s worth. You can only sell them for what someone will pay, and the South Koreans are absolutely focused on getting the lowest price.”

It is hard to argue that pellet producers operating in Vietnam don’t have great global opportunity. As the country continues to aggressively grow its forest products sector, the wood waste streams will grow proportionately. And as long as tenders for wood pellets continue to be issued in South Korea with a clear bias toward low prices, Vietnamese producers will, almost exclusively, have a role to play. “The South Korean RPS only requires that utilities cofire at a certain percentage of biomass,” Dale says. “And you get fined if you don’t do it. You don’t get a payment per megawatt hour like it is in Europe, so quality doesn’t really matter. The utilities have just got to prove that they are including biomass at the required percentage, and it’s really a very small percentage.”

This market reality isn’t ideal for larger producers hoping to build a long-term, stable pellet businesses inside Vietnam, and many developers are hoping to identify new markets willing to pay higher prices for a product with higher quality. But whether they be in Japan or Europe, convincing other buyers that wood pellets manufactured in Vietnam are high quality may be an uphill battle.  “Everybody I’ve met in Vietnam is looking for market opportunities in Europe, but quite frankly, it’s not going to happen,” Dale says. “If you think about the sustainability issues and the certification requirements that those buyers have in place, and the problems that genuine manufacturers in the U.S., Canada and Europe have meeting those requirements, I just can’t see how it is going to happen in Vietnam.”

Author: Tim Portz
Executive Editor, Pellet Mill Magazine
[email protected]