FutureMetrics offers wood pellet demand, spot pricing estimates

By Katie Fletcher | October 17, 2016

FutureMetrics LLC recently released a white paper with estimates of industrial wood pellet tonnage demand and spot prices. The tonnage estimates are based on optimistic scenarios in which cofiring or full-firing wood pellets in large pulverized coal (PC) power plants develops in Japan, Korea, the U.S. and Canada. The spot price estimates are based on a model of industrial wood pellet price behavior.

Policy drives industrial wood pellet markets, and has had a tremendous impact on the traditional markets in Europe and, more specifically, England. However, the white paper pointed out that the growth in those markets is expected to plateau by 2021, and the question arises of where demand growth will come from in the next decade.

Asia is one region where significant demand may arise in a few key countries. FutureMetrics published a white paper on the potential growth in Japanese markets earlier this year. Demand in Japan could exceed 10 to 15 million metric tons annually by 2030. Korea is another country that may offer substantial pellet demand if the policy defining the proportion of power from renewables continues and wood pellets are permitted to be used to offset coal demand. According to the white paper, if Korean policy persists, demand could be close to 8 million metric tons per year by 2024.

On the other side of the world, Canada has the potential to become a significant demander of industrial wood pellets as well. Canada recently announced a national carbon pricing system, pricing carbon at $50 per metric ton by 2023. Alberta has taken it a step further and legislated that coal power generation will cease by 2030. The province currently produces about half of its power from coal and two of its PC power plants are fairly new. Keephills 3—a 495 MW super critical PC power station—is five years old, and Genesee 3—another station with identical generation capacity—has been operating for 11 years. Some of the older plants that will be phased out by 2030 may begin cofiring to avoid the carbon tax. FutureMetrics believes the new plants in Alberta are “strong candidates for full conversions similar to those at Drax and Lynemouth in the U.K. As for the U.S., FutureMetrics believes the Clean Power Plan would have the ability to enable the industrial wood pellet market if it survives current challenges, as the company has written about in the past.

According to FutureMetrics, “sustainability and preservation of the working forest resources is the absolute limit to the size of the industrial wood pellet market.” The company has refuted arguments against the growth of the wood pellet market in the past, as they have conveyed how resource limits can be defined and how that is the foundation of a carbon accounting that supports the use of wood pellets for lowering carbon emissions in power plants.

In the recent white paper, FutureMetrics provided an analysis of an optimistic industrial wood pellet demand forecast (excluding China) that shows average growth from 2010 to 2025 to be over 3 million metric tons per year, essentially tripling industrial wood pellet demand from now to 2025. This forecast relies on markets developing in Japan, Korea, the U.S. and Canada, which are the countries FutureMetrics indicated having the most potential growth after 2021.

There are many reasons why some or even all of these four countries would not reach the levels shown in the chart, but “if the policies are durable and the support schemes needed to provide dispatchable, non-intermittent thermally generated renewable power are put into place, the industrial wood pellet sector could follow that trajectory,” the paper articulated.

The white paper also provided an overview of what drives spot prices. The cost to produce a metric ton of wood pellets is heavily tied to the average cost of its woody biomass feedstock, and, likewise, the cost of delivered biomass feedstock is strongly connected to the cost of transportation which is significantly driven by diesel fuel cost. Delivered costs per metric ton varies by location, by harvest and by the transport infrastructure used. Over time, production costs per ton of wood pellets fluctuate, primarily with changing wood costs—due to diesel fuel, and demand for the same feedstock in the region around the pellet plant—and the moisture content of the incoming wood. The higher moisture content yields lower output of densified dried pellets per ton of input.

The ultimate cost of wood pellets delivered to the power plant consumer depends on the cost to produce, in addition to the cost of pellet transportation and handling, whether by truck, rail or ship.

Most industrial wood pellets are produced for sale at a sustainable, negotiated price agreed upon in offtake agreements with a specific buyer. In other words, these prices are not too high as to destroy the generator’s margins and not too low so as to disallow profitable operation by the producer. Offtake contracts typically include price adjustors and terms defining currency risk, and the adjusters provide a mechanism for mitigating risk for both the producers and buyers from changes in critical inputs such as wood and shipping costs.

Most pellets are currently traded through bi-lateral contractual agreements, but trading for industrial wood pellets on the spot markets is limited, according to the white paper. Spot price does provide information on supply and demand relationships and foreign exchange effects. An example is when markets are oversupplied, prices on the spot market are lower.

FutureMetrics included a chart showing historical and forecast spot prices delivered to Amsterdam, Rotterdam or Antwerp in U.S. dollars at exchanges rates to the Euro calculated for each month in the series in its white paper. The chart showed a recent fall in spot prices, which FutureMetrics attributes to excess production capacity in the industrial pellet markets and, to some degree, dampened demand for heating pellets due to a string of warm winters and therefore some heating pellet production available to the industrial sector. It’s also partly a function of a strong dollar against the Euro and pound.

The forecast illustrated in the graph assumes supply/demand equilibrium will resume after several large pellet consuming projects come online—Lynemouth, MGT, Langerlo and Drax unit one moving to 100 percent biomass, expecting consumption of about 4.15 million metric tons per year by around 2019. The forecast also assumes that production capacity, at normal capacity factors, will not exceed demand and that the heating markets absorb normal quantities associated with more normal winter temperatures. Another assumption the forecast makes is that the market will return to prices associated with production costs in the major producing jurisdictions and that the dollar/Euro/pound exchange rates converge to values defined by purchase power parity. In the past, that price in terms of CIF ARA has been between $155 and $175 per metric ton. In the analysis, forecast inflation is set at 1.5 percent per year and ocean shipping rates will increase over current rates by about 2 percent per year from now until 2020.

The paper reiterated that many of the assumptions behind the forecasts for both demand and spot prices will not come true, but that it is quite probable spot prices will increase in the coming years and, more likely than not, that they will return to around the long-run average by the end of the decade in 2019-’20.  “The spot market matters because if the industrial pellet market has aspirations of becoming a true commodity market, spot and forward prices have to support producers and satisfy buyers.”