Russia’s Global Wood Pellet Supply Potential

According to official data, Russia is one of the world's largest wood pellet producers, ranking among the top five.
By Maria Frolova | February 24, 2021

According to official data, Russia is one of the world's largest wood pellet producers, ranking among the top five. The country’s current share in global output is about 6%, and it ranks fourth in terms of exports with a 7.6% share of the global market (Food and Agriculture Organization/United Nations Economic Commission for Europe, 2020). The Russian wood pellet industry is export-oriented—85% of output is sold to foreign markets. Such dependence on exports determines the quality of wood pellets produced by Russian companies.

Russian wood pellet manufacturers are currently guided by the requirements of ENplus standards or by contractual technical specifications close to the European standard. As of the beginning of 2021, 57 ENplus certificates have been issued in Russia (including 51 certificates issued to manufacturers). The exact number of Russian wood pellet producers is unknown. According to WhatWood's estimates, about 500 companies are engaged in the production of wood pellets in Russia. The 40 largest producers account for about 80% of the market. The main wood pellet production hub in Russia is the Arkhangelsk region (ULK Group, Sawmill 25, Region-Les, etcetera.) The top 10 regions account for 55.6% of the total wood pellet output in Russia.

Russia has substantial potential for further capacity growth. According to WhatWood's preliminary estimates, about 3 million tons of wood pellets were produced in Russia in 2020. The output growth was about 23% year-over-year, ranking only second to the U.S.

Exponential Growth in the Next 10 Years
An evaluation of the past five years indicates that the Russian wood pellet industry has rapidly grown. Although the history of wood pellet production in the country dates back over 15 years, it was during the past five years that a breakthrough was made. It so happens that the wood pellet industry in Russia is significantly conditioned by the development of sawmilling. There is a direct correlation: The higher the output of saw timber, the higher the output of sawmilling byproducts—saw-dust, shavings and chips, which are used for wood pellets.

Despite rapid development in recent years, Russia still lacks large enterprises with a consistent wood pellet business without integration with sawmilling, for example, such as U.S.-based Enviva or Canada-based Pinnacle Renewable Energy. Although there are many more prerequisites for creating such a business in Russia, opportunity is ripe. According to rough estimates, 15–20% of the volume of harvested timber remains as sawmilling waste in forest depots, especially in Siberia and the Far East.

It seems the first wave of active wood pellet production growth in Russia has ended, as nearly all large sawmills have provided their plants with wood pellet production facilities. Approximately 75% of wood pellets in Russia are produced from sawmill waste. Future production growth may be driven mainly by small- and medium-sized sawmills. While it is not improbable that one major player will form and, in line with Russian realities, adopt the North American model of doing business (that of Enviva and Pinnacle). There are certain prerequisites, however, as the export of roundwood of coniferous and valuable species will likely be banned after 2022. About 8 million cubic meters of roundwood is subject to the ban. It is likely that investments will be made in the processing of these raw materials and, firstly, production of saw timber. This could provide the market with an additional output of 1.7–2 million tons of wood pellets annually.

State aid can contribute to the more active development of the sector. For example, instruction released by the Russian Federation president on Nov. 6, following a meeting on the development and decriminalization of the timber industry, stipulates that municipal boiler houses switch from fuel oil and coal to biofuels. This provision will be formalized in the new timber industry development strategy, and then a federal program will be formulated for its implementation. This issue is also being regulated locally in some regions.

Wood Pellet Prices
According to WhatWood's Russian Wood Pellet Market Price Review, there was a significant decline in prices for wood pellets on foreign markets in 2020, which was conditioned by low demand, full warehouses and the start-up of many new production facilities. The decline in prices on foreign markets was offset by the weakening of the Russian ruble against the U.S. dollar and the euro. Thus, the average annual ruble to euro exchange rate increased by 15% in 2020 compared to 2019, and by 30% if measured December-to-December. Along with that, a so-called "deferred demand" may be observed in 2021. Starting from March 2020, export prices in Russia were dropping by 5–10 euros ($6-12) per ton every month. By December, the decline totaled almost 40% compared to the beginning of the year.

The average price for a ton of premium quality wood pellets exported on FCA St. Petersburg terms was 115.5 euros back in January 2020. By December, it ranged between 65 and 75 euros per ton, averaging 70, and even sinking to 60 euros per ton. As explained by market participants, the price of 60 euros reflects the real current cost of wood pellets for large shipments, while smaller quantities of goods can be occasionally sold at higher prices in a range of 75–85 euros per ton. The reasons for the continuing decline in prices are both the complete availability of wood pellets to European consumers and the current weather conditions. Continuing the trend of the previous year, autumn and winter were abnormally warm for the usual level of consumption in the wood pellet market.

As for the demand from Europe, Russian market participants are noting the almost complete absence of it. Wood pellets are shipped in this direction only by major market players such as CM Biomass. Thus, CM Biomass has been making record one-time shipments of 32,000–35,000 tons of wood pellets almost every month since June 2020. The company continued this trend in January 2021. In total, CM Biomass shipped 744,000 tons of wood pellets at the Sea Port of St. Petersburg in 2020, which means an increase of more than 65% compared to 443,500 tons recorded at year-end 2019.

Smaller enterprises note the market lacks desired stability—shipments are occasional and in small batches. One port reports there were no shipments of wood pellets at all in November. In addition, there was a delay in contracting procedures from September (the normal beginning period for entering into new long-term contracts). At the moment, long-term contracts are "postponed" until Q1 2021.

The prices in the market are determined by the weather conditions in Europe. The second wave of COVID-19 also exerts a slight impact, as it contributes to limiting industrial production in Europe. According to market participants, however, weather conditions are still the key factor. In addition to weather conditions, Russian wood pellet producers are under the influence of  output growth in other exporting countries such as the U.S. and Canada. In addition, some European countries, such as the Czech Republic, are significantly intensifying wood pellet exports. Shipments from the country amounted to 102,000 tons in Q2 2020, which is 16% more than in Q2 2019 and 1.6 times more than in Q1 2020.

Clients are constantly increasing wood pellet quality requirements that must be confirmed by the availability of relevant certificates. One of the ways to develop the wood pellet market may be disintermediation. As market participants note, more and more contracts are being executed directly between producers and consumers, which helps reduce the final price. One of the limiting factors for such transactions, however, is that companies only have operational warehouses for receiving and shipping cargo, which are not intended for long-term storage of goods. To be successful, companies need to improve the efficiency and flexibility of wood pellet production and logistics, build a buffer warehouse for raw materials and finished products, and comply with increasingly stringent European certification requirements.

Despite the near-absence of demand from European consumers, the market is witnessing the commissioning of new production facilities and expansion of wood pellet lines. Facilitating that is the growing ruble-to-euro exchange rate, making it possible for companies to gradually reach positive profitability values. One of the enterprises, which reduced output by three times during the pandemic (from 3,000 to 1,000 tons), increased it to 1,400 tons in September and was planning to reach 2,000 tons in October. Another producer plans to put into operation a pellet wood line that will increase capacity by 1.5 times. Amid developments like these, other companies are continuing to operate and sell products at a loss since the complete suspension of production will lead to even greater losses.

Prices: Short-term Expectations
According to WhatWood's estimates, spot prices for Russian industrial wood pellets will soon range between 65 and 80 euros per ton. The lowest possible price for this type of wood pellets can reach 50 euros per ton. Prices may increase slightly in Q1 2021 to average 75 euros per ton.

Remarkably, a large volume of Russian premium quality wood pellets (with ENplus A1 quality certificates, relevant confirmation from Incolab and SGS, as well as with Sustainable Biomass Partnership/Forest Stewardship Council/Programme for the Endorsement of Forest Certification) are sold in Europe in the segment of industrial consumption. That is, they are bought and consumed by energy corporations such as Ørsted, Stockholm Exergi, Fortum and Drax at 70 euros per ton (on FCA St. Petersburg terms). These same wood pellets could be sold by Russian producers in the private consumption segment of European retail at a price of 200–250 euros per ton since they conform to the required quality and specifications. More and more producers are offering 15- to 20-kilogram (33- to 44-pound) packages.

Not all large Russian wood pellet suppliers are ready to lengthen the sales channel, develop logistics in target markets, rent warehouses and offices, invest in branding and packaging, etc. to transition sales from industrial to private consumption.

Based on WhatWood's estimates, changes in prices, as well as significant changes in demand, are not likely in the near future. Spot prices will depend on weather conditions and how quickly the current surplus of wood pellets will be consumed by customers. Moreover, lack of demand leading to lower production profitability, as well as the potential for no positive price dynamics but increasing competition from Russian producers and European, American and Canadian industries, may force small-scale wood pellet enterprises that cannot afford to produce products at a loss to suspend and completely cease operations in the near future.

Notably, prices for long-term contracts will also decline in 2021. One of the major producers has announced a cutdown of its November/December 2020 price starting in January, by 5-10 euros.

Additionally, there were reductions in volumes or complete terminations of purchases under long-term contracts (when allowed), as well as a downward revision of price conditions in the autumn and winter of 2020.

Along with the decline in the FCA price for wood pellets, there is an increase in freight charges for them. Therefore, if freighting a vessel to deliver to a Denmark port cost about 16 euros per ton in July 2020, then the cost rose to 21 euros by November, and to 23–24 euros per ton by December. As a result, the freight price increased by 8 euros per ton, or almost by 1.5 times over six months.

Based on market participant expectations, wood pellet demand can fully recover only by the beginning of preparations for the heating season of autumn and winter 2021–‘22, particularly by September.

That hinges on whether active consumption of wood pellets will be accompanied by the stabilization of subzero temperatures. While this consumption will primarily be met by the current stocks, as customers' warehouses are full, it will not be possible to soon resume the usual volume of exports. At the same time, market participants are observing a rise in both prices and consumption of wood pellets within the country.

Russian wood pellet producers may feel price pressure from European consumers. Due to increased competition in the domestic market because of the commissioning of new production facilities, as well as the growth of the ruble-to-euro exchange rate, Russian enterprises have advantages over European manufacturers that are below the breakeven point already and cannot afford to reduce prices (the selling price of 110–115 euros per ton of industrial wood pellets (FOB Baltic ports) will result in negative profitability of their production). Meanwhile, Russian producers are noting that they have reached positive profitability values, thanks to the growth of the ruble-to-euro exchange rate.

New Production Facilities Intensify Market Pressure
Greater than 1.1 million tons of wood pellets are scheduled to be commissioned or expanded in 2021. The largest project is that of Luzales, which will increase its capacity to 180,000 tons of wood pellets in Komi, the village of Chovyu. The start-up of the facility was previously scheduled for 2020.
In total, production capacity of Russian enterprises increased by 670,000 tons in 2020. Another 850,000 tons of capacity were announced, but not put into operation.

One of the largest production facilities commissioned in 2020 is a wood pellet plant owned by Region-Les Group in Arkhangelsk, with an annual capacity of 80,000 tons. In the coming years, it plans to build a sawmill with a feed capacity of 350,000–500,000 cubic meters of raw roundwood at this site, and modernize the wood pellet shop to increase its annual capacity to 100,000 tons.

Author: Maria Frolova
Analyst, WhatWood
[email protected]