Navigating the Turbulence of Global Trade

Coming off a season with inventory levels the highest they have been in several years, an impending pellet shortfall in Europe has some U.S. heating pellet producers eyeing a challenging opportunity.
By Anna Simet | July 26, 2022

High supply chain and energy costs, lingering pandemic effects and Russia’s attack on the Ukraine continues to have profound impacts across the globe. In the context of the wood pellet industry, it has led to a projected shortfall of pellet fuel in the United Kingdom and other European countries. While stakeholders there look elsewhere to secure additional supply, it may have some U.S. producers investigating the potential option of sending product overseas, as a below-average heating season has left an above-average stock of inventory. Although select, large producers may be able to seize the opportunity to send product to Europe, there are a slate of hurdles involved for others, according to Todd Bush, CM Biomass, Head of North America. “There are lots of difficulties in getting pellets into Europe,” he says. “This isn’t just for selling into the premium market, but for industrial as well,” Bush says.

Broadly speaking, the shortfall is largely a ripple effect of the Sustainable Biomass Partnership revoking certification from Russian volumes—meaning industrial players cannot take any from Russian manufacturers—as well as the country’s disqualification from the United Kingdom’s ENplus program. “In order to get RHI incentives in the U.K., you must have that certification,” Bush explains. “So, lots of materials coming from Russia are no longer applicable, and this will lead to a shortfall in the coming 12-month period. While some of that volume might be some replaced from Portugal, no matter what, we will see a displacement effect. Approximately 1.5 million tons have been removed from the market with the exclusion of Russia.”

As for what this means for producers in the U.S. and Canada, where many came off of the heating season with higher-than-average amounts of inventory and have not traditionally accessed the European market, it really comes down to the price of pellets. “It has increased in Europe dramatically,” Bush says. “For U.S. producers selling into the domestic market, right now, [in Europe] the range of prices are where they usually are at the height of the season in a normal year. So, it does open up opportunities.”

However, that does not mean that it is simple, by any stretch of the imagination. “If you look at much of the stock left over from the winter in the U.S., it is in 40-lb bags on non-heat-treated pallets, with U.S. writing, not labeled for European sale,” Bush says. “Even if you can get them to Europe, to make it legal, you’ll have to swap out the pallet, as you cannot import non-heat-treated pallets to Europe. You can sell that product in bags with U.S writing and without the ENplus certification, but this all leads to a discount. You’re not going to get the same price as a 15-kilogram ENplus bag of pellets. No matter what, it’s going to be at a discount.”

If a producer is able to aggregate volumes to send over in a bulk container, it may be bagged in European bags and split among different consumers, Bush says, but it still will play into a discount not being ENplus certified. “But not as much as a 40-lb, U.S.-labeled bag,” he says. However, Bush notes, container prices are soaring, and containers themselves are difficult to acquire. “You’re lucky if you can even get a container,” he says. “The ports are congested, the trade lanes are full, and it’s not like you can tap into that market easily. If you look at aggregating a minimum of 10,000 tons to make it anywhere near cost-effective—realistically, it’s more like 25,000 tons and maybe aggregating with another producer so you can sell directly to storage—that isn’t possible without SBP certification.”

All of these are stages, he notes, that a producer could navigate through if they really desired to break into the European market. “You may initially do bags at a big discount, then later in a bulk container once you aggregate, at a slightly less discount, then maybe get ENplus certified to really put into place a lesser discount, and way in the future, maybe get SBP certified and play in the industrial markets as well as the premium.”

Getting ENplus certified is a large, fixed cost for pellets, with a small variable cost, Bush says. “If pellets go into the industrial market, then producers don’t need to pay the per-ton fee for ENplus certification, which is about 15 euros per ton.” He says CM Biomass owns a few pellet plants—one of which is in Texas and is ENplus certified—but approximately 99% of its production goes into the industrial market. “So, we don’t have to pay the ENplus fee on that,” he says. “But another U.S. producer, if they send 10% of their volume into the industrial market and 90% into the premium market, they have to pay that certification fee on all of their production. For good reason, U.S. producers have not traditionally gotten ENplus certified. The idea is to try to get them [U.S. producers] to adopt ENplus like CANplus in Canada, but the Pellet Fuels Institute has already established a standards program in the U.S. Both sides have what they view as relevant arguments.”

Despite the challenges that some producers will face, there will be creative mobilization of pellet volumes that haven’t traditionally gone into the European market, in Bush’s opinion. “We’re taking some out of St. Lawrence, and there are some out of the East Coast and Canada already, but a lot of these are supply chains that we had in the past, and were kind of reactivated. That’s easy for us to do because we’re a trader that does 3.5 million tons per year and we know how, but it’s difficult for some to figure out how to get product to Europe. They should choose a trusted partner who can handle that part of it for them.”

 As CM Biomass is also an active buyer, Bush says there is price gouging occurring. “We can probably pay you what you would get paid in a normal, good winter or a little less, but you’re not going to get rich off of 5,000 tons of pellets going overseas,” he says. Conversely, Bush he says, supply chains costs are extremely high, so higher pricing at plants is reflecting that, even with high pellet fuel prices in Europe.

The Russia/Ukraine conflict has led to high pellet prices for multiple reasons, mainly because the shortage of pellets and other fuels going into Europe and high electricity prices. Therefore, nontraditional export avenues for domestic futures in the U.S. and Canada will likely open up, but it will be complicated, Bush concludes. “So, how does a guy whose never done export figure out how to load an ocean-going vessel, the world around demurrage, freight costs, bunker fuel and all that? It is like entering a different world. They’re very good at trucks, but this is very different.”

While getting rid of some excess inventory may be alluring, smaller producers will likely want to hold onto inventory, according to William Strauss, president of consulting firm FutureMetrics Inc. He defines small producers as regional mills supplying heating pellet markets, typically making 120,000 tons per year or less. “As far as U.S. [heating] pellet producers stepping up, it is possible if the users in the EU area ignore the need for ENplus certification for heating pellets,” Strauss says. “But many smaller U.S. heating pellet producers do not even use the PFI mark, so there are challenges with certification of quality.”

Certifications aside, Strauss says FutureMetrics sees demand for heating pellets in the U.S. increasing substantially.  “High heating oil and propane prices are driving demand for new pellet stoves and boilers,” he tells Biomass Magazine. “Installers we know are very busy.  For lower-income people, with food prices where they are, this coming winter will be tough decisions on food versus heating oil or propane.  So, it is my opinion that aggregating slack capacity for many small producers is not feasible for economic, logistical, and security of domestic pellet supply reasons.”

As for industrial pellets, users would have to overlook lack of SBP certification, Strauss says, but that is unlikely to happen, as industrial pellets are used to lower CO2 emissions in the power generations sector and need the credentials showing they are sourced sustainably.

Global Markets
As for the volume removed from the industrial market, Russian, Ukraine and Belarus collectively exported nearly 3.4 million metric tons (MT) of wood pellets in 2021, according to FutureMetrics Inc. data. “Much of that will not be exported in 2022,” Strauss says.

Russia exported more than 870,000 MT to Denmark alone last year, where Orsted, the country’s largest energy company, operates three combined-heat-and-power (CHP) plants that use wood pellets as fuel. This includes the Studstrup CHP plant, one of the largest biomass-fueled power stations in the world. In late April, Orsted CEO Mads Nipper told the Financial Times that due to the global shortage of wood pellets, a result of Russian’s invasion of the Ukraine and global supply chain challenges, the company was likely to use coal instead later in the year. “However much we hate it, we are very likely going to see a temporary increase in our coal use, compared to the trajectory that we have been in,” Nipper told the Financial Times. “Biomass is hard to get right now because everyone is looking for fuel.”

Other large-scale, pellet-using utilities including Drax, Orsted, EPH and others have shifted to or are still working on plans to alleviate any shortfalls caused by ceasing use of Russian volumes in the midst of a tight market, a condition already present prior to the Russian invasion of the Ukraine, for a number of reasons. “Fundamentally, growth in global pellet manufacturing and supply capacity has failed to keep pace with demand growth,” says Fiona Matthews, biomass consultant at Hawkins Wright. “Furthermore, planned new capacity has been delayed due to construction and COVID-related issues.”
According to Hawkins Wright data, from 2020-’21, global industrial pellet demand grew by 18.4%, with production only growing 8.4%. That is in comparison with 2019-’20, when demand grew by 8.8% and production was nearly matched, at 8.7%.  “Additionally, the build-to-suit model for large industrial mills (i.e., lack of merchant capacity) means that the market has been heavily reliant on Russia for spot volumes, which have now disappeared,” Matthew says. Though it is estimated current biomass spot market prices are around $300 per metric ton, there is such a lack of spot volume that trading data is largely nonexistent.

Finally, Matthews adds, the sudden shift in energy market fundamentals—high fossil fuel prices—has created incremental demand for pellets, exacerbating the supply-demand imbalance. Rocketing energy prices have prompted more households in Europe to switch to pellet heating, and an additional demand of around 2.5 million tons is expected for 2022, reports proPellets Austria. In Austria—and largely representative of those across Europe—pellet prices are at a record level, increasing more than 53% compared to a year prior with no signs of relief in the near future. The organization reported that, in order to ensure the supply of pellets in the long term, the Austrian pellet industry is currently building 11 new pellet plants, as well as demanding a stockpiling obligation, speedy adoption of the Renewable Heat Act and an action plan to mobilize thinning residue. “The international energy markets are in a state of upheaval, not least due to Russia’s invasion of Ukraine, and this is also affecting the domestic pellet market,” says Christian Rakos, managing director of proPellets Austria and president of the World Bioenergy Association, in statements released in May. “The pellet industry is investing hundreds of millions of euros so that the supply is secured in the long term, but we also need the support of the relevant political decision-makers.”

A June survey completed by proPellets Austria resulted in an average price of bulk wood pellets was up 66% compared to last year. However, despite that increase, they still offer an 82.7% price advantage compared to extra light heating oil and 18.3% compared to natural gas. As for bagged pellets, they are up 52.8% compared to last year.

In a blog on its website, Scotland pellet manufacturer Puffin Wood Fuels recently provided its pellet users a snapshot to the challenges it has been facing, after keeping prices static for the past couple of years. Producers across the globe will likely find commonalities with these hurdles—the 25,000-metric-ton-per-year producer reports that energy and power prices have tripled, packaging manufacturing has doubled, haulage and fuel prices are up 40% in 2022, pallet prices have doubled, and due to the banning of red diesel in manufacturing (a U.K. law that went into effect in April) fuel bills have increased 200%.

Mark Lebus, chairman of the UK Pellet Council, tells Biomass Magazine the U.K. has been facing an immediate 200,000-ton shortfall in the domestic heating market and that new supply chain avenues are being explored. He notes that one of the main challenges right now is storage, as shipping volumes are higher than normal.

With extremely tight markets, supply chain bottlenecks, inflation and ripple effects of the ongoing war, strategy, creativity and flexibility will be required from pellet supply chain stakeholders. As for whether global pellet supply is forecast to become closer to being able to satisfy demand, it likely won’t be in the near future, according to Matthews.  “Economic forces will have an effect over time—high prices are a strong driver of new pellet mill investments,” she says. “But we are not yet seeing sufficient new supply capacity at an advanced stage in the project pipeline to fully address the imbalance.” 


Ports, Cargo & Congestion
U.S. port congestion has been front and center for the container sector for well over a year, and while North American ports still remain heavily congested, there are small signs of improvement, according to Eleanor Hadland, senior analyst of ports and terminals at Drewry. In a mid-June webcast update, Hadland said that on the West Coast, the average call duration (terminal time, pre-berth waiting, etc.) peaked at over seven days in October 2021, more than 300% higher than average in 2019. On the East Coast, it peaked just above three days, 161% higher than the 2019 average.

Port volumes have risen steeply from mid-2020, remaining high, she said. Meanwhile, European terminal time peaked at 1.4 days in Dec. 2021, 0.6 days higher than 2019 average, much less congested than the U.S. As for how chaotic the container currently market is, for the past two years, the dominant driver of freight rates, and subsequently carrier profits, has been container system inefficiencies, disruptions and port congestion. “These factors are now embedded into the market and have renegaded other supply, demand and cost factors into the margin, Hadland said. “Ultimately, carriers’ ability to charge customers extremely high freight rates will be dictated by the longevity of the line supply chain bottleneck, which sadly remains highly unpredictable. For as long as these chronic inefficiencies continue, the market will continue to be strapped.” Hadland added that some carriers have said port congestion will start to ease in the second half of 2022, but nobody has actually predicted when it will end. “There will probably be another 12 months of lengthy delays and high freight rates…we do expect gradual improvements before then.”


Author: Anna Simet
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