Analysis: Asian wood pellet prices gain ground
Singapore, 17 April (Argus) — Asian spot wood pellet prices edged up in the first quarter, reflecting strengthening demand across the region. The growth may escalate as supportive government policies pull new entrants into the market.
The fob Vietnam wood pellet price averaged $96.23/t during the first quarter of 2017, gaining $2.78/t from a year earlier when prices averaged $93.45/t, according to Argus assessments. The first-quarter 2017 prices were nearly $1/t stronger than in the final quarter last year, when prices averaged $95.39/t.
Wood pellet demand from Asia's largest consumers Japan and South Korea has been increasing steadily. Vietnam, Asia's biggest wood pellet supplier, has grown its shipments to the two countries by at least 25pc over the past year, taking advantage of its low-cost materials and weaker freight rates on the Vietnam-to-east Asia trade route.
Vietnam shipped 62,441t of wood pellets to Japan last year, a leap of 128pc from 27,440t in 2015. It also shipped 1.25mn t of wood pellets to South Korea last year, up by 23pc on 1.02mn t in 2015. At the same time, Japan's appetite for wood pellet imports has grown as several large utilities began their first full year of biomass co-firing at coal-fired power plants. Japan's imports rose by 49pc year on year to a record high of 346,788t in 2016.
New biomass-consuming power plants are scheduled to come on line in Japan and South Korea by 2020, which will further increase demand, and importers are likely to diversify their biomass feedstocks to ensure sufficient supply. The use of biomass for power generation in Japan is backed by a government commitment to tackle climate change and secure 22-24pc of its total power output from renewable sources by 2030.
Biomass is expected to make up 4pc of Japan's total renewable power generation, supported by the government's feed-in tariff (FiT) scheme. The FiT rate for power projects burning woody biomass and agricultural crop residues stands at ¥24/kWh (0.22¢/kWh) until the end of September. From October, the FiT is expected to be lowered to ¥21/kWh for larger projects with capacity of 20MW or more. But the tariff for smaller projects below 20MW is expected to remain at ¥24/kWh.
South Korean ambitions
South Korea imported 1.72mn t of wood pellets in 2016, up by 17pc year on year, to meet its tightening green energy obligations under the renewable portfolio standard (RPS) policy. The RPS target, set at 3.5pc for 2016 and 4pc for 2017, will incrementally rise to 10pc by 2024.
Some industry participants are now projecting total South Korean woody biomass demand of around 7mn-8mn t/yr by 2020, an upward revision from 5mn-6mn t previously. This growth is based on conversion projects and the addition of at least two large dedicated biomass power projects in South Korea in the coming years. Previously announced planned projects by state-controlled utilities Koen and Korea Midland Power (Komipo), as well as a joint project by construction company Hanyang and state-controlled nuclear power producer KNHP, could together create demand for 3.6mn t/yr of wood pellets when they start full operations by 2020, according to Argus calculations.
Koen is converting two of its coal-fired plants in Yeongdong to run on 100pc biomass, which could require a combined 2mn t/yr of wood pellets. The first 125MW unit is due to be completed by June this year, with a second 200MW unit planned for a start-up in late 2020. Komipo's 200MW planned dedicated biomass-fired power plant in Gunsan, in the southwest of the country, will consume up to 800,000 t/yr of wood pellets when it comes on line in July 2020. And Hanyang-KNHP's 220MW dedicated biomass electricity plant in the southern port city of Gwangyang is estimated to burn 800,000 t/yr of wood pellets and chips after its two 110MW units each start up in 2020.
Some traders expect rising wood pellet prices in Asia to pave the way for the increasing use of wood chips as biomass feedstock. Wood chips have a lower calorific value than wood pellets, but buyers can save on raw material processing costs. In Japan, at least two dedicated biomass power plants are being designed to burn both PKS and wood chips. These include Japanese industrial gas supplier and biomass newcomer, Air Water, which is scheduled to open its 75MW biomass-fired plant in Iwaki, Fukushima, by 2020. The other is a 50MW biomass power plant project by local utility Chubu Electric Power in Handa city in Aichi prefecture that aims to start up by October 2019.
Leading wood pellet exporter Vietnam may eventually become another competitor for supply. The Vietnamese government is encouraging the use of biomass for power generation with discussions underway to establish a FiT system. Hanoi's trade and industry ministry projects that Vietnamese energy demand will more than double by 2020, and the government aims to increase biomass-fired generation capacity to 2,000MW in 2030 from 500MW in 2020.
Vietnamese market participants say strong local biomass demand is probably 3-5 years away. The country's major biomass resources already include rice husk, bagasse and wood chips. Vietnam exported 2.6mn t of wood chips alone to Japan in 2016, for use mainly in the paper and pulp industry. And Vietnam exported 1.32mn t of wood pellets to Japan and South Korea, mainly for generation purposes.
It remains to be seen whether Vietnam's future demand will significantly reverse its export flows to large consumers such as Japan and South Korea. Stronger domestic demand in Vietnam could alter regional supply dynamics and create more opportunities for other suppliers.