Wood pellet producers in the Baltic region are seeking to renegotiate their long-term contracts with European customers, as spiking raw material and fuel prices have pushed production costs well above previously agreed export prices.
Most producers in the region are in talks or planning to open discussions on prices with their counterparties.
Production costs in the region have increased sharply, to well above previously expected levels, primarily because of raw material shortages and stronger competition from local consumers for pellets.
The raw material balance in the Baltics has changed slowly since the start of this winter and producers started facing shortages in January. Less raw material was available to the market overall, with forest owners supplying customers directly and pellet producers facing fierce competition from other industries, such as paper and pulp and cardboard, that were able to offer large premia to secure the material. The raw materials used by pellet producers typically undergo a year of preparation — from collection from forests to drying and other processes — before they are made available to markets.
The shortages' impact on the market was exacerbated by the start of the Ukraine conflict, which has resulted in widespread disruptions to wood trading activities by Russia and Belarus with Europe. Some Baltic producers were securing raw materials from sawmills in these countries directly or indirectly, in the form of residue from the processing of timber imported from Russia and Belarus.
Adding to this tightness, Baltic exporters are also facing fierce competition from the domestic market. Most biomass-fired boiler stations are buying biomass for deliveries up to two years forward, and interest is expected to hold strong throughout the summer 2022 season as these firms will want to restock. Most utilities in the Baltics and elsewhere in Europe are entering the summer season with record-low inventories, as consumption was strong throughout the winter 2021-22 season, while production struggled to match.
Domestic demand for biomass also seems to be less price-sensitive compared with that in the export market, as local governments are compensating residential consumers for the higher prices. State-backed support is also being offered to industrial renewable power and heat producers in the Baltics, including those that burn biomass, as long as security of supply is ensured, particularly following spikes in natural gas and, subsequently, power prices in recent weeks, market sources told Argus.
Demand-supply imbalances have lifted raw material costs to about €140/t, a level at which export prices for industrial pellets would have typically sat on a fob Baltic basis in recent years. Combined with rising power and gas prices, these have resulted in production costs almost tripling for Baltic producers so far in 2022 from a year earlier, a producer told Argus.
The Argus-assessed 90-day spot price for industrial pellets on a fob Baltic basis averaged €175.50/t on 1 January-16 March, rising to a fresh high of €227.50/t on 16 March — well above the €144.50/t seen in the first-quarter 2022 contract that expired in October 2021, when most long-term contracts for 2022 deliveries would have been concluded.
If counterparties do not renegotiate prices for these previously concluded contracts, producers may fail to deliver as they will be unwilling to continue producing at a loss. Some users understand the situation and are willing to make concessions, Baltic participants said. Counterparties need to come to an agreement quickly, as producers are running out of stocks for raw materials — with only enough stocks left for a month's worth of production at most sites, they said.
