Palm kernel shell (PKS) producers in Asia-Pacific are lagging behind in their efforts to meet new certification requirements that Japan will introduce from 1 April 2024. The rules will apply to PKS imports that are used at plants benefitting from the feed-in-tariff (FIT) state support mechanism, and could cause supply tightness from the start of the upcoming winter.
Japan is the largest importer of PKS and has requested that all PKS imports used by FIT or feed-in-premium (FIP) supported utilities are certified for sustainability from 1 April 2024.
But most market participants expect that only about half of the volumes sold into Japan will meet the requirement by the deadline, which could result in supply bottlenecks from November, when companies are expected to start looking for certified material. This could have a ripple effect on the whole biomass market.
Most palm oil mills — from which PKS is a residue product — are willing to co-operate with certification bodies. But smaller mills are struggling because of their limited resources.
Large mills typically own their plantations and have higher capacity to achieve third-party certification for most of their product. But the higher operational costs that certification will lead to — an estimated additional $5-10/t — will squeeze profit margins, leaving smaller mills with less economic incentive to certify their product.
And the so-called PKS collectors or aggregators — which collect PKS from a large portfolio of mills and sell it to consumers — are resisting certification, as it would require them to share commercially sensitive information with certification bodies.
And approved certification bodies may lack the human capacity needed to certify all suppliers, which adds another hindrance to the overall process.
Japanese consumers have been offering technical and financial assistance to their PKS suppliers, in a bid to ensure they can secure certified long-term volumes before the deadline. But many are still concerned that not enough PKS will be certified by the start of next year — which is when most companies would seek and secure cargoes for delivery from April 2024.
Japan's trade ministry (Meti) is responsible for approving the schemes that are eligible to carry out sustainability certification. The Malaysian Sustainable Palm Oil (MSPO) scheme for PKS and oil palm trunk imports was added to Meti's list of approved schemes in April, in a bid to increase the volume of certified PKS imports by the end of the grace period. But Meti approved the most recent version of MSPO, while most PKS producers hold an older version of the scheme and may not be able to update their certification in time.
Other recognised schemes are the Roundtable on Sustainable Biomaterials, Green Gold Label and International Sustainability and Carbon Certification (ISCC) — which all cover PKS and palm trunk. The Roundtable on Sustainable Palm Oil scheme has also been approved by Meti for palm oil (PO) imports, and Meti is reviewing the ISCC scheme for PO, the domestic Agricultural Resource Certification system for PKS, and the Indonesian Sustainable Palm Oil for PO and PKS.
There have been suggestions that the grace period could be extended to help consumers cope with a potentially large supply deficit, but the Japanese authorities are keen to start implementing the regulation by the 1 April 2024 deadline, market sources said. The requirement for PKS certification was originally to take effect from 1 April 2023, but the grace period was extended by one additional year in response to a stagnated evaluation process because of Covid-19-related restrictions.
There could be a large PKS supply deficit for Japanese consumers, if large volumes of PKS imports do not achieve certification by Meti's deadline. This could result in price volatility for PKS from late 2023, and also potentially price volatility for wood pellets too, if companies try to partly make up for the PKS deficit with wood pellets. Some uncertified PKS that would have been exported to Japan may find a new home in other markets, such as South Korea or Thailand, or be offered to producers' domestic markets. But the latter have limited capacity to absorb such large volumes.
Japan imported 5.1mn t of PKS last year, which was 17pc higher that a year earlier. Japan is expected to ramp up consumption further in the coming years, in line with new power generating capacity coming on line.
