US wood pellet producer Enviva said it did not expect spot prices for industrial wood pellets delivered to northwest Europe to return to 2022 highs, although still sees the market structurally short for the coming winter.
"We do not expect the spot market price levels to go back to levels that we had in 2022," chief executive Thomas Meth told investors earlier this week. "If that happens, that is upside [for the company's financial performance]."
But the structural shortage of the market "has not subsided at all" and in Europe, "the nervousness for this coming winter is very pronounced", he said.
Enviva aims to realise higher profits this year as it expects economies of scale to increase while it ramps up production capacity. It also plans to cut production costs by about 11pc on the year in 2023.
The company has revenue escalators. "Not only do our costs escalate, but typically our entire revenue line escalates in different forms," Meth said. Repricing new contracts at much higher prices than the existing contracts due to expire within the coming three years will start "flowing through", particularly in the second half of 2023, he added.
"Our customers are gearing up for a very strong generation season starting in the third and fourth quarters of 2023… Our customer mix will see high-priced ships in the second half [of 2023]," Meth said.
Enviva expects high carbon dioxide emission prices to continue to render wood pellet-fired generation more attractive compared with coal and even gas in Europe. The company also welcomed the political agreement between the European Council and Parliament over a revised renewable energy directive (RED III) reached last week, which recognised biomass as a renewable and zero-rated source and removed restrictions on primary woody biomass use that had been proposed by Parliament in late 2022.
‘Balancing agent'
About 80-85pc of Enviva's annual adjusted earnings before interest, taxes, depreciation and amortisation (Ebitda) is provided by take-or-pay contracts, with the remaining 15-20pc from the flexibility to make incremental changes with customers on delivered volumes that are also done over long-term contractual volumes and "has nothing to do with the spot market", Meth said.
"We are a balancing agent in this market," he said. "This is a physical commodity [business] under take-or-pay contracts." He added that the firm still had flexibility in contracts. "We can help our customers, because we have dozens of customers not in different jurisdictions to optimise physical delivery of [pellet cargoes]."
The alternative would be end-users seeking to store or hold pellets in ships for longer and pay for demurrage, if they could not take cargoes at certain times when generation was low because of stronger output from other renewables — wind and solar, Meth said.
"So we benefit from … helping our customers balance some of their physical flows," he said, adding that there was also flexibility for Enviva to deliver cargoes earlier or later "to optimise for our purposes as well".
Enviva has also benefited from a rapidly growing Asian market in recent years. "We are buying from suppliers [in the Pacific Rim]," Meth said. "They are smaller, do not have the credit profile that we do … and the reliability and long-term agreements into Japan that we do."
Enviva's portfolio to Japan was 4mn t/yr, with some of the power-generating capacity of its customers still not ramped up and set to come on line gradually in the next few years to 2026, Meth said. "We have flexibility in our contracts to not only deliver from North America but from really anywhere in the world," Meth said. "And we are using that to drive incremental value into our business."
Sourcing out of the Pacific Rim to deliver to Asia could save Enviva a shipping cost differential of about $20/t, Meth said.
