The breakeven price for Indonesian palm kernel shells (PKS) and Vietnamese wood pellets converged to near parity in late March on an Argus-calculated landed basis, bucking a historical trend in which PKS has historically been the more economically viable fuel compared with wood pellets.
Prices have converged because of relatively tighter PKS supplies. Weaker wood pellet demand, as a result of power plant outages in Japan earlier this year and a milder than expected European winter, weighed on the spot fob price of Vietnamese wood pellets typically sold to Japan.
This has prompted some Japanese utilities to increase co-firing of pellets wherever possible, although the switch might not be widely adopted because of boiler design and storage limitations, market participants said.
The 90-day spot price for Indonesian PKS was last assessed by Argus at $131.50/t on 12 April, when the fob price of Vietnamese pellets typically sold to Japan and to meet the country's feed-in tariff (FiT) requirements was assessed at $148.59/t.
The breakeven price for Vietnamese pellets on a landed basis was at ¥13,678/MWh ($101.65/MWh) on 19 March against the breakeven price for fob east coast Sumatra PKS at ¥13,801/MWh, based on a 40pc plant efficiency basis.
Vietnamese wood pellet prices for Japan's FiT use was assessed at $183/t on a fob basis on 17 August last year when Argus first started assessing Vietnamese pellet prices to Japan, while the Indonesian PKS price was assessed at $130.44/t fob east coast Sumatra. The 17 August 2022 breakeven landed price spread was at ¥16,486.43/MWh for Vietnamese pellets for Japan FiT use against ¥14,029.76/MWh for east coast Sumatra PKS.
The landed Vietnamese pellet to Japan price is based on an estimated freight rate between Vietnam and central Japan on a 10,000t bulk basis and the weekly Argus-assessed fob Vietnam to Japan FiT wood pellet price.
The landed Indonesian PKS to Japan price is based on an estimated freight rate on a 10,000t bulk basis between east coast Sumatra and central Japan and the weekly Argus-assessed fob east coast Sumatra PKS price.
Price pressure
The fob Vietnam price of wood pellets typically sold to Japan has been under pressure since November 2022, after hitting a historical high of $205/t on 16 November. Prices were pressured because European demand softened because of a milder than expected winter and ample regional stocks. Several Japanese biomass-fired power plant outages in late January also resulted in increased cargo availability in the spot market, raising supplies at a time that demand was relatively weak.
But Indonesian PKS prices remained firm as this market is supported by tighter supplies because of slower fresh fruit bunches collection since October last year with the low harvest season continuing through to 2023.
Some participants attributed the slow collection of PKS to the prolonged low harvest season, which was a result of bad weather and fertiliser shortages last year. Standard MOP, which is the main fertilizer used by palm plantations, hit a historical high last year with the Argus-assessed Potash Standard MOP bulk cfr southeast Asia price hitting a high of $1,075/t on 16 June, more than double June 2021's average of $313.75/t.
The delivered price parity between PKS and wood pellets typically sold to Japan resulted in some utilities increasing their co-firing ratio of pellets to PKS under the FiT scheme, participants said. But they have also noted that storage limitations and boiler technicalities may make it difficult for plants to easily switch from wood pellets to PKS.
Wood pellets require storage with increased protection against rain compared with PKS. Many Japanese wood pellet warehouses are full after firm production from a major North American supplier saw the resumption of term shipments into Japan towards the end of last year when European demand softened.
PKS breakeven prices may continue to outpace Vietnamese wood pellets as pellet stocks remain ample in the country, participants said, even as the pellet price weakness eases.
