Concerns that the policy mandating use of certified palm kernel shells (PKS) under Japan's feed-in-tariff (FiT) scheme from April 2024 would result in a supply shortfall have eased, although the announcement led to a two-tiered market in 2023.
The Japanese ministry of trade and industry (Meti) has mandated the use of PKS certified by the Green Gold Label (GGL), the Malaysian Sustainable Palm Oil (MSPO), Sustainability and Carbon Certification (ISCC), Sustainable Biomass Program (SBP), and Roundtable on Sustainable Biomaterials (RSB) from 1 April 2024.
Japan is the largest importer of PKS and the mandate created demand for certified PKS, driving prices upward in the second half of 2023, while simultaneously weighing on the non-certified PKS market.
Prices of non-certified PKS have fallen steeply as the mandate draws nearer, as demand from Japan plunges. The certified PKS market continues to be at a premium compared with the non-certified market, but prices have also been faltering as the market adjusts expectations and supply crunch concerns have eased.
Certified PKS
Indonesian suppliers first quoted offers for certified PKS in the $140s-150s/t range in August-September because of limited supply.
But the certified PKS price started stabilising as negotiations between suppliers and Japanese buyers progressed, with some Japanese buyers securing shipments of certified PKS for the first quarter of the April 2023-March 2024 fiscal year in the high $120s-130s/t fob east coast Sumatra.
Argus started its 90-day spot price assessment for FiT-certified Indonesia PKS fob east coast Sumatra and fob peninsular Malaysia PKS on 8 November.Indonesian PKS prices were stable in the mid-to-low $130s/t, while Malaysian PKS prices were in the low $130s/t and high $120s/t at the time.
Some buyers were able to negotiate FiT-certified PKS offers lower, but others have yet to secure cargoes.
Japanese PKS buyers did not rush to procure FiT-certified PKS at the beginning of 2023 because of hopes that Meti would extend the mandate's deadline for the third time. Additionally, some buyers which can mix feedstocks conducted trials to reduce their PKS-to-wood pellet ratio.
But market panic started to grow from the second quarter of 2023, after optimism about a further extension diminished, and some buyers scrambled to negotiate cargoes while sellers held back, hoping for supply bottlenecks before the 1 April deadline. This supported offers in the mid-$140s-150s/t fob east coast Sumatra.
The initial relatively high offers were unviable for buyers under the FiT scheme, as these would have likely resulted in higher costs, making generation unprofitable especially for plants with lower efficiency.
Clarity on the GGL certification process for PKS started to weigh on offers as the market expects an increase in FiT-certified PKS supply. As much as 70pc of supplies would be certified before the 1 April deadline, up from a previous estimate of around 50pc, with only around a 1mn-1.5mn t of PKS supply deficit in the certified market next year, market participants said.
FiT-certified PKS spot negotiations are likely to focus on slightly weak prices in the coming months compared with the second half of 2023.
Some buyers are yet to secure certified PKS volumes in hopes of a further decline in prices. This hesitation to secure material is typically uncharacteristic of the Japanese market but more participants have been doing so after the global fuel price spike in 2022 owing to the Russian-Ukraine war.
Meanwhile, uncertified PKS spot negotiations will likely remain muted, and the price is likely to be weaker given softer Japanese demand.
Non-certified PKS prices slump
Indonesian PKS spot prices that do not meet Japan's FiT sustainability requirements have dipped by 23pc from $133.18/t fob east coast Sumatra on 21 June, which was an all-time high.
Argus last assessed the non-certified Indonesian PKS spot market at $105.31/t fob east coast Sumatra on 3 January.
The rapid decline comes as sellers rush to sell uncertified cargoes to Japanese buyers, with the realisation that buyers under the Japanese feed-in-premium (FiP) and FiT systems would not be permitted to burn uncertified PKS, following a working group discussion on 20 September.
Wood pellets more economical
The breakeven prices for Vietnamese wood pellets and FiT-certified Indonesian PKS show that wood pellets are more economically viable fuel.
Argus last assessed the 90-day spot price for FiT-certified Indonesian PKS at $133.58/t on 3 January, when the fob price of Vietnamese pellets typically sold to Japan to meet the country's FiT requirements was assessed at $137.42/t.
But the breakeven price for Vietnamese pellets was at ¥12,790.16/MWh ($89.04/MWh) on 3 January against ¥15,304.89/MWh for FiT-certified fob east coast Sumatra PKS on a landed basis, for plants with 40pc efficiency.
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.
