Wood pellet producers in Europe and North America could consider output cuts should spot prices remain at current levels or fall further, which would be well below production costs. But cutting production may prove challenging given the need to achieve economies of scale, as well as maintaining raw material supply streams and cash flow.
Raw material and other operational costs have increased significantly for producers — particularly in Europe — since 2022. Sanctions on wood imports from Russia or Belarus significantly cut raw material availability in Europe. And inflationary pressures have lent support to labour, fuel and transport, energy, equipment, maintenance and other costs for producers globally.
Estonian prices for roadside firewood dropped last year to €42.83/m³ from €56.93/m³, but they remained 55pc above their 2019-21 average. Last year's drop has yet to be fully reflected in overall production costs, as most producers secure raw materials on yearly or multiple-year contracts with the prices negotiated quarterly at best.
In Latvia, a producer said its overall costs had increased by 50pc on the year in 2022 and by another third in 2023.
Producers in the Baltic countries have reported production costs in a wide range of €190-220/t this year, well above the fob Baltic spot price, which has dropped significantly this year (see chart). Baltic pellets have lost their competitiveness to North American supply on the spot market.
One Baltic producer said it would have to reduce production to avoid selling pellets at a loss at current spot prices. Another, while not currently planning additional maintenance for 2024, said a currently planned outage could be longer or start earlier.
And even for long-term contractual volumes, not all Baltic producers were able to pass on the higher costs. While many in the Baltics managed to renegotiate contractual prices with utilities in northwest Europe (NWE) in 2022, utilities returned to applying pre-2022 prices for term contractual supply to many in 2023, when electricity prices dropped significantly, capping utilities' ability to pay higher prices to producers.
In the US, producers have also been facing higher overall production costs, particularly in the past couple of years and some producers continued to report rising costs for the second half of 2023 (see table). Feedstock prices maintained an increasing trend particularly for sawdust and roundwood, whose share in the producers' total feedstock mix has increased significantly in the past two years, EIA data show.
Other costs such as energy, inland and sea transport, labour, as well as equipment and maintenance, have also increased significantly.
US producers' ability to pass on the higher costs to consumers depends on whether the long-term contracts have clauses to adjust prices for inflation. And many argue that delivering wood pellets in the $200-220/t cif NWE range — which is well above current spot prices — would be unprofitable. One US producer told Argus that it has temporarily halted operations at one of its plants because of negative margins, adding that other firms could follow suit later in the year.
But it may prove harder for producers to cut output significantly, as they need to keep production as high as possible to achieve economies of scale and reduce fixed costs per ton. It would also negatively impact companies' cash flow and their ability to maintain raw material sourcing streams. In fact, production continued to increase in the US in 2023, according to EIA data, and is estimated to have reached an all-time high last year despite firm production costs and lower spot pellet prices. This may in turn have further supported raw material prices.
Slipping power prices in Europe have also capped utilities' ability to absorb higher feedstock costs, particularly for deliveries in the summer, and they were not looking to review contractual prices as they did in 2022, when power prices reached record highs. And most utilities in Japan — a key market for US pellets in Asia-Pacific — receive a fixed feed-in tariff price for their output, which caps their ability to absorb higher pellet purchasing prices.
