Viewpoint: Signs of rebalance in 2021 for biomass

Strong wood pellet production and weak demand over most of 2020 have left Europe's pellet market oversupplied. But early signs of demand have appeared in recent weeks and the Argus-assessed cif northwest Europe (NWE) forward curve for industrial wood pellets shows a steady contango in 2021.

But cif NWE spot prices are still far from North American producers' break-even rates, blocking forward trade as bids and offers remain too far apart.

Europe's industrial wood pellet consumption can decline rapidly with downtime at a single large unit, as demonstrated by the outage at RWE's Eemshaven plant in May, caused by a fire which halted biomass burn and left the plant either off line or burning coal only for six months. The drop in demand was further compounded by a month-long outage at the UK's 396MW Lynemouth plant from mid-October, after a control-room ceiling collapsed.

While all large units have resumed operations, the dip in demand has left biomass-burning utilities across Europe well supplied, with stocks across the continent at high levels. At least three utilities took on extra storage in 2020, although buyers have begun to dip into stocks as outages finish and the heating season starts.

But as supply has outpaced demand for the majority of 2020, any additional demand is likely to serve only to rebalance the market in 2021 and bring spot prices back to break-even production costs.

German utility RWE tripled its Dutch biomass burn in the third quarter, as firing continued at its 631MW Amer 9 plant. And its 1.5GW Eemshaven plant started co-firing biomass again in mid-November, further boosting demand.

RWE recently moved Amer from the hard coal to the biomass section of its Remit data, suggesting that a biomass-only future for the plant is moving closer.

If the UK's Drax and Lynemouth plants — totalling nearly 3GW of pellet-fired capacity across them — and Orsted's biomass-fired fleet in Denmark run steadily over the coming months, demand may prove steady enough for the market to regain some balance in the first half of 2021.

And further demand capacity growth will likely come in the form of increased co-firing in the Netherlands and the commissioning of UK biomass developer MGT's 299MW dedicated combined heat and power new-build Teesside plant, due to start up in February 2021.

Looking ahead, wood pellet producers have pointed to Germany and Poland as possible new European demand sources. But all bids were successful in a recent German coal capacity closure tender, taking nearly 5GW of coal capacity off line, and ending any speculation over the plants' conversion to biomass. German regulator Bnetza opened the second tender in early December, to close 1.5GW of coal-fired capacity in 2021. In Poland, Czech utility Cez has put on hold its planned dedicated 25MW biomass plant, despite EU support.

On the supply side, production capacity will continue to grow and some long-term contracts between North America and Asia will commence deliveries. At least two new pellet production facilities in the US are set to start commissioning in 2021 — US wood pellet producer Enviva's 700,000 t/yr Lucedale plant in Mississippi and Canadian producer Pinnacle's 360,000 t/yr Demopolis, Alabama, plant.

Enviva "expects to complete the purchase of the project site and commence certain pre-construction activities" for its planned 700,000 t/yr Epes production facility in Alabama by the end of 2020, when a final investment decision is expected. Enviva also has expansion work set for three of its plants. The producer has signed around 3.4mn t/yr of long-term take-or-pay wood pellet contracts with Japanese offtakers, with deliveries scheduled to start in 2021-25.

In Canada, the 200,000 t/yr High Level facility in Alberta, joint-owned by Pinnacle and lumber firm Tolko, is set to reach full capacity in 2021.

The pellets produced will be sold through Pinnacle's backlog of long-term contracts. Pinnacle has at least 11 long-term offtake agreements with Japanese buyers and at least three with South Korean consumers, with various start dates, for a combined 1.68mn t/yr of wood pellets.

Production is also set to restart at US wood pellet producer Highland Pellets' 600,000 t/yr Pine Bluff plant in Arkansas in the second quarter of 2021. The plant has been off line for upgrade work since January 2020. Highland expects to produce 675,000 t/yr initially, but lift nameplate capacity to 750,000 t/yr.

Outside North America, Russian pellet production has risen consecutively for the past seven years and is on track to grow again in 2020. Russia exported 1.83mn t in January-October 2020, setting numerous record highs for wood pellet exports throughout the year.

Infrastructure upgrades and streamlined logistics at St Petersburg have helped to increase shipments. And Russian producers ramped up their efforts to obtain SBP certification to meet sustainability requirements from European utilities. There were 26 operational SBP-certified biomass production facilities in Russia at the start of 2020 and 49 by the end of the year.

Russia has increased deliveries to the Asian market, making significant inroads in South Korea this year. Japanese traders expect imports from Russia — which competes with southeast Asian producers on price — to grow in future.

Upcoming growth in supply from North America is set to cover the rise in new demand from Asia, and Russian production is well-placed to supply Europe and Asia

Although supply has outweighed demand in 2020 and resulted in full storages, strong burn from all European utilities into early 2021, as we have seen in November and December, should deplete excess stocks and help gradually shift the industrial wood pellet market back into balance and spot prices into break-even territory. As the market stands, spot price levels look unlikely to move much higher than break-even production costs, particularly for North American producers, until next winter.

By Georgia Gratton and Jamie Aldridge

European industrial wood pellet-fired capacity MW