Net Zero Transition: biomass markets- South America

A number of developments are taking place in the biomass sector across South America.

Alex Comerford founder of Sustainable Pellets and Erisa Senerdem editor Argus Biomass Markets report discuss the wood industry there, its potential and the current situation with the capacity challenges.

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Transcript

Erisa: Hello, everyone. Welcome to this biomass podcast. My name is Erisa Senerdem. I am editor of the Argus Biomass Markets report, here in London, and my guest today is Alex Comerford. He's founder of Sustainable Pellets,  a brokerage firm with a focus in wood pellets and other wood products in South America. Our topic today will be South America. We are going to talk about the wood industry there.  Alex, welcome to this podcast.

Alex: Thank you for the introduction. Let me just give you a quick summary of what we've been doing here in South America. We've been involved in the brokerage and trading of wood pellets basically since an inception. So, around 12 years now. In the last five or six years, we've focused a lot more on South American origin. So, that goes for wood pellets, wood chips, and also logs to different markets that we're serving now.

Erisa: Yeah, that is fantastic.  Let's start our discussion. I first wanted to ask about the Brazilian companies. They've been looking into opportunities to ramp up capacity to serve European and Asian biomass markets. What is the current capacity in Brazil? And is there anything that differentiates Brazilian pellets from other regions?

Alex: Sure.  So, as it stands today in terms of existing capacity, going to the industrial market, there really is only one large facility, which is located in the southern part of Brazil, in Rio Grande. And I think that company is probably selling around 350,000 or 400,000 tons per year into the UK. And outside of that, sadly, we've seen three or four projects over the last 10 years, none of which have yet come to fruition. So, when it comes to industrial pellets, that's really the main facility that's pushing volumes in that direction, in large vessels. And the rest of the production today is both, A, extremely fragmented into smaller facilities, and B, completely focused on the residential markets.

So, there's probably around 250,000, 300,000 tons of that production. So, that's a lot of containers, it's a lot of bags, but it's really, really distributed geographically all over southern part of Brazil. So, there's some small hubs, but ultimately, it's pretty spread out. Those companies today, you know, you have facilities that are doing maybe 25,000 30,000 tons a year, to the slightly larger ones, who are more like 80,000, and perhaps one or two where they're closer to 100,000 tons. So, it's a bit of a mixture. The facilities are very different in size, but not in nature. They're all focused on residential market, using, you know, pine as their fibre, and focusing mainly on bagged and container product.

Erisa: That's all very interesting. You mentioned in the beginning of the conversation that the industrial pellet projects have not been successful, and, to come to life. What's the reason for that? And going forward, how do you see Brazil's potential?

Alex: Yeah. So, I think we probably all agree that Brazil has a huge amount of potential, in terms of its, well, first of all, its fibre basket. It's cost-competitive, you know, in terms of distance to ships to European and Asian markets. It's not all that fundamentally different versus the U.S. or southeast U.S. or Canada. So, in principle, there's a lot of potential there.  Each project in the past has been slightly different, but I think what they have in common is, first of all, they're very, very large-scale projects, which is great in terms of taking advantage of the fibre available there, and the scale. But ultimately, those types of projects require a lot of CapEx, and is often very difficult without a very long-term, structured offtake into either Europe or Japan.

But I think everything else is in place. There's no other reason that stands out to me as to why they haven't been successful. The fibre is there. You have world-class ports. You have, you know, functioning internal domestic transport systems.  Technical capacity is obviously there, terms of education, in terms of manufacturing equipment that's available.

But I think there's definitely a lot of potential. There's a few projects out there right now, one in particular that's been in the pipeline for some time, but still with the huge potential. And the scale of these projects is really what I think they can provide in terms of differentiation versus, you know, anywhere in North America these days, I think, that the capacity, fibre being there, to go to, you know, one, two, three million tons worth of production, just one or two plants, is incredible. And I think that will keep it interesting, especially as we move into a world of BECCS and other potential projects that could really, really start to consume a lot more pellets or fibre than they are consuming today.

So, the potential is there, but I think the main bottleneck up until now has been financing and the structured offtake.

Erisa: Right. When would we expect one of these big projects to come online, you reckon?

Alex: I think now, the next milestones that we need to get across in order, any of these projects, to really get off the ground is clarity on the BECCS situation in the UK specifically. Because I think that's going to affect the ability of that and other buyers to go really long-term with their offtakes. If they can provide the length of term, then I think these projects will come to fruition a lot easier than at the moment.

Erisa: Mm-hmm. Yeah. That makes sense. And I think all eyes in the biomass market now are on BECCS projects in the UK or in continental Europe. So, let's hope we have some clarity on that sooner rather than later. So, I was also curious to know  what are the other hotspots for wood pellets in Latin America?

Alex: Sure.  So, Chile is probably the most obvious one. They have a very, very well-established forestry system there. They have been exporting wood chips and logs for many years. They have huge pulp projects locally, lots of sawmill industry. So, I think there's a lot of potential in Chile. There is already an existing capacity of around 100,000t/yr. And I think in the future, that could potentially grow maybe three or four times. And then if you follow up on the west coast, other countries such as Ecuador, or potentially even Peru, again, sawmilling industries, fibre available, very well-suited to Japanese or to Asian markets because of the freight and their direct route.

There is a new project underway right now in Colombia. First one up in that part of the world, for around 100,000 to 150,000 tons of pellets in its first phase. This project is in the financing stages, but progressing very, very well. I think we'll see more in Brazil as time goes on, both for industrial land for the residential.

So, you see more buyers there, more plants cropping up, and I think with the sawmill industry, when it gets back online a little bit stronger than it is right now, we'll begin to see more and more plants there.  And then if we move further south, definitely Uruguay and Argentina, they both have huge amounts of potential, large fibre baskets, well-suited to the European market geographically. So, I think, in the future, we'll also see developments there.

Erisa: Speaking of Argentina, you used to be based there, but now you have moved to Uruguay. So, what took you to Uruguay?

Alex: So, yeah, I lived I've been almost there 20 years in Argentina. And in recent months, finalized a move that was taken place over the last couple of years, to Uruguay.

So, no, as a family, we decided to move to Uruguay. We thought it would be a slightly nicer and more, let's say, slightly quieter option versus Argentina.  And actually, one of the few countries that has been very, very good in growing its forestry business, and the coverage of plantation wood, both eucalyptus and pine. So, when it comes to new capacity of forests in order to export logs, or timber products or pellets or chips, I think, although it's a small country, it's probably one of the ones with the largest opportunity to really develop more exports in the future.

Erisa: That sounds really like a lovely move there,I also wanted to ask about the other types of biomass, because I'm aware you've been more engaged with the world of pulp chips and sawlogs recently. Tell us more about that.

Alex: Sure, but when it comes to wood chips, all of the countries that we mentioned have potential for supply. If we focus solely on the idea of wood chips for biomass, all over Brazil, Argentina, Uruguay, Chile, going onto the other side, Ecuador, Peru, and up to Colombia, you know, there's this huge amount of fibre that isn't being taken advantage of today. So, you will find the high-end pulp-quality chips is a well-established trade that is going to Europe and to Asia now for 20, 30 years, or perhaps more in some locations. And then you have, let's say, slightly lower-grade fibre, be it logs, or logs with bark, or clearing wood. That can be taken advantage of as well.

So, I think huge, huge potential. And why is it that Brazil right now is supplying some volume of biomass into European utilities and not a lot more? I just think it's a case of European companies getting a little bit more comfortable dealing with Brazil. I think there's big concerns around Amazon, and cutting down native woods, which really  what these biomass producers are looking at doing or are focusing on. We're talking about plantation wood, or wood that has been, you know, there's no other value for it, and taking advantage of old forests that have no markets, or clearing wood that is normally thrown away or left. In the case of Uruguay, there's around 10% of the harvesting which is just left to dry, or to biodegrade organically over time. And so there's huge amounts of fibre, but I think people find it a little bit difficult, first of all, to transact with South America, which I think, over time, will change.

And then secondly, it's about SBP, FSC, having the right certification and the right chain of custody in order to be able to supply utilities. And that's improving. Beginning to see more wood chip producers looking to have a biomass angle to their business as well, and not focusing solely on pulp markets, which, right now, is actually quite a good option.

Erisa:  I also wanted to ask on this point, as we all know, there's been a massive cut in fibre supply out of Russia and Belarus, following the start of war from last year, sadly, and companies, particularly companies in Europe, which has been hit hardest,  have been trying to find new sourcing regions. Is South America one of these regions

Alex: Sure.  I think now people have really been forced, when it comes to pellets, people have been forced to look for other markets and find other origins, and Brazil, with a small capacity, is already on the map. Therefore, growing that will come naturally over time. And when you look at things like, well, wood chips for biomass, we just discussed huge, huge potential there. And I think, as a result some of the larger, like, you know, the Russian forestry, or some of the other countries will see definitely a lot more focus on people trying to find long-term structured agreements whereby they can buy this type of fibre from Latin America. Obviously, one of the big challenges that we will see is freight, and how that plays out. of course, the distance is definitely longer than a lot of other countries, so it's something definitely to take into context.

Erisa:  I hear you.  Volatility in freight is one of the things that everyone is keeping an eye on. Let's talk a little bit about China. We've seen, more recently, much stronger interest of Chinese companies in South American woody biomass. Are you seeing similarly, and why do you think that is...this new trend is?

Alex: Very much so.  just to give you a bit of context, traditionally, when it comes to pulp chips, be it from Chile, Brazil, Uruguay, who...in the past, Ecuador, which have been the main suppliers of fibre in terms of pulp chips for pulp production into Asia, traditionally, Japan has been the big market there, and let's say has had maybe, out of anything going in that direction, around 70% would always traditionally go to Japan, and 30% to China. Over the years, that has, simply because of more pulp capacity coming online in China and the growth that we're likely to see over the next few years is,  it's startling the volumes that they will need to consume in order to run these huge, huge pulp plants that are coming online over there.

So, that mix has definitely changed. It's probably around 50-50 today between China and Japan. So, China is definitely taking a much more active role in purchasing fibre from this part of the world. It always has done, but they're doing it now in a much larger scale. There's more competition. The volumes that they're buying is significantly larger. One of the challenges that I think a lot of the producers find is that, you know, this is, people would love long-term offtakes into this business, but unfortunately it's kind of more like there's some long-term relationships, but it's almost handled on a yearly basis, with specific pricing parameters that come into play over time.

The difficulties that this market has is that when pulp prices are very bad, as they are right now, you know, people, Latin America is the one to suffer. Out of all of their origins, Latin America is probably the one who will first suffer, because it's the furthest away, geographically. 

And so, a lot of producers right now are dealing with not cancellations, but people postponing volume. There's people pushing volumes further down the line. And when you have a mill, you know, the only way, really, to make money is to keep the thing running at full capacity, all the time 24/7. And, okay, you can store wood chips outside, but you still need a lot of physical space to handle this. And obviously, the longer you leave them, quality can deteriorate. So, there's a challenge there. But I think the new capacity in China for wood chips will also help support growth on the production side as well. Be it Argentina, Uruguay, Brazil, or Chile. I think, right now, we're sort of more or less balanced, but with the projected demand that we have in China, they will need to ramp up production as well, this end, to serve it.

And not only hardwood, which has been traditionally their main focus with eucalyptus, but also softwood now as well. So, that might change things a little bit, given softwood markets domestically, both in Brazil and Chile, are pretty strong. So, that will be interesting to see if China can really, you know, find the volumes it's looking for, unless they also invest upstream a little bit more, which is probably the most likely step. Up until now, in Latin America, they have investments, but small ones.

Erisa: Yeah. It's interesting that they haven't invested, and they're mostly buying, but the potential is all there and they might as well opt for that. So, I take it that pulp and paper, Chinese pulp and paper sector, is the key driver here, demand-wise from Asia.

Alex: Correct. Correct.

Erisa: Along with Japan.

Alex: Yep, yep. Both are consuming very large volumes of fibre from this part of the world. And like I said, we are also the first to suffer. So, you will see it in places like Vietnam this year, even they, who are right next door, have also felt the squeeze. And with pulp prices as they have been, they've slowed ] down as well. I would say they probably shipped this year half of what they would do in a normal year to China and Japan.

Erisa: That's very interesting,Chinese demand for wood chips, particularly from the pulp sector, has also affected the Vietnamese biomass market, and yeah, their strong demand in recent years has meant that there was less raw material left in Vietnamese markets for production, and that has had a direct impact on pricing, biomass prices over there. But it seems to have fallen silent so far this year, which is probably for the number of reasons that you counted there. What's the outlook? Do you see a change in the near future?

Erisa: That's all very interesting, Alex. Thanks a lot for sharing your insights on Asia as well. That's a very interesting part of the global market which is ramping up really quickly in China, in Japan, in other countries in north and southeast Asia as well. And I wanted to circle back to where we started, actually, with this discussion. I would like to know your opinion about the role that South America will play going forward.  Do you see it become a big player in the global market?

Alex: I do. It's a good question. So, I think it's clear that the potential is there to be, you know, one of the biggest players, I would say, in terms of fibre to global markets, whether it be for pulp, whether it be for biomass, pellet, or chip production. I think there's huge potential for development of agro-residue projects as well, given the volume and scale that we have of this untapped resource. But I think there's a few things that need to happen, or develop over time, to really support that. One is what will happen with BECCS, because I think, in the biomass sector specifically, that will be a big driver of whether, A, more pellets are bought and consumed from South America, and B, whether these projects are actually supported with long-term offtakes, to get them up and running.

I also think sustainability is, today, obviously, a fundamental piece of our business, and the development of anything that we do within the biomass sector. This will be critical especially as it's something that's constantly changing and evolving over time, right. So, the ability for Brazilian, Argentinian, Chilean projects to really get up to scale on SBP, to make sure that their fibre is all FSC[-certified]. I think that this is something that's physically possible. It's quite straightforward because the forestry is developed and advanced in this part of the world. I think it perhaps has a bad reputation sometimes, but it's quite the opposite. When you compare it to some of the European development of forestry, this is really, really world-class in this part of the world, on some parts of this region.

And then, it's really, it's, for me, it's just a natural next step. You have a lot of development in North America. Obviously, you have the Baltics, Siberia, Southeast Asia, Latin America, with the fibre that it has, the geographical proximity that it can have to some of these major markets, it's inevitable. But I think those things will have to happen and develop over time in order to really, really fulfill its potential.  I think everything that we do in this region will help to support these types of projects. We're a big believer, and hopefully, over time, it will fulfill its potential.

Erisa: Fantastic. It's been an absolute pleasure to talk to you today, Alex. Thank you so much for sharing your insights on South America. It's a region which we talk less about, but of course that it's going to change soon, as you said, with all the wealth in resources that the region has. That is certainly inevitable. I would like to take this opportunity to thank you again.