Estonian wood pellet producer and utility Graanul is expected to produce around 2.2mn t of wood pellets in 2024, ratings agency Fitch said in a report on 17 October.
Graanul's pellet production is expected to see "a gradual recovery to around 2.6mn t in 2027", Fitch Ratings said.
Graanul's earnings are expected to improve from 2024 rising to €94mn ($102mn) from €61mn a year earlier, mostly because of additional contracted volumes as well as higher spot sales, Fitch said. Adding that this followed successful renegotiation of a loss-making contract with its largest customer, UK utility Drax, in December 2023.
Graanul also reported €1.1bn of new contracts in the second quarter of 2023, with numerous new contracts pending, the ratings agency added.
Despite fundamentals for wood pellets in Europe expected to remain sound in the mid-term, Graanul's ability to maximise capacity will depend on contracting new long-term volumes, spot prices' rebound and successful expansion in the premium pellets market, the report said. Graanul's premium pellet output was 344,000t in 2023.
Fitch said Graanul's "generally predictable cash flow" was underpinned by term contracts and by cost inflation pass-through or fixed-price escalation provisions in contracts.
About 75pc of Graanul's revenue is generated from take-or-pay contracts, with the remainder from sales in the spot market, according to the report. The pellet producer targets contracts with maturity of 3-5 years, which while allowing for contract price renegotiations, reduces long-term certainty on revenues.
Graanul has a concentrated customer base, with the three largest European offtakers — UK utility Drax, Dutch utility RWE and Denmark's Orsted — accounting for the majority of its contracted volumes, Fitch Ratings said. The firm's contract renewal rates have historically been strong, supported by long-lasting relations of over 10 years with its customers.
The key risk for Graanul in the near term is the extension of state subsidies post 2027 in the UK, the firm's key market, Fitch said. Major UK utilities are currently in talks with the government for the extension of subsidies from April 2027 to the early 2030s, when they expect to start up the first units for bioenergy with carbon capture and storage (Beccs), which is also referred to as the "bridging gap". The government launched a consultation on bridging financing in early 2024, which is expected to conclude by the end of the year.
Graanul is well integrated vertically as it owns and operates 12 wood pellet plants in the Baltics and the US with a combined capacity of 2.7mn t/yr, six combined heat and power (CHP) plants in the Baltics, and four vessels with which it covers its shipping needs.
