Deutschland’s Sleeping Giant

Although Germany’s pellet supply and demand has steadily increased over the years, recent factors have impacted growth.
By Katie Fletcher | January 12, 2015

In 1910, the great-grandfather of German pellet producer Markus Mann added a small sawmill operation to his wood-turning business. More than a decade later, the eldest son of the wood turner, Mann’s Grandfather Emil, founded a transport company that trucked wood and other raw material in the region. Emil’s daughter Anna and her husband grew the small wood-turning company and sawmill into a larger operation, known today as Koch GmbH. The sawdust and woodchips from this operation feed one of three pellet plants that Mann’s company, Westerwälder Holzpellets GmbH, runs today.

Westerwälder installed its first pellet plant in 2001 in Mann’s home village next to the family sawmill in Langenbach. In 2006, the company installed a 48,000-ton-per-year pellet plant in Oberhonnefeld, and four years later built another similar-sized plant in Hosenfeld. Westerwälder’s capacity has grown from 2,000 tons of pellets in 2001 to 184,000 tons in 2013.

Growth of this family-owned pellet company mirrors the evolution of the entire German pellet industry. Now the largest wood pellet producer in Europe, Germany got its start in the mid-1990s with pellet boilers from Austria and very small operations like Mann’s. In 1996, pellets were approved as solid fuel and introduced to the German market two years later. At the beginning of the millennium, there was a parallel between the number of pellet heating system installations and pellet production. That continued until 2006, when demand for pellets outgrew capacity, mainly due to high oil prices. Over 100,000 pellet heating systems were installed through 2007.

The rapid growth caused a shortage of pellets in 2006. “This led to a great uncertainty in Germany, and people started hesitating to invest in a pellet boiler or stove, as they thought they might not get enough pellets in the winter time,” says Barbara Pilz, former editor-in-chief of the German trade magazine Pellets—Markets and Trends and project manager of the international trade conference Pellets Industry Forum. “That shortage led to a decline in demand of pellet heating systems. At the same time, new pellet production was being built up to cover the expected demand in the future.”

According to Martin Bentele, CEO of the German Wood Fuel and Pellet Association (DEPV) and German Pellet Institute (DEPI), booming demand of alternative energy, combined with the high price of fossil fuels in the late 2000s and the vast amount of raw material from sawmills, is what led to Germany becoming the largest pellet manufacturing presence in Europe.

It is estimated that 2.15 million tons of pellets were consumed in Germany in 2014, approximately 60 percent in pellet stoves and pellet boilers smaller than 50 kW. DEPV estimated that at the end of 2014 there would be 116,500 residential pellet stoves installed in the country, 321,000 residential and commercial pellet boilers smaller than 50 kW and 10,500 strictly commercial applications greater than 50 kW, some with combined-heat-and-power facilities.

These statistics reinforce one of the biggest differences between the German and North American pellet industries. The German pellet market is focused largely on the residential sector, while the North American pellet industry has grown rapidly in recent years by targeting the European utility market.

Once larger producers entered the scene, Germany began producing for other countries in Europe. Germany’s largest producer, German Pellets, began production in 2005 in the port city of Wismar in northern Germany. Anne Leibold and her husband Peter Leibold founded German Pellets with development of the greenfield investment of Wismar Pellet Mill.

Besides the Wismar plant, GP controls 19 more, 14 of which are in Germany, three in Austria, one in Belgium, one in Woodville, Texas, and another under construction in Urania, Louisiana. The Woodville plant has up to 500,000-metric-tons annual production output, and a few of the company’s large plants in Germany produce 250,000 metric tons. Others range between 75,000 to 150,000 metric tons. In total, the company is capable of producing approximately 2.6 million metric tons of pellets annually, and its German mills make up approximately 50 percent of the German pellet market. GP is one of the few pellet producers in Germany to produce pellets for both commercial consumers and utilities.

Leibold says that from the beginning GP has followed an international strategy for sales and production, even when sourcing fiber. “Our core market brands are German Pellets, Firestixx and Hot’ts, but we have several others for different markets and distribution channels,” she says.

GP exports its pellets to Denmark, Belgium, the Netherlands, France, Italy, Austria and the United Kingdom. According to Leibold, in general, the main markets for residential pellets in Europe are Germany, Italy, France, Austria and Denmark. The U.K. is the main market for industrial pellets.

Westerwälder exports about 20 percent of its annual production to France, Switzerland and Italy. “There is no delivery to industrial like they have in Holland or Great Britain like Drax; no cofiring in Germany,” Mann says. “My 184,000 tons ran 99 percent into residential or school buildings, medium-sized heating systems.”

According to the DEPV, in 2013, Germany imported 387,295 tons of pellets and exported 666,988. Germany's largest customer was Denmark with 93,000 tons, followed by Belgium at 43,000 tons. Out of the 666,988 tons of exported pellets, less than 100,000 went to non-European countries. The main countries exported to were Austria, Denmark and Italy at 161,000, 121,000 and 100,000 tons, respectively.

In second quarter 2014, 17 percent of German pellet production was exported, mainly to neighboring countries. Increased trade has led the industry to adopt a new pellet certification system. In 2010, the ENplus certification system for wood pellets based on the EN 14961-2 was introduced and implemented by DEPI. The standard was created in order to offer the same pellet quality throughout Europe.

Bentele says that quality has been emphasized with ENplus, and a training program for installers. “A constant challenge for us is quality, both for pellets and installers’ work,” Bentele says. “We have qualified both groups to offer a modern, comfortable and environmentally friendly heating system to their customers.”

Westerwälder’s and GP’s pellets are ENplus certified.

Industry Insight
Westerwälder and GP are joined by about 40 other pellet producers in Germany with an estimated 55 to 60 production sites, many located near sawmills in the densely-wooded, low mountain ranges of Germany.

About 90 percent of German pellet production comes from sawmill industry residues. Only about 10 percent of round wood is sawed. German sawmills cut approximately 35 million to 40 million cubic meters of round wood, resulting in 13 million to 15 million cubic meters of sawmill residues that could annually supply 1 million pellet heating systems.

Germany has the capacity to produce 3.5 million tons, but the current output is between 2 million and 2.2 million tons annually. Years ago, the industry grew quickly due to the rise in oil prices, amongst other factors, but recent events have led to a rise in sawmill residue price. Mann estimates the total cost of producing bulk pellets by the ton is between 171.50 and 181.50 euros ($215 and $228), whereas the market price for bulk is in the 165 to 175 euros-per-ton range. “Due to the relatively high raw-material cost, not everybody is producing at 100 percent,” Mann says.

The increased price is partially attributed to a lack of sawmill residue in 2013 due to a reduction in sawmill activity in the country. In the first half of 2014, however, sawmill activity bounced back and pellet producers were able to buy residues at a lower cost. “That, in combination with full storages due to the warm winter, led to a decrease in pellet prices from spring on,” Pilz says.

According to Pilz, pellet traders have had storages full since the beginning of 2014 and have been unable to sell enough pellets to gain their economic return. “Quite some exigency in the German market at the moment,” Pilz says.

Overproduction has also occurred as a result of many plants built around five years ago. Over the past few years, this, combined with the sawmill residue shortage, has led some producers to bankruptcy or consolidation. “The market did not develop as fast as everyone thought after the great interest in pellet heating systems in 2005 and 2006,” Pilz says.

Sleeping Giant
Last years' warm winter led to decreased pellet demand, and Germans to postpone installing new pellet heating systems. “I am very astonished that the people are thinking so short term and they are not investing now,” Mann says.

Mann believes now is a good time to install with low interest rates and the looming outcome of the Russia-Ukraine gas disputes. “I think a big thing that could cause an explosion in the market would be higher oil prices due to the gas crisis with Russia.”
“What we are facing at the moment, especially this year, is that people just postpone changing their heating system as long as it’s possible and they’re putting their money in bathrooms,” Pilz says.

She adds that as long as an old boiler functions, consumers often think their money is better spent elsewhere. Bathrooms are one upgrade people are doing, and in Germany, the people who install boilers also install bathrooms. “For them, it does not matter if they do not sell boilers, as long as they have business,” Pilz says.

According to DEPV, 6 million oil heating boilers can be replaced in the long run. “They have what’s called the sleeping giant in Germany, there are so many old boilers and stoves in cellars and hardly anybody is going to replace them at the moment, even though it is really needed because they are so old,” Pilz says. “Everybody is waiting. If there is high demand, we might run out of pellets and therefore need some imports, but if pellet prices go up, it might incentivize new production in Germany with other raw materials.”

Pilz believes there is potential in other wood sources for pellet production. “Besides using fast-growing trees, there would also be the option of using whole trees instead of sawmill residues, in order to increase the amount of pellets being produced in Germany,” Pilz says. “It only depends on the price of pellets.”

Although it is hard to predict which way the industry will turn, price is the main driver. According to Leibold, the cost of wood pellets as heating fuel is around 30 to 40 percent lower than petrol or gas, depending on the country. Other market drivers are the broad environmental consciousness of European consumers and government assistance. “The German Market Incentive Program supports the replacement of old fossil boilers with modern pellet boilers and pellet stoves that support central heating with at least 2,400 euros ($3,000),” Bentele says.
There has, however, been a lack of consistent funding, which has left some to postpone changing heating systems in the hopes that subsidies might go up. “A lot of people in Germany think it would be better to stimulate the renewable heating market by a feed-in tariff like the British implemented,” Pilz says.

A challenge in Germany is raising the exchange rate of insufficient fossil fuel or outdated biomass heating systems with new wood pellet systems. “When the energy transition takes up speed in the heating market, we’ll see a moderate yearly growth of both installations and pellet production,” Bentele says.

Author: Katie Fletcher
Staff Writer, Pellet Mill Magazine