The industrial wood pellet market in Europe is characterized by relatively few offtakers, with Drax Power in the U.K. (annual demand of roughly 7.4 million metric tons (MT) and DONG Energy in Denmark (annual demand of about 2.1 million MT) having the strongest positions in the market. Of the total expected industrial pellet demand of 11 million MT for 2017, these two players jointly account for a market share of 86 percent. Over the next few years, only a handful of new offtakers are expected to enter the market. In the U.K., Lynemouth Power is expected to start operating in 2018, and MGT Power in 2020. In the Netherlands, five biomass cofiring projects have received support contracts, which help diversify the offtake side. The general market situation, however, characterized by a high level of demand concentred on a few players, will not change markedly. There is also a limited number of very large pellet suppliers in this market, with only seven able to offer volume from production capacities above half a metric ton each&mdash; Enviva, Drax Biomass, Pinnacle Renewable Energy, Graanul Invest, Pacific Bioenergy, Fram Renewables and Georgia Biomass. These large suppliers, with a combined annual capacity of approximately 9.2 million MT, often have mid- to longer-term direct supply agreements with European consumers, and are able to manage their export infrastructure and distribution operations in an efficient way. With an average size of 140,000 tons per year (TPY), There are 25 pellet mills that are primarily focused on supplying the industrial market, and a further 230 smaller pellet mills with individual sizes of above 25,000 TPY in Europe alone. These pellet mills could supply some of their volumes into the industrial market, in addition to serving the premium pellet segment. Smaller producers usually lack efficient access to export and storage infrastructure and distribution channels, however, as well as the knowledge and insight into how the international market operates. Their relatively small, individual size also makes them less attractive counterparties to large offtakers, as they would not be able to fill larger vessels to allow efficient ocean transport. To resolve this high level of fragmentation on the supply side, and to bring more of these volumes to market, the industry requires market participants who can effectively aggregate these smaller volumes, and channel them as larger packages through strategically located export and storage hubs. The requirement for such strategic hubs on the export and import side can present a significant market entry barrier. Nevertheless, there are some examples for the successful implementation of such an aggregation model already existing within in the market. CM Biomass, a subsidiary of Copenhagen Merchants, is a good example of successful implementation of such a strategy. CMB currently has control over 20 storage facilities, located at import, export and inland locations. These facilities allow distribution to premium markets in Europe. CMB is handling around 1 million MT per year, and the key focus of its strategy is the aggregation of volumes from around 35 mills in Russia, the Baltic States, Portugal, the U.S. and Canada. For example, CMB annually aggregates over 500,000 MT of mostly premium pellets in its terminals in Saint Petersburg, Russia. It then distributes to its own storage facilities throughout Europe, to premium customers directly, and to industrial customers when there is a need to keep flow moving (i.e., in summer months). This allows CMB to purchase steady volumes throughout the year, thereby giving steady offtake to producers. It also allows for flexibility toward industrial offtakers, and to its own distribution network. CMB performs similar services in export locations in the Baltics and Iberia, while supplementing with spot and structural volumes sourced from the U.S. and Canada. CMB had the advantage of its parent company having its roots in the grain business. This has helped the company overcome typical market entry barriers by giving them access to grain storage facilities that could be repurposed for handling wood pellets. Such a portfolio allows an aggregator and trader time to swap, store, buy and sell on a flexible basis, unlike structural contracts direct from producers. The optimization within its own book, and the ability to move sourcing, means that such an organzation can always be competitive on spot sales. The establishment of more organizations that can efficiently aggregate volumes from smaller mills, and channel them through strategic export and storage hubs, will be very important for the rapidly emerging market in Asia Pacific. While pellet mills in Vietnam seem reasonably aggregated, there are about 70 pellet mills with an average annual capacity of 65,000 MT in other Southeast Asia countries. Their relatively small size indicates the need for aggregation and efficient distribution. This presents opportunities for market participants to fill this role, and would help satisfy the upcoming market demand in South Korea and Japan. Author: Hannes Lechner Senior Principal, P&ouml;yry Management Consulting +44 7876 348 262 hannes.lechner@poyry.com

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The global wood pellet market has a high level of fragmentation on the supply side, a problem that could be resolved through market participates that can effectively aggregate smaller volumes.

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