“Come on in. The water’s fine.”
The phrase was a warm welcome to prospective wood pellet exporters, uttered by Harold Arnold, president and CEO of Georgia-based pellet producer and exporter Fram Renewable Fuels, at the inaugural North American Biomass Pellet Export Conference in New Orleans. “I think it’s a great business to be in,” he added.
The event, held Sept. 8-9, was a learning tool for stakeholders in many aspects of the pellet industry, from mill building and raw material supply, to production, quality standards and sales. Focused for the most part on exporting to European industrial pellet users, the conference also offered insight into Asia’s emerging pellet market, as well as predictions from industry experts about how and where the markets will develop in the future. Relevant topics and speakers chosen by the U.S. Industrial Pellet Association, the event’s organizer, helped paint a clear picture of the global market opportunities, challenges and facets of the pellet business.
“I see you as the supply side,” Henry Pease, in biofuels development for RWE Supply & Trading in Geneva, told the crowd of about 200 people during the event’s first panel, a roundtable of European utilities and other experts. Utility representatives such as Pease offered an invaluable take on what they and their industry expect from producers and in product quality. RWE has a multitude of power plants using biomass in Europe, and Pease said the continent sees biomass power generation as a low-cost, reliable and 24/7 renewable energy source. “We like it in Europe because the price is right,” he said, adding that baseload power is crucial. “We see a huge role for [all renewables] but biomass is very important.”
Speaking from the end-user’s perspective, Pease said Europe’s utilities will buy what the U.S. producers manufacture. “We can commit to buying what you supply,” he said. “But we can’t trust you’ll make it,” he said later, drawing laughter from the crowd.
The export conference wouldn’t have been possible a year earlier, Pease said, because of the lack of a solid pellet industry infrastructure in the U.S. Today, however, a number of pellet companies are working the market, he added. “The U.S. is on the map in a way that it wasn’t before.”
And wood products group The Westervelt Co. is adding itself to that map, with a business plan to produce 1 million tons of pellets from existing byproducts of forestry thinning and harvesting operations on its 520,000 plus acres, as well as residues from saw and timber mills. “Pellets are an obvious choice for us,” said Mike Williams, director of strategy for Westervelt. The company plans to sell its pellets to European utilities.
And it isn’t alone. Biomass is expected to play a sizeable role in the tremendous renewable energy growth anticipated in Europe, according to Nicolas Denis, partner with consulting firm McKinsey & Co. “Most but not all European regions theoretically have sufficient biomass to fulfill their mandates domestically,” he said, adding that it is unlikely much of that biomass can be successfully mobilized. North America and Brazil are best situated to supply Europe’s growing demand, he said.
Not surprisingly, utility Danish Oil and Natural Gas (DONG) Energy had a presence at the show, as 60 percent of all energy consumption last year in Denmark came from biomass. But the demand there is still growing and resources in the small country cannot support it, said Niels Bojer Jørgensen, head of procurement for DONG Energy. In 2009, 90 percent of biomass consumption was imported, he said, from the Baltics, North America and Europe. “I think we’re in all markets,” he said. Although the Baltics represent an ideal location to supply all Denmark’s biomass needs, icy waters during Denmark’s prime biomass use months can interrupt the supply chain, he said.
For Baltic producers, major markets include the U.K., Scandinavia, the Netherlands and Belgium, said Simon Rodian Christensen, principal for commodity broker Copenhagen Merchants Group. Different buyers have different product parameters, he said, and even color can be a significant aspect in some residential markets. “As a producer, you should try to meet and understand all the specs possible,” he told the conference attendees.
But with globalization of the biomass industry, issues such as sustainability will come into play, Denis said. “The headline against all of this is sustainability, and that means nothing and everything at the same time,” said John Keppler, CEO of Enviva LP.
Sustainability was a theme throughout the event and was the focus during the final panel. It is the core of pellet production, according to Morten Neraas, CEO of Florida-based pellet producer Green Circle Bio Energy Inc., and without it, the business is not successful. Arnold added that sustainability here in the U.S. is even a growing concern in the sought-after European pellet markets.
Reliability and Accountability
Ensuring the reliability of producers is yet another crucial supply issue addressed by many of the event’s speakers. “We are going to hold you accountable for delivering on your promise,” Pease said.
Reliability, along with sustainability, is among the key criteria for “culling the herd” of pellet manufacturers, according to Carl Williams, principal of private equity firm Riverstone Holdings. Ranking up there with it are health and safety, and product quality. “When you say a shipment of pellets will show up, it sure as hell better show up,” Williams said.
He and Justin DeAngelis, a director for Denham Capital Management LP, offered conference attendees the view from a crucial vantage point: private equity firms. Pellet exporting is a difficult business, they both agreed. The two were not the only speakers who referred to the pellet export industry as nascent and fragmented. Economies of scale and scope are crucial, and it’s difficult to realize “cash-on-cash” returns, according to Williams. “I will tell you that it is possible to do that in this business, but it is extremely difficult,” he said.
To be completely successful, the pellet industry needs to become a mini coal industry, DeAngelis said, because power companies want to burn coal. In addition, pellets need to become a real commodity, instead of the nascent product it is today. “Basically, people want to deal with coal at the end of the day,” he said. The survivors in the industry will be those that look like coal companies, he added, saying he wouldn’t be surprised if coal companies are making pellets 10 years from now.
DeAngelis added that a global strategy for a pellet business provides for the highest potential value. “We believe if you have a truly global footprint … it allows you to supply current demand, but also to switch when the market picks up elsewhere.”
Opportunities in Asia
And that switch, or at least some rapid growth, could be coming out of Asia. Todd Bush, of Pöyry Management Consulting Inc., shifted the focus from European to Asian pellet market potential.
Bush briefly addressed conference attendees during lunch the first day of the conference, discussing the sometimes overlooked potential for pellets in Asia. He singled out Korea, saying plans are uncertain for Japan after the Fukushima disaster, and China has ample agricultural residues to feed its biomass power plants.
Dedicated biomass power, as well as cofiring with biomass are both incentivized in Korea through renewable energy certificates, he said, calling bioenergy Korea’s “low-hanging fruit.” Pellets, he assured, will be a large portion of bioenergy generation in Korea.
Currently, Malaysia, Canada and Chile are supplying biomass pellets to Korea, he said, but demand will grow rapidly. “Korea is going to become a competitive market,” he said.
Pellet producers who have not gotten into export markets may not realize the multitude of factors they’ll need to specify in sales and shipping contracts. Roderick W. Simmons of law firm Hirschler Fleischer was on hand to address aspects of international contracts that concern producers.
To begin, Simmons introduced the International Commercial Terms, or Incoterms, which define the roles and responsibilities of buyers and sellers, including the division of costs such as insurance. The two most common sets of Incoterms Simmons said he’s encountered are free on board (FOB) and cost, insurance and freight (CIF). Under an FOB contract, sellers are only responsible for getting the pellets to the ship, the subsequent responsibilities of the transaction falling upon the buyers’ shoulders. Under CIF contracts, however, the seller maintains responsibility for the pellets until they are discharged off the ship at their destination.
Simmons continued through a list of contract aspects, beginning with basic commercial terms that will need to be agreed upon between supplier and buyer. Those include tonnage, price, contract term, pellet specifications, and number and frequency of shipments over the life of the contract.
“In the purely shipping mechanics arena there are a number of things that need to be ironed out,” he said, listing nomination of port and of vessel, loading and discharge rates, and several other factors. Delivery-related terms include weight determination, payment, sampling and analysis, and acceptance and rejection.
Nonperformance aspects that need to be considered include remedies upon contract breach, termination provisions and credit support. Simmons also discussed the inclusion of allocation of certain risks into contract negotiations. That includes sustainability criteria, warranty limitations and liability limitations.
The panel also included Henrik Christiansen, president of shipping company Oldendorff Carriers Inc., who informed attendees about the shipping industry as it relates to pellet exports. “We are the biggest carrier, I believe, of pellets for the last five years,” he said.
Pellets are still a “new” commodity, he said, and have experienced just in the past three years the weeding out of what Christiansen called “cowboys,” those who called themselves producers but were ill-equipped to enter the pellet market. It was commonplace for prospective producers to underestimate storage, logistics, construction and more, he said, adding that the industry environment has improved. “Today is much better,” he said. “People in the industry know what they’re doing and it’s much more professional.”
Most of the 1.3 million metric tons of pellets Oldendorff has shipped in the past three years went to Europe, with the U.K. emerging as a strong pellet user. But pellet shipping can be tricky, Christiansen cautioned. “In the beginning, ship owners were scared of pellets,” he said. The stowage factor of pellets is larger than that of coal, he said, pellets can’t get wet, and the temperature in the cargo hold needs to be monitored.
Much like the shipping aspect of the pellet export business, the supply side carries challenges, and Mike Williams of The Westervelt Co. focused briefly on them, including resistance from industries such as power, and pulp and paper. He also emphasized the continued resistance from environmental and other opposition groups, and the need to keep them properly informed about what’s really happening in the industry. “We can’t afford any major slip-ups,” he said. “The unfortunate thing is they’re more organized than we are and they have more funding than we do.”
But a robust commodity futures market will emerge, Williams predicted. And that will open the doors for more profit possibilities in an industry already making a name for itself in clean energy.
“Just because we’re doing something good doesn’t mean we can’t do it well and profitably,” Keppler said. “We have a fantastic, fact-based story to tell here.”
Author: Lisa Gibson
Associate Editor, Pellet Mill Magazine