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The Potential for Industrial Wood Pellets in Asia

By M. SETH GINTHER | October 24, 2012

Will there be an Asian market for industrial wood pellets? That’s a question that the U.S. industrial wood pellet market is confronted with almost daily. Personally, I am very bullish about this market developing because in order for it to do so, the Asian utility market will have to adapt to the European utility model of entering into long-term, off-take agreements with U.S. producers. To date, Asian utilities have been unwilling to do that. 


On a recent visit to Seoul, South Korea, to speak at the annual Biomass Trading Conference, I learned that Asian demand for industrial wood pellets will hover at around 5 million metric tons per year beginning in 2015. In both South Korea and Japan, subsidies are in place that will drive this demand number for years to come. If it is assumed that in order to develop production capacity for 1 million metric tons per year in the U.S., $200 million in development capital is needed, then approximately $1 billion in development capital will need to be deployed in the U.S. in order to meet that 5 million metric ton-per-year demand predicted for Asia. Who is going to spend that $1 billion? 


As I told the Asian utility community in my remarks in Seoul, U.S. financiers are anxious to make these investments in the U.S., but they will only do so once U.S. producers have signed long-term, off-take agreements with Asian utilities. At the end of the day, the industrial wood pellet industry is an infrastructure industry. Building out pellet manufacturing facilities and the supply chain infrastructure that’s needed to consistently deliver sustainable, high-quality industrial wood pellets requires infrastructure investment and that capital will not be deployed unless financial partners are assured of a long-term customer. Investors need certainty in order to deploy capital.  Every single successful industrial wood pellet company in the U.S. has used this model to build out infrastructure for European demand, and it will be a necessity to do the same for Asian demand.

 
While in Seoul, I was asked the question a number times, “What about the spot market? Can’t Asian utilities meet their 5 million metric ton per year demand by buying wood pellets on the spot market?” Because the U.S. industry is based on long-term, off-take agreements with utility counterparties, it means that the country’s supply, for lack of a better term, is sold out. Sure, there are U.S. spot volumes from overproduction and other optimization scenarios, but those volumes are minimal and would barely make a dent in the 5 million metric ton-per-year number. 


Asia needs to take action now if it intends to source large volumes of industrial wood pellets from the U.S. Deliveries for 2015 will require significant infrastructure investment in the capital deployment cycle of the next six months. The Asian market must recognize that there is strong competition for supply from European utilities due to the Renewables Obligation Certificate banding announcements in the U.K. and expected additional subsidies in Belgium and the Netherlands. Asian utilities must follow the European model and sign long-term, off-take agreements that contain certainty in the contract—it’s the only way that the U.S. will deploy capital to meet the upcoming Asian industrial pellet demand.



Author: M. Seth Ginther
Executive director, U.S. Industrial Pellet Association
(804) 771-9540
www.theusipa.org

 

1 Responses

  1. Modisaotsile

    2012-11-09

    1

    Oh, I hope you feel better soon! I have serlggutd with back pain on and off my whole life. I have been told it is because I am so tall and have flat feet. I recently started chiropractics which has helped quite a bit. Back pain can really affect your whole life. Rest up!

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