While most commodities have been battered by low demand and falling prices, woodchips and wood pellets have demonstrated remarkable strength and buoyancy.
In a sea of battered commodity prices, woodchips and wood pellets have demonstrated remarkable strength and buoyancy. They’ve provided a bit of comfort for both producers and those involved in transporting these products, which move by bulk carriers and purpose-built ships.
According to Bob Flynn, the director international timber for forest products industry information provider RISI, lower shipping rates has helped the trade in both chips and pellets. But it’s demand for both woodchips and wood pellets from importing countries that has remained solid, although for very different reasons, and in very different marketplaces.
Woodchips, used mostly for paper and pulp, are bound primarily for China and Japan, from sources in North America, but primarily Australia and Southeast Asia. Wood chips are also shipped to Turkey for use in panels and particleboards. However, European Union regulations effectively ban wood chips from being imported into EU countries, which could be used to fuel power plants as well as in construction material.
On the other hand, the EU is embracing wood pellets, which are shipped almost exclusively from North America. These provide a substitute for coal in power generation and are used as a heating source as well for residences and commerce. Britain is the biggest market in Europe for power-related pellets, while Italy leads in terms of heating. New markets are being opened as well in South Korea and China, with Japan likely to emerge in the next few years.
Going forward, woodchips appear the more vulnerable, as they could well be affected by the economic downturn in China and the possibility of a renewed and lengthy economic stagnation in Japan. “We see this period of rapid growth coming to an end,” said Flynn.
The market for wood pellets, by contrast, will continue to grow rapidly, Flynn and other analysts believe. Even with lower oil and gas prices, this source of fuel is being more widely embraced as an alternative to coal.
Asia now accounts for about 90% of all maritime woodchip trade globally, Flynn estimates. In 2015, Asia imported 23.3 million dry tons (the measurement that assumes all moisture has been removed, so the actual tonnage is more), according to RISI, with a value of $4.2 billion. That represents about a 6% increase over 2014 and marks the sixth year in a row records were broken.
Japan imported about half of that total. China accounted for 42%, with the rest of Asia making up the difference. What’s noteworthy, Flynn said, is that while Japanese demand is basically flat, Chinese imports set another record last year and he expects a slight increase in 2016, even with its economic softening. China began to import woodchips only in 2002, but really ramped up about six years ago.
China’s voracious appetite for woodchips is the result of a pulp mill-building spree, whose products are primarily cardboard and paper packaging materials. Those new mills created a supply shortage in domestic fiber, one that has worsened dramatically over time.
While the Chinese government has stopped issuing licenses for new pulp mills and has forced closure of hundreds of old mills for environmental considerations, that hasn’t put a damper on imports, at least not yet.
“Even though the total demand in China may not be growing, the big companies haven’t lost volume and they’re the only ones to import woodchips,” Flynn explained.
“They still need pulp and paper,” added Hakan Ekstrom, who runs the consultancy Wood Resources International. “They’ve invested billions of dollars and they need to import chips for those plants.” Ekstrom said.
However, with Chinese demand down, there are pressures on price. “It’s definitely a buyer’s market,” said Jordan Solomon, the CEO of Ecostrat, a Toronto-based biomass trader.
The North American woodchip supply to Asia of 680,000 tons last year represents a small fraction – about 3% - of Asia’s total imports. It’s now shipped almost entirely from Coos Bay, Oregon. Fibreco Export ships wood chips from Vancouver as well, although there’s some concern that service will end this year. Fibreco didn’t return a call asking for comment.
Woodchip shipments from the Atlantic Coast accounted for another 690,000 tons last year, with cargo bound for Turkey. RISI predicts a slight increase this year. However, North America enjoys a 60% share of the Turkish market, with shipments out of Wilmington, Savannah, Jacksonville and Morehead City, NC.
However, don’t expect woodchips to ride any sort of crest across the Atlantic. Because of concerns about pests and disease, the EU prohibits woodchips from outside the Eurozone that aren’t heated and dried. Complying with that would raise the price prohibitively. While some producers have explored the possibility, none have so far made serious attempts. “It’s functionally impossible,” said Solomon. “It’s expensive to dry chips,” he said. “If you’re going to dry wood chips, you might as well make pellets.”
There is some talk about relaxing these regulations, but given the nature of the EU, it’s not going to happen anytime soon, Solomon, for one, believes. “There’s a lot of chatter, but it will take a long time to get all countries together.”
The woodchip trade has been around for decades. Japanese paper companies, in concert with the large trading companies, Japanese shipping companies and ship builders, developed a specialized vessel to carry the commodity. That’s because woodchips are so light, the ratio of volume to weight is extremely high, so a more efficient vessel is tilted toward volume over weight.
The actual number of woodchip carriers is down to 138 from 168 in 2011, according to RISA, as older vessels are being scrapped. Newer ships are larger and more environmentally friendly. Most recently, NYK and Hokuetsu Kishu Paper Co. announced a new vessel to be built by Oshima Shipbuilding and delivered in 2018. It will be able to hold 4.3 million cubic feet of woodchips, the companies said.
Two Chinese shipyards, Nantong Mingde and Jiangsu Yangzijiang, also began to build these vessels, with a new design that increases the capacity to 4.7 million cubic feet, and 70,000 dwt. However, Nantong Mingde, went bankrupt last year, so its ability to produce anything more is highly uncertain.
Add to that new competition from an old source. With rates so low, bulk ships are contracting to move woodchips as well, even if they’re far less efficient.
“The freight prices are so low, you can get smaller vessels at a reasonable price,” said Luca Corello, the woodchips manager at Enviro Srl, a biofuel trading company based in Genoa, Italy. “That means less capital, less stock, less draft necessary for the port and an earlier release. Bulk carriers are plentiful.”
Made from compacted sawdust and other lumber waste, wood pellets have been exported from North America since 1997, but demand took off only in the past decade. The global market reached an estimated 28 million tons a year and is growing at 20% annually, according to Staffan Melin, the research director for the Wood Pellet Association of Canada. It’s split pretty evenly, he said, between heating and power generation.
Although some energy analysts believe wood pellets represent an interim step in the evolution toward sustainable energy sources, Europe has embraced them as an environmentally attractive alternative to coal. “It’s a strategic decision in some countries,” Ekstrom said.
The fix is relatively easy because a plant burning coal can also burn pellets, without having to spend on conversion to, say, natural gas. (Because the wood products are heated to make pellets, so-called phytosanitary certification isn’t an issue.) Even with low oil and gas prices, the need for the wood-based fuel stock will continue, with consumption increasing, analysts believe. “There are long-term agreements with five, ten-year contracts,” said Ekstrom.
The consultancy firm Hawkins Wright projected a year back that EU demand for pellets will grow 50% between 2015 and 2019.
The industry is also looking at advanced wood pellets, called black pellets, to boost demand. These are steam pressured, baked or thermally conditioned. They burn more efficiently, produce less dust, are water-resistant so can be stored outdoors and don’t run the risk of self-fire or gas discharge. One producer, Zilka Biomass, which started commercial production in a plant in Selma, Alabama, called black pellets “a direct replacement for coal.”
The Asian Market
Asia is beginning to use wood pellets as well. While China also is producing wood pellets, quality isn’t high. South Korea moved aggressively into wood pellets, but has begun to taper off, in part because its power companies insist on weekly deliveries. The real unknown is Japan, which has moved cautiously into pellet usage. However, one source indicated a Japanese trading company is scouting possible locations on the North American west coast for a large-scale pellet factory.
North America produces 40-45% of global production, although domestic use is minimal. (Canada consumes only about 7% of what it produces.) Both coasts are deep into the trade. On the Pacific, British Columbia is the major producer and shipped from Vancouver and Prince Rupert. On the Atlantic, the industry is growing rapidly in the southeast. A handful of huge pellet plants have been constructed with ties to European power suppliers. Georgia Biomass, for example, is a 750,000 metric tons capacity plant that was built by RWE Innogy, the German energy firm, and inaugurated in 2011. It supplies both RWE and the British energy company Drax Group. Pellets are exported out of the Port of Savannah.
While bags of wood pellets destined for consumers in North America ship by container, most major wood pellets exporters use bulk carriers, ranging in size, now up to large Panamax, according to Melin. (On Jan. 1, 2016, these large bulk carriers gained permission to handle wood pellets. In the past, they were prohibited because they lacked fixed gas fire extinguishing systems and wood pellets were considered a substance that could self-combust and emit flammable gas.) He said shipments out of the west coast can fill an entire ship, while vessels from the east coast tend to be less. One problem, he said, is that there are few ports in Europe capable of handling the biggest bulk carriers.