Author: EIC | Economic Intelligence CenterPublished in Bangkok Post/Asia In Depth: Asia Focus section, 4 December 2017
Biomass pellets have been fueling the world’s energy needs significantly in recent years. According to IEA Bioenergy, global wood pellet production observed phenomenal growth, from 6-7 million tons in 2006 to 26 million tons in 2015, with an annual growth rate of 14%. Over 60% of the pellets are designated for export markets, which has propelled the annual growth rate of global wood pellet exports to 11% for the past five years, reaching USD 2.5 billion in 2016.
What has sparked the increase in demand for wood pellets? The continuing trend to optimize value from wood by-products as biomass pellets is deemed by some as an efficient way to turn waste into a lucrative business. Industrial agricultural residues such as sawdust from the milling of lumber, eucalyptus bark, rice husk, and tapioca trunk are amongst some of the valuable waste in the pellet business. Among the various types of biomass pellets, wood pellets are the most popular due to the high availability of raw materials and higher fuel efficiency in comparison to other biomass feedstocks. In addition, wind, solar and biomass energy are in strong demand in countries such as China, Japan, South Korea, and the United Kingdom due to the enactment of the Renewable Portfolio Standards (RPS) policies, which aims to increase the production of electricity from renewable energy resources.
According to the International Trade Center (ITC), the top three exporters of wood pellets are the United States, Canada, and Latvia. Vietnam is the sixth largest exporter in the world as well as the largest exporter in Asia. It is also the fastest growing exporter, contributing to 5% of global wood pellet exports. Vietnam benefits from its furniture industry, the second largest in Asia, behind China. This provides Vietnamese producers, who are mostly small, pellet producers, with a large pool of wood scrap to be used as cheap feedstock for the production of pellets that can be sold cheaply.
South Korea and Japan are the two leading Asian importers primarily due to the implementation of RPS policies. In 2012, South Korea set a target for large power utilities to increase the use of renewable sources in their energy production from 2% to 10% by 2024. As a result, power utilities in South Korea turned to wood pellet to fulfill the regulatory obligation. This prompted a surge in imports from 0.1 million tons in 2012 to 1.7 million tons in 2016, with Vietnam benefiting as the top export partner for South Korea.
In Japan, an RPS-equivalent policy was also introduced in 2012, following the aftermath of the Fukushima disaster in 2011. Under this Feed-in Tariff (FiT) scheme, power utilities are obliged to purchase electricity generated from renewable sources such as wood pellets. As a result, Japanese wood pellet imports have spiraled towards a 48% annual growth rate since 2012, from 0.02 to 0.35 million tons.
Is Thailand hopping on the global wood pellet bandwagon? Currently, there are 77 pellet factories in Thailand, with half of the factories located in southern Thailand due to an abundant supply of rubber wood, which enables pellet factories to utilize residue generated from the lumber industries as feedstock. Thai wood pellet export declined significantly in 2014 due to a short-term halt in South Korea’s import strategies due to changes in import regulations. Despite being in a nascent stage, with most of Thailand’s pellets only produced for industrial use, the growth rate of Thailand’s wood pellets has seen a healthy increase from almost none in 2011 to USD 2 million in 2016. This is attributed to a growth rate of 112% for the past five years, thanks to South Korea as the major importer in view of the proximity advantages enjoyed by Thailand.
Despite a rosy outlook, the Thai wood pellet industry can be a double-edged sword. First, Thai pellet producers have to compete for a constant supply of feedstock from biomass power plants that also use wood residue such as wood chips and sawdust to generate power. Wood pellets are not typically used by Thai biomass power plants due to their high cost. According to the Energy Regulatory Commission, Thailand’s installed biomass power plant capacity is 242 Megawatts, consuming some 3 million tons of wood chips and sawdust per year.
Second, procurement of suitable equipment for the production of wood pellets is an uphill task. Many Thai pellet producers encounter problems in importing expensive pellet machines which are incompatible with the production of local rubber wood pellets, and at a prohibitive cost. This is due to the differences in the types of wood used in Thailand and other pellet producing countries where the machines originate.
Third, export opportunities are being hindered by sustainability certification requirements by prospective customers such as Japan. Forest Stewardship Council (FSC) certificates are issued to ensure the traceability of wood pellets that come from responsibly managed forests. As most Thai rubber plantations are small holdings, they lack the expertise and resources required to obtain proper FSC certification. Some cooperative groups have introduced initiatives to encourage Thai small rubber plantation owners to apply for this type of certification.
Although Thailand’s export of wood pellets is conservative at this stage, domestic demand for wood pellets is gaining a stronger foothold, as more and more industrial boilers are switching from other fuels such as fuel oil and firewood to wood pellets. According to the Department of Alternative Energy Development and Efficiency, wood pellets are 60% cheaper than fuel oil in generating the same energy output. Even though wood pellets are a costlier resource compared to firewood, pellets are preferred due to their many advantages over counterparts, including their possessing a higher density, which makes pellets easier and cheaper to transport and store. The homogenous quality pellets make it easier for boilers to operate at a constant burning rate.
Despite challenges, the outlook for wood pellet exports in the medium term looks promising, as global demand is gradually shifting from Europe to Asia. Japan and South Korea are projected to demand 4.4 million more tons of wood pellets by 2020 for power generation, according to IEA Bioenergy. In addition, China is striving to replace the use of coal with 30 million tons of biomass pellets by 2020. Although the Thai wood pellet industry remains at an infant stage, given the marginal export quantity of 22 thousand tons of wood pellets in 2016, there is room for Thai producers to dream of bigger export markets in the long run while continuing to concentrate their efforts on the domestic market in the short term.