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Asian Biomass Market: Challenges And Opportunities
- Dec 01, 2017 -

Compared with the European market, the biomass energy market in the Asia Pacific region is still quite immature. However, recent developments are expected to result in significant growth in biomass demand, which may result in rapid trading volume in the region beyond the European market.

As of March 2017, the amount of certified capacity under “general wood and agriculture waste” has, with 11.4 GW, already far surpassed the bioenergy targets initially defined by the Japanese government (2.7 to 4.0 GWe). If all the projects awarded feed-in tariff (FIT) contracts under this category go ahead, biomass demand could reach 47 million oven dry metric tons (ODMT) by 2021.

Announced bioenergy projects in South Korea are also expected to increase current wood biomass import demand from 2 million ODMT to up to 12 million ODMT by 2024.

Biomass Sourcing Strategies

Bioenergy projects in Asia Pacific are mainly targeting industrial wood pellets, woodchips and palm kernel shells (PKS) as biomass fuel. As these feedstocks all have different characteristics, the technical design of each bioenergy plant will need to be tailored according to the biomass feedstock mix, in order to maximize efficiencies and minimize operating costs. Detailed trade-off analysis, covering different biomass supply chains and technical designs, will afford developers and their investors a better understanding of expected returns and underlying risks, and help define risk mitigation strategies. Even though some project developers have already formulated biomass sourcing strategies, the actual implementation of these strategies may yet change in reaction to future market conditions and requirements brought forward by investors. The Japanese market is especially characterized by a high level of uncertainty regarding preferred biomass fuel assortments, and sta keholders will have to develop in-depth market knowledge and prepare strategies covering a range of potential future market scenarios.

Although Indonesia and Malaysia have theoretical potential of approximately 15 million tons of palm kernel shell (PKS), in the long run, the share of demand for Japan and South Korea is very limited. The PKS market will experience considerable changes. The increase in mobilization of international buyers and the challenges of inland logistics have further increased the domestic demand for PKS as a biomass fuel, which may lead to a sharp increase in its prices.

The majority of biomass fuel imports into Japan and South Korea will need to come in the form of industrial wood pellets or wood chips, both of which largely come from the same fiber resource base. Thus, before defining long-term biomass sourcing strategies, a detailed understanding of current and future wood fiber availability in potential supply regions is required, in order to develop a clear understanding of the risk of upcoming fiber shortages and price increases.

Such assessments will also need to consider competing demand from and market expectations of other wood consuming industries, such as pulp and paper, and wood products. For example, the Japanese and Chinese pulp and paper industries, both of which are currently importing around 10 million ODMT of wood chips per year, might be wary of the increasing demand pressure, and its effect on international wood chip markets.

Supply Chain Opportunity

Additional challenges come from the short timelines for developing and implementing sourcing strategies, as projects in Japan have a window of only three years from receiving a FIT contract to the start of operations. This does not allow for the development of significant additional forest plantation resources, and buyers will have to contend for the existing resource base in the short- to medium-term. Competition for existing supply opportunities will be intense, and buyers will have to mobilize resources from further afield, with associated higher transport costs. 

Not only could this increase supply costs, at least initially, it could also lead to less favorable carbon footprints, negating some of the positive impact bioenergy can have on net carbon emissions in the power sector. Project cancellations can also be expected, as developers are likely to struggle to secure long-term supply contracts for the required biomass assortments at affordable price levels. 

The expectation of significant demand increases in Japan and South Korea offers interesting opportunities for a range of stakeholders across wood pellet and wood chip supply chains. Indonesia, Malaysia, Thailand and Vietnam are attractive supply sources where production capacity can be expanded, drawing on a mixture of roundwood from fast-growing forestry plantations, residues from wood processing industries, and other residue sources such as rubber wood plantations. Other regions, such as the Russian Far East, western Canada, Brazil and Australia are also expected to play important roles as potential supply regions, due to an existing biomass surplus and the potential for establishment of new plantations.

Several developers of bioenergy projects in Japan and South Korea have also shown intent to invest upstream, by acquiring or co-investing in existing biomass supply projects, or by developing their own greenfield projects. However, any upstream integration strategy that does not cover the full supply chain still leaves the risk of increasing biomass raw material prices, or even supply shortages, potentially increasing investors’ exposure to risk. 

Only full upstream integration strategies, similar to strategies employed by Japanese pulp and paper producers, can provide a high level of supply and price security. In any case, such ventures will require comprehensive project due diligence covering all aspects of the supply chain, followed by a sound implementation strategy to successfully secure financing.

The biomass power generation industry in Japan and Korea will be the driving force behind major changes in the international biomass energy market, and stakeholders will have to deal with considerable uncertainty. Resource owners, biomass energy suppliers and biomass energy producers need to have a good understanding of the short-, medium- and long-term price trends for each biomass portfolio to avoid signing adverse or unsustainable long-term fuel supply agreements.