Forecasting Industrial Wood Pellet Prices

Delivered Pellet Historical Prices

Future Metrics has estimated the historical delivered (CIF) price of wood pellets from international trade data. Data on the value and quantity of imported pellets gives insight into the prices that buyers are paying for the fuel. Because most of the international trade of pellets is under long-term contracts, those prices reflect a competitive, long-run, market-clearing value.

The spot price is influenced by short-term supply and demand imbalances. If the market is in a state of excess supply, prices fall. If the market in a state of excess demand, prices rise. Long-term offtake agreement prices are based on mutually sustainable values for the pellet fuel. Those prices are unaffected by short-term supply and demand imbalances.

Future Metrics has estimated CIF prices for several common destinations, including ARA and Japan. The estimates for CIF U.K. are in Figure 1. Note that the weighted average considers the market share of the exporting countries. The U.S., Canada and the Balkan states dominate the share of pellets imported into the U.K. The most recent data for June shows that the U.S. has 58.4 percent of the U.K. market, with Canada having 19.6 percent, the Balkan states about 19.8 percent, with the small remainder from Russia.

Since the trade data includes pellets imported at spot prices, lower-volume exporters such as Russia, which has traded almost entirely on spot, will exhibit higher price volatility. The three-month moving average and the trend smooth out most of that volatility. Over the past several years, based in this analysis, the average long-term offtake price delivered to the U.K. has been between $180 and $190 per metric ton (MT).

Since the trade data includes pellets imported at spot prices, lower-volume exporters such as Russia, which has traded almost entirely on spot, will exhibit higher price volatility. The three-month moving average and the trend smooth out most of that volatility. Over the past several years, based in this analysis, the average long-term offtake price delivered to the U.K. has been between $180 and $190 per metric ton (MT).

The analysis assumes that that market is not in a condition of excess supply ｏｒ demand. In the short-run, there may be a supply and demand imbalance that would impact spot prices. However, the intrinsic costs of producing and delivering pellets, including typical profit margins, will set the market prices for long-run supply contracts.

The methodology involves developing independent submodels for each of the main components of pellet costs, which are wood costs delivered to the pellet mill, pellet mill conversion costs (excluding wood costs) plus margin, inland transportation from the mill to the port and port storage and loading costs, and shipping.

The wood cost model begins with stumpage cost and then accounts for equipment, labor and trucking for harvest and delivery. Within the model are inputs for distance traveled on four classes of roads, from in-woods to highway. The use and cost of diesel fuel is a large component of the total cost of delivered wood. If the pellet mill uses only sawmill residuals, the model accounts for the fact that the sawmill has absorbed most of the harvest and round wood delivery costs.

Conversion costs are the costs to take incoming fiber and converting it into wood pellets. The margin is based on historic values for EBITDA per MT.

For inland transportation from the mill to the port, costs per MT-kilometer are calculated based on several inputs. Storage and loading costs are based on typical rates and the amortized cost of the storage and ship loading infrastructure.

To estimate shipping costs, from the Argus Biomass Market Report, Future Metrics used over 200 weeks of pellet freight rates from five different routes and two vessel sizes, and performed a regression analysis based on oil prices, distances traveled, vessel sizes, transit and loading/unloading time, and a few other parameters. The regression output provides a robust set of coefficients for estimating long-term shipping costs.

FutureMetrics has added an adjustment to the per-MT shipping rates based on the Jan. 1, 2020, implementation of the International Maritime Organization sulfur cap on emissions from shipping. The adjustment is based on distance traveled, and thus the increased cost per MT increases with longer distances.

FutureMetrics has estimated the potential variability of the critical inputs to the model and has developed probability distributions for those inputs. That allows for a series of Monte Carlo simulations. The simulations yield ranges for the price forecasts that are shown in Figure 2, which uses several stylized assumptions. The inputs for each pellet mill will be different and unique.