Wood pellet supply shock in Europe

On October 31, FutureMetrics released a new white paper explaining how sanctions on Russia have reduced pellet supplies in Western Europe and the United Kingdom, causing supply chain shocks that have led to sharp increases in pellet prices. FutureMetrics President William Strauss explained in the article that supply shocks occur when a significant portion of a good or service is no longer available on the market and alternatives are scarce or non-existent. The Russian-Ukrainian war and the resulting sanctions against Russia have created a supply shock in the European heating pellet market.

According to Strauss, the average global supply of pellets is already sufficient to meet demand. Despite localized seasonal shortages during the unusually long, cold winter, total supply has been sufficient to meet aggregate demand. The market has not experienced any mid- to long-term supply shocks over the past decade. However, 2022 is not a typical year. Strauss explained that the conflict in Ukraine and the ensuing sanctions have severely affected the pellet industry. Last year, wood pellets produced in Russia, Belarus and Ukraine accounted for 15 percent of global trade. A significant portion of these pellets are sold to the heating market in Western Europe. A significant portion of the 3.5 million tonnes of wood pellets exported from these regions last year has been locked out of the European market due to the sanctions now imposed by Russia.　

Strauss noted that Russia was still exporting wood pellets as of the third quarter. However, these pellets are increasingly being supplied to the Korean market. Due to the supply shock in Europe, the price of pellet fuel has risen to levels not seen before in every country that uses pellet fuel for heat or power generation. Data cited by Strauss shows that industrial (power generation) pellets are trading at more than $453 a tonne on the spot market. Heating pellet prices have risen even higher in many European markets in recent months, with German bulk prices surpassing $760 a tonne earlier this fall.

Before this supply shock, projections showed that demand for pellet fuel could exceed 75 million tonnes per year by 2030. Strauss estimates that more than 28 million tonnes of new capacity will be needed to meet this demand if sanctions are no longer imposed on Russia. If sanctions against Russia continue, additional capacity will need to be added. Strauss explained that uncertainty about the need for capacity to fill the gap due to reduced supply from Russia, Belarus and Ukraine could cool new investment. The white paper also discusses the potential to alleviate heating pellet shortages by reducing pellet consumption for industrial users. While the concept works in theory, Strauss warns that there are significant technical and economic hurdles that need to be addressed.

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