HAWKINS WRIGHTHAWKINS WRIGHT

Update on the global wood pellet market

Fiona Matthews, Associate Director

Ottawa - Sep 2019

www.hawkinswright.com

HAWKINS WRIGHT

Consultants to the global woody biomass industry

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Headlines

Industrial pellet prices hit record highs in Q1 2019 amid shortages in supply

EU industrial demand through 2019 has been suppressed, softening prices

European demand outlook: plateau from 2021, then fall(?)

Asian demand outlook: continued rapid growth to 2024

Critical – and rapid – need for investment in new supply capacity

HAWKINS WRIGHT

Wood pellet demand

HAWKINS WRIGHT

Global heat + industrial demand rose by 4.2Mt in 2018 (+14%)

Source: Hawkins Wright, Outlook for Wood Pellets

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5

10

15

20

25

30

35

40

45

2013 2014 2015 2016 2017 2018 2019

Pelle

t dem

and

(hea

t + in

dust

rial),

mill

ion

tonn

es

EU27 + UK

Other Europe

North America

Russia & CIS

Asia

35Mt

22Mt

*

HAWKINS WRIGHT

The heating market continues to show stable growth +1Mt in 2018 (+6%)

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

2003 2005 2007 2009 2011 2013 2015 2017

mill

ion

tonn

es

Asia

Russia & CIS

North America

Other Europe

EU28

Source: Hawkins Wright, Outlook for Wood Pellets

HAWKINS WRIGHT

Trends in European industrial wood pellet demand

Source: Hawkins Wright, Outlook for Wood Pellets

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2

4

6

8

10

12

14

16

2014 2015 2016 2017 2018 2019

mill

ion

tonn

es

2019 growth uncertain

Belgium 8%

Denmark 16%

Finland 1%France (& French territories) 2%

Netherlands 3%Poland 0%Sweden

9%

United Kingdom 59%

Other EU27 2%

EU industrial wood pellet demand

(2018)= 13.3Mt

HAWKINS WRIGHT

The growth in EU demand is visible and locked in

Source: Hawkins Wright, Outlook for Wood Pellets

13

18

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2

4

6

8

10

12

14

16

18

20

Industrialdemand

2018

EPH,Lynemouth

MGT,Teeside

RWE, Amer9

Uniper,MPP3

RWE,Eemshaven

Engie,Rotterdam

Others Industrialdemand

2020

mill

ion

tonn

es

*

*Demand adjusted to account for construction delay

HAWKINS WRIGHT

The outlook for industrial wood pellet demand in the EU+UK

• Over the next two years, EU+UK utilities expect to increase industrial wood pellet consumption by ~5Mt/y.

• Beyond 2020, demand will plateau until 2027 when UK consumption is likely to drop when RE support schemes expire.

• The potential decline in demand in the mid-2020s is making it difficult for pellet suppliers to justify investment in new capacity aimed at Europe.

HAWKINS WRIGHT

Asian wood pellet demand is growing quickly…

South Korea

• Demand = 3.4Mt in 2018 (IPPs and gencos)

• 3 new pellet-fired power plants under construction

• Low REC prices (YTD: -33% y/y) are challenging IPP economics

• Policy changes are creating uncertainty and driving increased use of local wood

Japan

• Demand = 1Mt in 2018

• 18 new pellet-fired power plants under construction

• Most use a combination of pellets, PKS, local wood

• Demand will exceed 5Mt by 2023

• Sustainability criteria under development

• FIT restricted for as-yet uncertified projects

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1

2

3

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6

2014 2015 2016 2017 2018 2019m

illio

n to

nnes

HAWKINS WRIGHT

Korean imports down (-4%), Japanese imports up (+71%)

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1.0

1.5

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3.5

4.0

Kore

a im

port

s, 1

2 m

onth

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ing

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nnes

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1.0

1.2

1.4

Japa

n im

port

s, 1

2 m

onth

mov

ing

tota

l, to

nnes

JapanSouth Korea

Main suppliers:

Vietnam

Canada

Malaysia / Thailand / Indonesia

HAWKINS WRIGHT

The 5-year outlook for industrial wood pellet demandA central forecast

• Although industrial wood pellet demand in Europe will plateau and may decline in the 2020s, Asian demand will grow rapidly.

• By the mid-2020s, wood pellet demand in Japan, South Korea and (possibly) China is expected to exceed that of Europe.

0

5

10

15

20

25

30

35

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

mill

ion

tonn

es

TOTAL Asia

TOTAL EU27 + UK

Source: Hawkins Wright, Outlook for Wood Pellets

HAWKINS WRIGHT

Wood pellet supply

HAWKINS WRIGHT

Supply shortages: what happened in late 2018/early 2019?

• North AmericaVery little spot volume available and delays to contracted deliveries. Some mills stood idle or operated at reduced output. Technical issues at other plants also limited spot and contracted supply e.g. start up of Highland Pellets, reduced output at Enviva, Fram’s Hazlehurst plant.

It seems some producers over-contracted with the plan to purchase on the spot market but such volumes were not available.

• Baltic StatesHarvesting issues over the 2017/18 winter severely reduced raw material availability. Spot supply was limited and some producers failed to meet contracted deliveries. Output recovered in second half of 2018 but there was limited availability above contracted volumes.

• PortugalPortuguese production was impacted by the summer 2017 forest fires. Two pellet mills were destroyed and fibre prices rose in H2 2018. Producers with low-priced long term contracts (signed in mid 2016) struggled to fulfil contractual obligations; huge reputational damage.

HAWKINS WRIGHT

Industrial wood pellet capacity expansions

The three largest pellet producers –Pinnacle, Enviva and Graanul Invest –account for 2Mt/y of the planned industrial capacity growth worldwide.

• Graanul Invest has purchased its first mill outside Europe - German Pellets’ former Texas mill.

• Enviva brought online its new 600kt/y Hamlet mill in July.

• Enviva has secured permitting for its planned 700kt/y Lucedale pellet mill. A FID is expected soon.

• Pinnacle and Tolko will build a new 170-200kt/y mill in High Level, Alberta.

Source: Hawkins Wright, Outlook for Wood Pellets Q2 2019

00 1,000 2,000 3,000 4,000 5,000

Enviva

Graanul Invest

Pinnacle Renewable Energy

Drax Biomass International Inc.

An Việt Phát

Fram Renewable Fuels

Georgia Biomass

SY Energy

Highland Pellets

Pacific BioEnergy

Tanac SA

Rainbow Pellets

thousand tonnes/year

Operating

Operating at reduced capacity

Temporarily idled

Under construction/financed

HAWKINS WRIGHT

Additions to global industrial pellet production capacity

Source: Hawkins Wright, The Outlook for Wood Pellets

• The supply-side is ill-prepared to meet the surge in demand.

• Net capacity additions have slowed since 2016.

• Higher prices should help to reverse this trend, but limited long term European contracts will affect investment.

• Visible expansion of wood pellet capacity is less than the market requires.

• Further growth in pellet production is needed to meet demand.

HAWKINS WRIGHT

Asia capacity growth

• Production capacity in south east Asia continues to grow rapidly.

• Because of the opaqueness of the market, customs data is often the best indication of capacity in the region. Malaysia, Thailand and Indonesia produced over 1.1Mt of pellets in 2018, based on their exports. Up from 620kt in 2017.

• Asian market has traditionally been made up of lots of smaller mills but we are now seeing the development of large-scale Asian mills:> South Korea’s SY Energy is planning to build its (and the country’s) second industrial

wood pellet mill in Busan (capacity 320kt/y) > Ayo Biomass recently began production at a 120kt/y in Vietnam, modelled on North

American-style pellet mills> Biomass Fuel Vietnam has ordered its equipment for a planned 160kt/y pellet mill

in Nghệ An, Vietnam.

HAWKINS WRIGHT

Wood pellet supply and demand balance

HAWKINS WRIGHT

The global pellet supply & demand balance is very tight

• The dominant role of local supply means most countries are well stocked with heating pellets

> Heating pellet distributors in Europe built up significant stockpiles ahead of the 2018/19 heating season

> These were preserved by (repeated) mild temperatures

• But global industrial pellet production capacity has failed to keep pace with demand

> This created a ‘structural shortage’ (as opposed to a short-term shortage due to temporary production issues)

> It will not be resolved until there is a satisfactory supply or demand response e.g. new pellet mills are built, or pellet consumption is curtailed

2015-16 2016-17 2017-18 2018-19*Annual growth rate – demand 5.4% 11.5% 13.6% +11.9%

Annual growth rate – supply capacity 5.9% 5.4% 6.0% +7.2%

Source: Hawkins Wright, Outlook for Wood Pellets

Total (ind + heat) pellet demand and supply changes, 2015-2019*:

HAWKINS WRIGHT

Enviva and Pinnacle are expanding aggressively in Asia

• Enviva and Pinnacle have contracts to supply 4.2Mt/y to Japan and South Korea by 2023

• Enviva’s commitments require construction of around 3.3Mt/y of new supply by 2022. Currently 1.9Mt/y under construction (inc. Lucedale, Hamlet and expansions at existing mills).

Drax33%

Ørsted6%

Lynemouth15%

Other Europe5%

MGT Power15%

Mitsubishi Corp5%

Marubeni3%

Sumitomo9%

Unnamed Japanese trading

houses9%

Europe74%

Asia 26%

Drax10%

Ørsted7%

Lynemouth14%

Other Europe1%MGT Power

17%Mitsubishi Corp10%

Marubeni5%

Sumitomo17%

Unnamed Japanese trading

houses19%

Asia 51% Europe49%

Enviva’s long-term offtake contract portfolio

2022 2026

Source: Hawkins Wright, Outlook for Wood Pellets

HAWKINS WRIGHT

Wood pellet prices and recent trends

HAWKINS WRIGHT

Wood pellet prices have fallen from their Q1 2019 peak

Source: Hawkins Wright, Outlook for Wood Pellets

• The arrival of warmer spring weather helped relieve the tight industrial market in Q2.

• This trend continued in Q3, due to dampened demand from European utilities i.e. delayed cofiring in the Netherlands, technical issues at Lynemouth, planned maintenance at Drax.

• The oversupply of wood pellets in the Korean market persists.

• Some gencos had ordered excess pellet volumes because of fears over supplier reliability.

• Prices dropped to ~$75/t CIF Korea

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10-year average: $183/t (real 2019 USD)

HAWKINS WRIGHT

Conclusions

• Global demand continues to grow> Demand is expected to rise by +4.2Mt in 2019, then +4.3Mt in 2020> New biomass power plants have suffered delays (MGT, EPH, Dutch cofirers). > Korean cofiring is still subject to much uncertainty (low REC prices & policy changes)> Japanese demand is rising as expected

• The supply-side is ill-prepared to meet the surge in demand> If demand is to be satisfied, at least 14Mt/y of new pellet production capacity will

need to be built very quickly (and within five years)

• Policy uncertainty in Europe will not be resolved quickly, this creates a significant challenge for the European market post-2022

• The outlook for the coming winter will be strongly dependent on the performance of the Dutch plants and the weather, with MGT then critical to supply-demand in 2020/21

HAWKINS WRIGHT

Any questions?

HAWKINS WRIGHT

The Outlook for Wood PelletsDemand, supply, costs and prices

A multi-client service comprising regularly updated forecasts of the wood pellet market’s development

• Four quarterly reports • Accompanying Excel databases• Quarterly webinar and Q&A• Workshop or presentation meeting• Charts and background data on request• On-call response to ad hoc queries

W: www.hawkinswright.com

E: fiona.matthews@hawkinswright.com

T: +44 7809 888300