German Pellets: The elephant in the room

Biomass market participants from all over the world gathered in London for the annual Argus Media biomass conference, but there was one noticeable absentee — German Pellets, until recently one of the world’s largest wood pellet producers.

Since the start of this year, barely a week has gone by without new headlines concerning the wood pellet producer and its recent downfall. The producer filed for insolvency in February, followed by seven European subsidiaries and its US arm Louisiana Pellets.

But even more surprising than the firm’s absence was the lack of discussion about the situation on the conference’s first day, which focused on the premium pellet market — of which German Pellets had been a market leader. Was the market turning a blind eye? Or was the fact that the insolvency has had very little impact on wood pellet prices both in Germany and across Europe limiting interest?

Intriguingly, as the conference rolled on, the subject arose more and more. And the question on most people’s lips was: what went wrong, what is the impact and is it contagious?

As Harold Arnold, president at US producer Fram Renewables pointed out, German Pellets is a clear signal that there is no such thing as “too big to fail” in the biomass market. Much talk at the conference centred on a potential shake-out of producers in the next 12-18 months, given the current oversupply in the market. It is very likely that German Pellets will not be the last casualty of the current environment — the Argus cif ARA wood pellet index hit an all-time low on 13 April.

But the expected shake-out of wood pellet producers could benefit the market in the longer term. “As installed capacity disappears, the remaining producers will be in a very strong position,” Portuguese producer Enerpar’s chief executive, Joao Rocha Paris, said.

What could damage the industry further in the long term is the impact that German Pellets’ demise could have on investor confidence in the sector. New projects will have to answer a lot more questions from financial institutions looking to invest, Europe’s largest producer Graanul Invest’s chief executive, Raul Kirjanen, said. If we see the market start to grow it will be a lot more difficult to finance new projects, he added.

Other traders argue that German Pellets was a unique event. Its business model certainly seems unique – behind the scenes the interlinked companies were held together by a complicated web of ownership, the unravelling of which has raised more questions than answers. Who owns the US units? And how are they linked to the German company? Why did German Pellets hand over Belgian coal-fired power plant Langerlo to an unnamed Austrian company days after buying it from Eon?

But some of the reasons behind its collapse are not exclusive to German Pellets. The current oversupply in the market continues to damage producers globally — a number of plants are for sale or running well below capacity. That in part has been caused by weakness in all commodity markets but also by delays in new demand projects.

The industry can and has to learn from German Pellets’ mistakes. It may have been a victim of high costs — from both raw materials and financing, Kirjanen said. Producers in this market need a very low cost structure to succeed.

However, it could be argued that what damages investor confidence the most is uncertainty over European government policy — Europe is the largest consumer of wood pellets. Just this week, the Dutch government announced that it will investigate the closure of two potential co-firing coal-fired plants by 2020 — a move that RWE described as “very surprising” and which at the very least will prevent Dutch coal-fired plants from making any firm decisions on co-firing until further clarity is provided.  The Dutch are not alone. The UK market awaits a government announcement on if or when it will open a contract for difference subsidy auction to biomass conversions during this parliament.

How can an industry so reliant on uncertain and ever-changing government policy attract investment?

Having said that, German Pellets’ pre-insolvency administrator has registered interest from more than 130 parties regarding the firm’s European assets. Investors are clearly still interested in the wood pellet industry and see further opportunities. Those opportunities, for the foreseeable future at least, will be reliant on government policy.

3 thoughts on “German Pellets: The elephant in the room

  1. Good post! I read your blog often and you always post excellent content. I posted this article on Facebook and my followers like it. Thanks for writing this!

  2. I would appreciate if we as bond investors are given some light as to what will be the final outcome of such situation.

  3. Great information. Thanks for sharing. I think the problem lies in the over supplied status in wood pellets industry. People need to find a way out.

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