Published in Russian Business Outlook (Nov 2013)
Rapidly growing lumber production in Russia brings wood waste management challenges. The already existing wood waste in Russia and its potential growth provides the best and most comfortable conditions for the production of biofuel, particularly wood pellets.
In August 2013 the European Union published its annual report on biofuel, in which the European Commission remains convinced that solid biomass will play an important role in meeting renewable energy targets. According to the report, by 2020, the consumption of wood pellets in the EU will rise drastically, reaching 20 to 32 million tons of oil equivalent (Mtoe), or approximately 50 to 80 million metric tons. In 2008, consumption of wood pellets was only 2.5 Mtoe.
The EU is currently the world’s largest market for wood pellets. The UK, Denmark and the Netherlands are Europe’s three major consumers of pellets, with the UK topping the list. Sweden, Germany and Belgium also consume large volumes of pellets.
A growing demand for fuel pellets in Europe has led to the need for more producers. Due to the shortage of raw material (byproduct of some other wood processing operation) for the production of pellets, the demand is predicted to soon outstrip the supply.
EU and Russia: future perspectives
Russia is Western Europe’s nearest wood supplier. The country has the world’s largest standing forest reserve, yet Russia’s forest-based industries remain a vacant niche, underdeveloped but radiating great potential. With one niche – lumber production – already blooming, Russia faces challenges of wood waste management. The already existing waste and its estimated increase provides the best and most comfortable conditions for the production of biofuel, particularly wood pellets.
A short overview of wood pellet production in Russia
First pellet production companies to have been build in Northwest Russia in 2003 were pioneers of the industry, Rospolitechles (“Росполитехлес”) and Biotop (“Биотоп”). Self-made manufacturing equipment allowed for arguable quality, and the price rate was the lowest on the market. Despite this, 100% of the produce was being exported to Europe. Of course, the production costs were kept relatively low as well. Building a long-term relationship with timber production companies settled the question of raw material supply and, at the same time, solved the problem of wood waste utilization.
At some point, the idea of pellet business has attracted the attention of major lumber companies that understood the immediate profits of effective wood waste recycling. Until recently, sawdust, wood chips and bark were simply burned in the boiler or used to produce wood-based panels (MDF, particle board, etc.). However, the construction costs of the MDF production line were too high for a medium-sized enterprise. Besides, due to the high competitiveness of the market in this industry, the long-term investment was hard to secure. In that respect, a start-up pellet production company is relatively cheap, the pellet market has low-entry barriers and the price of building a supply and distribution chain is low. As a result, for almost all large-scale pellet businesses in Russia production of wood pellets is ancillary, secondary activity created to optimize the costs of wood waste recycling.
Operations of large-scale logging and timber companies in the pellet sector since 2005 led to the construction of pellet plants with the capacity over 50,000 tons started to appear. Almost all well-known wood working enterprises incorporated pellet production into their main lines: Group “Titan”, MLC Yenisei, Novoyeniseisk LHK, Zelenodolsky plywood plant , etc.). However, there are also new players in the industry. For example, in 2009 the factory Talion Terra was launched in the city of Torzhok. Talion Terra is the manufacturer of laminated wood board, with wood pellets as its incidental product.
Pros and cons of pellet business in Russia
Almost all export from Russia goes to Europe’s industrial sector. According to Research Techart, pellet export from Russia to Europe in 2011 increased to 850,000 tons. Most of the product is exported to Denmark and Sweden via major Scandinavian Biofuel traders.
In 2011 the number of pellet companies in Russia increased to 200. Yet, two thirds of their production capacity is fully utilized only during the high season, slowing down remarkably for the rest of the year. As stated by Vitalii Lipsky, CEO of the National Forestry Development and Investment Agency, only 13% of all Russian pellet production units are fully functional. Practically, this means that the plants that are now under construction are doomed to chronic underutilization of their capacity, with bankruptcy on the horizon. 75% of all production belongs to ten major companies. Small businesses lose their competitive stand, not having access to foreign markets in lieu of their sub-standard product. Besides, most of European customers, large energy companies, prefer to cooperate long-term with verified suppliers.
Small independent pellet companies enter a harsh survival battle due to the lack of supply and seasonal character of production. Logistics of wood waste delivery to the pellet plant pose a certain problem as well: loggers are widely scattered around the country.
Logistics and imperfect infrastructure are still the biggest issues Russian pellet production industry faces today. Those companies located near the ports (“Lesozavod 25″, “Biogran”) are definitely lucky, as they benefit from easy access to cargo. On average, the time difference to unload a standard batch of industrial wood pellet is huge: in Canada, for example, it takes a few hours, and in Russia on average – two to three days.
At the moment, export-oriented pellet production, unsupported by its own base of raw material, is cost-effective only if its capacity is not less than 70,000 tons per year.