Copyright 2017 Indufor Oy

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1 Opportunities for Russian Pellet Producers in South Korea Spring Biofuel Congress 2017, St. Petersburg, Russia Ms Vasylysa Hänninen, Consultant, Russia & CIS Mr Petteri Nuolivirta, Senior Consultant, Leading Bioenergy Expert

2 Agenda Indufor Russian pellet industry Increasing opportunities for Russian pellet producers: case South Korea Home take-aways 2

3 Indufor 3

4 Indufor Quick Facts Independent international consulting company based in Finland, New Zealand, Australia and the US with over 35 years of experience in the field of forestry, forest industry and bioenergy Provide world class advisory services to a wide range of private and public sector clients More than 300 clients in over 800 projects in 5 continents 4

5 Indufor Russia In Russia since late 1980s Experience in both greenfield and operational projects Services cover all strategically important issues for both forest industries and bioenergy Biomass sourcing and wood supply plans Business strategies and investment advisory Forest inventories Benchmarking and improvement of manufacturing processes Go-to-Market considerations and logistics 5

6 Take Away Messages Future Opportunities and Challenges Korean demand for wood pellets is going to continue strong growth. It is estimated that it could grow from current 1.9 million t up to 8 million t in the next 10 years. Most of the demand need to be satisfied by imports Currently, there is strong competition from South-East Asian producers in terms of price. However, South-Asian producers are unlikely to be able to satisfy the future demand increase. Korean wood pellet industrial consumers will be forced to expand their sourcing area and will have to accept increased prices Russian producers have access to clean abundant wood raw material with possilibitly to showcase solid chain-of-custody certificates Many South-Asian producers are struggling with CoC standards and the quality of the pellets Already now, Korean energy utilities provide opportunities for joint ventures and off-take agreements for Russian pellet producers. 6

7 Russian Pellet Industry 7

8 Russian Pellet Industry Production volumes surpassed 1 million t in More than half of the volumes were produced in the North West federal district. About 30%, totalling to t, originated from Siberia and Far East. Russian Pellet Production Regional Pellet Production t Volga 8 % Ural 2 % Central 11 % Far East 11 % Siberia 18 % Total, million t North West 50 % 8

9 Russian Wood Pellet Producers Most of the Russian pellet producers are traditionally located in the North-West region. However, new producers integrated into large sawmills, have emerged recently in Siberia and Far East. These players have stable and sufficient supply of raw material and have all the pre-requests to run with full production capacity. 9

10 Example Sawmilling By-Product Chips in Siberia Russian suppliers have access to clean abundant raw material. Pulp and paper sector offer limited markets for residual wood chips in Siberia and Far East. Some of the companies are forced to dump the surplus wood chips. Photo: Indufor 10

11 Russian Pellet Export Nearly all the produced volumes are exported and exports exceeded 1 million t in More than half of the volumes are sold to the Nordics, especially Denmark, Sweden and Finland. Other large European buyers are the Netherlands, Italy and UK. Already in 2016, Korea accounted for 12% of the Russian exported volumes. Russian Pellets Exports Destination of Russian Pellets t Finland 5 % UK 5 % Italy 6 % Others 14 % Denmark 37 % Netherlands 9 % Korea 12 % Total, t Sweden 12 % 11

12 Largest Exporters & Buyers In second half of 2016, four out of top 10 Russian exporters originated from Siberia and Far East. Largest buyers were mainly bioenergy traders, as well as large energy utilities. Top-10 Russian Exporters, H1/2016 Largest Buyers of Russian Pellets, H1/2016 VLK Setnovo Lesresurs DOT Plus Novoenisejskiy LPH Swedwood Tikhvin Arkaim/ LAN LDK 3 DOK Enisey Peltrade Aarhus Karlshamn GDF Suez Dong Energy LDG Forest Group Engie Energy Van Leer Energy Kajmar Fortum Sweden Lesozavod t Copenhagen Merchants t

13 Increasing opportunities for Russian pellet producers: CASE KOREA 13

14 Overview of South Korean Power Generation In Korea fossil fuels account for the majority in the power generation and the country is highly dependable on imported fuels. Korean renewable energy policies require the 10% share of renewable energy by 2027 South Korea lacks domestic energy reserves. Imported fuels such as coal, crude oil and liquefied natural gas account for about 97% of primary energy consumption Coal power plants consist almost 1/3 (26.3 GW in 2014) of the total energy production capacity. In 2014 Globally fourth largest coal importer, following China, India and Japan Renewable portfolio standard (RPS) became effective in 2012, with the goal of reaching 10% of energy generation from renewable resources in the Through the RPS, the South Korean Government mandates that state-owned and independent power utilities with a capacity over 500 MW generate a certain percentage of their energy production from renewable sources annually or else face penalties Since the South Korean RPS was implemented, renewable sources remain a small share of the country s electricity generation (ca. 5% in 2015), although renewable capacity and generation, apart from hydropower, are rising. 14

15 Overview of Korean Biomass for Energy Market Already now Korea imports over 25% of consumed biomass for energy generation. Biomass, mostly pellets are imported and is consumed in the large power plants. Locally produced pellets are used at residential heating. In the first few years after the introduction of the RPS, many companies have decided to focus on wood pellets for power production since the co-firing with coal is relatively easy Domestic wood pellet production in the country is on a very small scale and the average pellet mill size is very small About one fourth of the biomass is being imported. Biomass imports are dominated by wood pellets. Oil palm residue pellets have technical restrictions due to low ash melting temperature In addition to wood pellets, other imported biomass types are: Wood chips Non-wood pellets Empty fruit bunches (EFB), bagasse, aggregated from agri residues such as rice husk, straw, etc. Palm kernel shell (PKS) 15

16 Korean Consumption of Wood Pellets Korean biomass imports are heavily dominated by wood pellets. Exceptionally rapid increase in Korean pellet imports was registered in Start of RPS in 2012 contributed to increase of consumption totaling to over 1.7 million t in Non wood pellets 6 % Korean Biomass Imports PKS 3 % Wood Chip 1 % Total, million t Wood pellets 90 % Korean Wood Pellet Consumption t RPS effective

17 Korean Imports of Wood Pellets Vietnam is the biggest importer wood pellets to Korea. Other South-Asian countries account for about 18% of imports. Russian imports have steadily grown to t in 2016 covering about 7% of the total. Korean Imports of Wood Pellets Korean Wood Pellet Imports Indonesia 5 % Russia 7 % Canada 2 % Thailand 1 % Others <1% t Total Imports Malaysia 12 % Total, million t Viet Nam 73 % Russia

18 Investment Projects Examples Most of the upcoming projects will be located in close proximity to the sea ports. Launch in is planned for

19 Logistics: East and West To identify the routes 19

20 Korean Pellet Import Specifics and Restrictions On average, Korean CIF import prices stood at USD 100 per t in 2016, while imports from Russia were paid higher at USD 120 per t. Future increase of supplies from Vietnam can be questioned due to sustainability issues. Vietnam s share of the wood pellet market rose from 24% in 2012 to over 70% in This has clearly been the lowest priced pellets available. However major increase of Vietnamese supply can be questioned Other wood plantation resources in SEA region are scarce because of high integration to P&P sector Vietnamese pellets have higher probability of including mixed non-wood material (rice husks). These are considered as biomass solid refuse fuel which have even stricter import regulations than wood pellets Biomass origin is of great importance (forest certification). Many Vietnamese suppliers lack solid chain-of-custody certificates. Import Prices of Wood Pellets in Korea CIF, USD/t All imports Russian imports 20

21 Take Away Messages Future Opportunities and Challenges Korean demand for wood pellets is going to continue strong growth. It is estimated that it could grow from current 1.9 million t up to 8 million t in the next 10 years. Most of the demand need to be satisfied by imports Currently, there is strong competition from South-East Asian producers in terms of price. However, South-Asian producers are unlikely to be able to satisfy the future demand increase. Korean wood pellet industrial consumers will be forced to expand their sourcing area and will have to accept increased prices Russian producers have access to clean abundant wood raw material with possilibitly to showcase solid chain-of-custody certificates Many South-Asian producers are struggling with CoC standards and the quality of the pellets. Already now, Korean energy utilities provide opportunities for joint ventures and off-take agreements for Russian pellet producers. 21

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