Cheap energy, high raw material costs and competition from Canada, Russia, force rush of wood pellet factory closures in Finland

Wendy Lisney

HELSINKI , October 27, 2011 (press release) – Wood pellet industry suffers in Finland. Companies close down their pellet factories. The reason is cheap energy and hard competition in export.

The latest announcement of closing wood pellett factories came from Vapo. Some weeks ago it told that it closes three of its eight pellett factories.

A similar announcement was made previously by L&T Biowatti. The company closed down all its pellet business in May 2010.

What makes the development more dramatic is that both companies have invested significant sums of money in pellett production. As to Vapo, it has invested almost 90 million euros along the years.

When making its announcement L&T Biowatti was constructing a pellet factory in Suonenjoki in central Finland. The construction work was shut down ”because of the market situation and difficulties in getting raw material”, despite the work being almost finished. The announcement meant that the factory, which had at that time caused expenses of nearly three million euros, never will be finalised.

The situation is odd also because of the fact that Finland is a total exception: the use and production of pellets in the rest of Europe increases fastly. Similar development was prognosed in Finland, as well, which was the reason for companies’ investemts.

Increasing, but only slightly
As a matter of fact, the use of pellets has increased in Finland. However, the growth has been slow and recent, compared to Sweden, for example.

”In Sweden the use of pellets managed to gain good market share before its heavy competitors, mainly geothermal energy and air-source heat pumps. This is not the case in Finland,” says Mr. Antti Asikainen, professor at the Finnish Forest Research Institute.

The same goes with the bioenergy policy in Finland: its profile has been low and increased only lately.

”We have concentrated on the use of wood chips in combined heat and power production, which is not a bad choice,” says Asikainen.

There are, however, other reasons, too. Mr. Lauri Sikanen, professor of energy pellet research in the University of Eastern Finland, says that ”Finns have been pampered with cheap energy for a long time”. According to Sikanen, the cheapest electricity in the European Union in 2010 was in Finland.

The support of alternative energy sources aims at replacing electricity and oil as energy source in residential buildings. However, their share continues to be large.

”This is easy to understand. Heating with electricity needs really small investments, while it takes much money to install a heating system based on water circulation,” says Sikanen.

Finland is a land of cheap oil
Heating oil has always been cheap in Finland as well. However, its taxation doubled in the beginning of 2011. Even after that the share of taxes in the price of heating oil is only a third of that in Sweden.

Sikanen blames the responsible Ministry of Trade and Employment of slack policy. The Ministry replies, as to the Swedish situation: ”What is the benefit of high taxation on things that are not used at all,” asks Mr. Petteri Kuuva, Industrial Counsellor in the Ministry.

Might this be just because of the high taxation? Kuuva answers by blaming the comparison as populistic: ”We have enormous amounts of houses built just after the second world war, heated with oil and inhabited by retired people. Would they, just because of higher oil taxation, take 15,000 euros from their pockets and change the heating system? No, in reality higher oil taxes would only lead to them getting poorer and poorer,” says Kuuva.

According to Sikanen, the systems to support pellet use have started to work properly only this year. ”And already now they say that we cannot offer the systems, not now and not in the future. Why did we not take them in use when we had the money,” asks Sikanen.

According to Kuuva this is just what they have proposed several times in the Ministry. The politicians have not, however, approved of these propositions.

The raw material is worth money in Finland
The consumers are not the only problem with pellets. Another one is in production.

The raw material of pellets – sawdust – is coslty in Finland, because this is not the only use for the dust. Competing uses are direct burning, board industry and litter, for example. For comparison, in Canada there are thousand million cubic meters of stout timber killed by insects just waiting for someone to take it – with a price of zero.

It is true that the way to transport the pellets from Canada to Europe is long, but they can be loaded directly from the factory to large ocean vessels. ”While in Finland, part of the factories stand alone in the woods far from waterways, which means more than one unload and load along the route. In addition to this, the inland vessels are small and cannot be used during Finnish winter,” says Asikainen .

The competition is getting harder as well. Russians have opened a new pellet factory with a capacity of million cubic meters just behind the Finnish border in Vyborg. It is assumed that the production in Vyborg will be some 500,000 cubic meters already this year.

The increase is inevitable
However, Sikanen is not desperate. The global demand of pellets is some 16 million tons this year. In 2020 it will be 46 million.

The use will increase in Finland as well, but not so quickly. However, all those who need pellets, will get them.

As to Vapo’s decision, for example, it does not decrease production, only capacity. The capacity has been some 900,000 tons annually. After the new decisions it will be around 500,000, which is at the same level as production has been.

For Sikanen, the price is not a problem either. ”The price of raw material is normally some 60 euros per ton. Consumer price is some 240–260 euros per ton, which is enough for the industry, provided the demand was there,” Sikanen says.

But if there is not, the industry has to export the pellets, with losses. As to Vapo, it reported to have operational losses of 40 million euros from pellet production.

But a change may be coming. In Asia, for example, the demand of pellets is increasing significantly. If the Canadian production starts to go to Asia, the situation in Europe is not the same any more.

On the other hand, the bioenergy targets set by the European Union say that coal as energy source must be replaced. One source substituting it will be the pellets. ”This is a good perspective, but only if it can be done in such a way that Finnish taxpayers’ money does not go abroad,” says Sikanen.

* All content is copyrighted by Industry Intelligence, or the original respective author or source. You may not recirculate, redistrubte or publish the analysis and presentation included in the service without Industry Intelligence's prior written consent. Please review our terms of use.