Commoditization of biomass markets

Commodities are intermediate goods available in standardized qualities that are traded on competitive and liquid international markets. The authors present five criteria that are key indicators in the process towards commoditization and market maturity. They then use those indicators as a framework to understand biomass market developments, with particular focus on wood pellet markets, and identify current obstacles to market maturity.

They also draw comparisons with developments in fossil fuel markets, with the dramatic developments in crude oil markets from the late 1960s to the mid-1980s used as a point of reference. With both crude oil and wood pellets, the successful establishment of a futures contract is seen as a litmus test of the commoditization process. The authors find several similarities between historical and current fossil fuel markets and wood pellet markets in the reliance of vertical integration as a risk management tool and in how rigid fuel quality standards are perceived as obstacles to market liquidity.

However, biomass markets also have particular characteristics that have not been present in fossil fuel markets, especially the need for sustainability and traceability in supply chains. These are essential features of biomass fuels, since their attractiveness depends to a very high extent relies on being superior to fossil fuels in terms of life-cycle environmental performance. At the same time, these characteristics add another level of complexity that makes commoditization more difficult. This tension must be addressed in discussions about biomass market development and the role of international trade in a future bio-based economy.

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