Baltpool advises: what strategy should you follow to secure the most favourable biomass price?

Those who take fewer risks, avoid mistakes, and trust in a time-tested strategy of transaction diversification usually don’t overpay when buying biomass. 

“Some biomass boiler plant managers still believe that heat prices for consumers don’t depend on them—that their only task is to burn the biomass and ensure heat production and distribution. That’s not true. Buying biomass at too high a price can condemn the city’s residents to pay excessively high heating bills for half a year. Therefore, choosing a fuel procurement strategy affects many people and should not be treated as just another assigned duty. Everyone must have a purchasing strategy. Some of them aren’t complex; the key is to apply them consistently,” says Vaidotas Jonutis, Head of Trade at Baltpool. 

According to him, when the heating season ends, many biomass boiler plant managers start discussing whether they managed to buy biomass cheaply enough—whether the price matched the market average. 

“Of course, if they paid less than the market price, everyone is happy, and no one asks questions. But if it turns out they paid more than the average, people begin to speculate that mistakes were made, that the purchase was done too early or too late, and who should be held responsible. Many buyers who haven’t faced market fluctuations have only one scenario in mind: buy when the price is lowest and don’t buy when it’s highest. But the reality is that when you’re buying, you can’t possibly know what the price will be in a few months,” Jonutis explains. 

A Proven Strategy – Diversification 

In financial markets, the idea of investment portfolio diversification wasn’t invented without reason—it involves investing in different asset classes, various funds, and so on. Some investments rise when the economy grows, others when it falls, and some price changes are so unpredictable that they defy rational explanation. 

By investing in a diversified portfolio, you can reduce the impact of poor performance in one asset or industry, as losses in one area can be offset by gains in another. In this way, diversification helps smooth overall results and reduce the risk of losing money. 

According to Jonutis, Baltpool has received proposals to create a mathematical or similar model that would signal each year which strategy to choose. After discussions with colleagues and commodity and stock trading specialists, it was decided to recommend a single approach—diversification. 

One of the main mistakes in commodity trading strategies is overestimating the information one has, assuming that “this year will be different” and that it’s possible to outsmart the market. When it’s your own money, it’s your right to choose your strategy and take responsibility for it. But when it comes to public money (and in the case of biomass, that’s essentially what it is), the most appropriate strategy is diversification. 

The main goal for heat producers participating in biomass auctions is to ensure that their annual average biomass price matches that of their key competitors—those operating in the same city—because otherwise, their biomass contract could jeopardise their operations. If participation in the heat auction isn’t required, then the responsibility lies with consumers, who compare final heating prices with the national average. 

Price fluctuations in the biomass market are always similar; there’s no difference in volatility trends between SM1 and SM3 products. When one price rises, so does the other. Market mechanisms work such that if biomass is cheaper in one region, market participants quickly begin transporting it elsewhere—this is called arbitrage. Arbitrage opportunities arise from what’s known as information asymmetry, when some market players know more than others. But this doesn’t last long—markets soon self-correct. 

“In the biomass market, broad diversification isn’t possible, but there’s one simple and inexpensive method we can use: buy part of the biomass through long-term contracts and part through short-term deals. Historically, we’ve seen no clear trend—some years long-term deals are cheaper, others short-term ones. A few consecutive years might show a pattern, but then it changes. Drawing conclusions is very hard. It’s more about emotions and market irrationality than logic,” Jonutis says. 

In his view, diversifying transactions between short-term and long-term contracts is the best way to secure an average market price. 

“I’d compare such trading to tennis. The difference between professional and amateur players is that for amateurs, the most important thing to win is not to make mistakes. The main goal for biomass buyers should also be not to try to outperform others by taking risks, but simply not to make mistakes. In my opinion, avoiding mistakes is more important than trying to save a little,” Jonutis explains. 

How to Split Transactions into Parts 

According to a biomass trading expert, plant managers have recently begun to better understand the benefits of diversifying their transactions. This growing awareness naturally leads to discussions on how to balance different types of deals while managing price and supply risks. 

When it comes to managing these risks, V. Jonutis emphasizes the importance of a balanced strategy — long-term contracts provide stability and allow for expense planning, while short-term ones offer flexibility to respond to market changes. By combining both approaches, companies can adapt more effectively to potential market shifts and business growth needs. 

“We applied Nobel Prize laureate Harry Markowitz’s portfolio theory, which is used to assess investment risk and return, to the biomass market. The analysis showed that the lowest risk is achieved when transactions are divided equally — 50% long-term and 50% short-term,” notes V. Jonutis. 

Thus, according to the expert, transaction diversification becomes not only an economic but also a motivational balance between the security of long-term contracts and the flexibility of short-term ones.