Estonian‐Swedish wood fuel trade and market integration: a co‐integration approach

In the Baltic Sea area, wood fuels have been traded internationally on a relatively large‐scale since the 1990s, with trade flows primarily from the Baltic States to Sweden and Denmark. This has been driven by strong demand for renewable energy in Scandinavia, inexpensive wood resources in the Baltic States and relatively low costs of sea transport. The purpose of this paper is to clarify if this trade has contributed to integration between the wood fuel markets of Sweden and Estonia.

The authors use co‐integration analysis of quarterly price series data from 1998 to 2010, in order to determine whether there are interconnections between wood fuel prices in the two countries. As wood fuels generally are rather bulky, transport costs often have an important impact on price levels. For this reason the analysis is expanded to include estimated transport costs from Estonia to Sweden.

It is concluded that wood fuel prices in Sweden and Estonia are not co‐integrated, regardless of whether the transportation costs are taken into account or not. In other words, the wood fuel markets in the two countries cannot be considered integrated, which could be seen as a sign that international wood fuel markets still are far from fully developed.

There are some uncertainties about data quality and lack of information on market structure – in terms of, for example, fuel delivery contract specifications and shipping arrangements.

Lack of market integration implies a lack of market efficiency in the international wood fuel market.

Co‐integration analysis has been applied to many commodity markets, but there are only very few studies of international wood fuel markets.