North American pellet manufacturers talk about supply, demand and competition.
In the wood pellet industry there is always competition for raw material and for making sales. It doesn’t matter if you’re just a small guy, because in this industry, the small guys matter. One or two new small-scale producers in the right area can wreak havoc on the sales of a pre-existing plant.
That’s the perspective of Chris Sharron, owner of Western Oregon Wood Products. “A lot of the smaller ones can add up to quite a bit of tonnage,” Sharron says.
And, they may have advantages over large-scale manufacturers, one being that they don’t have a lot of production to sell so lags in market demand don’t affect them as much. “A sawmill plant utilizing its own materials doesn’t have transportation costs to bring materials to the plant,” he says. “A lot of them are using their own byproducts that are kiln dried, so there are also no drying costs. They can be highly competitive although they aren’t very big, and they take little mouthfuls out of the market in a particular region that some former supplier was supplying into.”
WOWP, which was started by Sharron and his brother in 1985, operates two pellet plants in Banks and Columbia City, Ore., which have a combined annual capacity of 80,000 tons. Seeing the industry evolve over the decades, Sharron says there was a period of rapid growth several years ago, but in the past couple of years things have become rather flat. “There’s been an increased demand over the years, especially in the past five years, but it hasn’t been real steady growth,” Sharron says. “It’s spiky. Fossil fuel costs go up, and if the economy is conducive to where people have jobs and disposable income, they might look at an alternative way to heat their homes, one being a pellet stove.”
When that happens, demand can increase at a quick pace and there may be spot shortages of fuel, which potential developers can misconstrue as a beckoning opportunity. “[Shortages] hit the headlines and people decide pellet making is a business they should get into,” Sharron says. “What they don’t realize is that there is a lag time in putting the project together—permitting and installing the equipment—and by the time they’re ready to turn the keys and start bagging fuel, the industry has cycled back the other way, and there’s an oversupply. That’s kind of what’s happened in the past few years. It’s highly competitive now, because the market hasn’t grown enough.”
To put that into perspective, Sharron says that there were roughly 40,000 new pellet stoves sold in the U.S. last year, and a general rule of thumb is that on average, a stove uses 2 tons of pellets per year. That equals an additional demand of 80,000 tons annually. “There are a number of plants where just they by themselves are producing that or more,” he says.
Charlie Niebling, general manager of New England Wood Pellet, says pellet demand was off the charts in 2008 because of the big run-up in fossil energy pricing, but things slowed down in 2009, and 2010 was a soft year for the company. Despite that fact, he says things are beginning to pick up again.
Supplying Close to Home
New England Wood Pellet operates three plants in Jaffrey, N.H., Schuyler, N.Y., and Deposit, N.Y., which have a combined capacity of about 250,000 tons per year when running at full tilt.
Much like WOWP, most of the pellet volume produced at NEWP ends up in residential heating applications—about 98 percent. Despite the fact that U.S. pellet exports are being touted by the government as a great opportunity, Niebling says it is unlikely that the company will ever ship overseas, as long as the domestic market is strong enough. “Philosophically, we strongly believe in focusing our efforts on solving America’s energy challenges, not Europe’s, and from a practical standpoint it’s something that is very difficult to do viably from the Northeast U.S.”
That’s because of the region’s high wood material costs, and its lack of port facilities set up for bulk cargo shipping of pellets. “Our plants aren’t conveniently located near port facilities; we have a lot of inland freight,” Niebling says. “Where it works in this country is where there is less expensive wood feedstocks, and rail to get the product to a port, one that can stage a large volume for bulk cargo shipping. The Northeast just doesn’t have the circumstances that are well-suited to that, given the current pricing overseas.”
Sharron says that with the nature of pellets—a relatively low value versus bulk and weight—freight is a big issue, so most pellet plants only have the ability to distribute regionally. “Being here in western Oregon, our markets are Washington, Oregon, California, Nevada and Idaho and Utah a little bit, but past that point we’re not very competitive due to that freight issue.”
WOWP has looked at many opportunities to ship overseas and has had a lot of inquiries over the years, but it just doesn’t pencil out, Sharron says. “The value on the other end will only bear so much,” he says. “By today’s standards, we’re not a huge producer, so we don’t have the economies of scale that some of the other exporters do have. Alongside that, the raw material costs in this area are not conducive to getting things to balance out, certainly not to Europe or the Asian markets, where some activity is starting.”
For Pinnacle Renewable Energy in British Columbia, shipping overseas makes the most sense for the company for a number of reasons, one being the close proximity of its plants to rail and ports.
Pinnacle has six plants in B.C. that produce a total of 1.1 million metric tons per year. The company ships about 90 percent of its product overseas to the large-scale industrial power generation sectors in both Asia and Europe, but mainly to Europe, according to Leroy Reitsma, Pinnacle’s chief operating officer.
Reitsma says demand has slowed in advance of new legislation being defined and introduced in both Asia and Europe, but indications for future demand remain strong.
The company’s plant development model has kept it from experiencing some of the obstacles other manufacturers are facing, such as stiff competition for raw materials and transportation costs. All of Pinnacle’s plants are strategically located close to Canadian sawmills, and have formed material supply relationships with them. “Fiber pricing is more a function of local economic factors, due to the high price of transporting raw residuals,” Reitsma says.
Competing for Raw Material
In an industry that is a branch of the larger biomass power industry, wood resources of all kinds are sought after for different purposes. “We compete for our feedstock, there is no question about it,” Niebling says. “When our plants are at 100 percent capacity, we are dependent on round wood chips, and then we’re competing much more directly with the pulp and paper industry. Also to some extent, [we compete with] the biomass power plants we have up this way, although we have a slightly different feedstock need than they have because they can use a much lower quality chip than we can to make a premium grade pellet.”
Michael Curci, business development manager for Indeck Energy, says competition for feedstock is always a source of concern in the region where the company operates. Indeck has a two-year old, 90,000-ton pellet manufacturing facility in Ladysmith, Wis., that sells about 60 percent of its product for residential use, the rest commercial and industrial.
“There are three pellet mills within close proximity to us, and there are some proposed biomass power plants in the area that are under review by the state, so it’s something we have to keep an eye on,” Curci says. “If prices go up with more competition, pellet prices will reflect that. That won’t be the case at any individual production facility, but across the board in our region.”
The cost of raw material is a cyclical issue, Sharron says. “Our two plants rely on byproducts or residuals from sawmilling operations, for the most part,” he says. “In these past few years, with the housing and construction markets being soft, a lot of the area sawmills have curtailed production or even shut down completely, so there’s less supply on the market.”
A big competitor for the materials WOWP uses is the composite/particle board industry, but it has been affected by the depressed wood product industry as well. “They aren’t as stiff a competitor as they have been at other times,” Sharron says. “On the other hand, pulp mills also use the same fiber, and their markets have been relatively strong, so there’s always something, depending on the cycle.”
Niebling says raw material prices float, according to what fossil fuel prices are doing. “If oil and propane prices keep going up, and there’s enough margin for the retailer, the distributor and manufacturer to operate profitably even with higher wood costs, that price threshold can be higher than it is today.”
Some plants can afford to pay more for their raw materials than others, Sharron says. “That depends on a lot of things, such as debt service,” he says. “If it’s a new plant, it probably has a higher debt load and it might not be able to afford as much as an older manufacturer who doesn’t carry as much debt. It’s all relative to what the value of a finished product is at a given time.”
When competition for wood fiber material is fierce and prices are high, looking for alternative feedstocks is an appealing idea on the surface, but it isn’t as easy as it sounds.
Searching for Alternatives
“We’ve looked at [alternative feedstocks], but never seriously, because when you design and build plants like we have, you do it to handle one type of feedstock,” Niebling says. “The handling, conveying, refining and processing of biomass is unique to each individual type of feedstock. When you start to introduce different types of materials it changes your plant performance. You have to understand how those different feedstocks affect operations.”
Furthermore, the residential market is still the major market in the U.S., and there aren’t many appliances or pellet stoves that can handle the quality characteristics of an ag-based pellet, which has higher ash content and is more prone to clinkering. “You may not even be able to manufacture a lower grade pellet that you would have to sell for less, because some lower quality materials are more expensive to turn into a pellet, unless it’s offset by the cost of the raw material at the gate,” Sharron says. “That might be less of an issue on a commercial or industrial basis, but no matter what the pellet is made of, we’re competing with coal and it’s extremely difficult to compete with the cost of a Btu of coal.”
Those in the industry know that making pellets is a low-margin proposition. “There’s not a lot of profit in it and there isn’t a lot of room for inefficiency, so we’ve been reluctant to consider blends or to make different types of pellets from other feedstocks,” Niebling says. “We want to get really good at doing one thing, but that doesn’t mean that won’t change in the future. If wood gets really expensive and suddenly hybrid willow or poplar starts to look more attractive, we’d consider that. I don’t see it any time soon, but if this industry grows the way we believe it will, we might all be looking at a variety of feedstocks.”
Author: Anna Austin
Associate Editor, Pellet Mill Magazine
(701) 738-4968
aaustin@bbiinternational.com
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