Price Trends: Fuelwood

From the June 2009 Forest2Fuel newsletter.

Over the last two years, stories about the number and scope of wood bioenergy projects have dominated the news. Outside of pellet manufacturing facilities, however, the vast majority of these projects have yet to become operational. During this two-year period, we at Forest2Market have repeated over and over again what our data, experience and models have told us: increased consumption of wood fiber from the bioenergy sector will be slow to come about, a gradual augmentation to current demand.

As this additional demand takes shape, we’ll continue to struggle in attempts to find a definition of biomass that applies to everyone in the industry. As Pete mentioned in his inaugural letter, the definition of biomass is fungible. In this issue’s price trends feature, we look at one of the categories of wood fiber that is considered biomass: fuelwood.

The measured pace by which this new market for wood fiber is taking shape is reflected in the pricing trends we’ve seen for fuelwood—the category of fiber that includes a significant portion of the feedstock that bioenergy facilities plan to use, including hog or hogged fuel, bark from sawmills, and other wood yard and in-woods biomass. This is not to say that prices for this material have not changed over the last one to three years. In fact, in two of the markets we track, the U.S. South and Northwest, trends suggest that prices for this material—even before the current wave of bioenergy plant construction—are on an overall upward trajectory.

In the U.S. South (from Virginia west through Tennessee, Arkansas and the Southeast corner of Oklahoma and all points south), the trend is particularly striking and consistent, especially since 2Q2006. In that time frame, fuelwood prices rose 29 percent in real terms and 40 percent in nominal ones (See Figure 1).

If bioenergy demand hasn’t driven these prices higher, then what has? Interestingly, the upswing in prices began in 3Q2006, about the same time that the housing market started cooling off. From that time, sawmill production decreased significantly, reducing harvest rates and the amount of residues sawmills produce. This supply shortage has been primarily responsible for the price increase.

Prices are likely to remain at this higher range. In general, our data and experience tell us that once a trend has continued for a two-year period, it becomes difficult for prices to retreat to their previous level. Only an abundant oversupply or significantly weakening demand can have this type of effect on prices.

Based on the rate of new facility announcements, the current administration’s interest in renewable energy and climate change, and the growing consensus among states in the South concerning the economic benefits of renewable energy, we don’t think that abundant oversupply or weakening demand are on the horizon. While we're seeing some effect on price from bioenergy plants in some local markets,

In the Pacific Northwest, the story over the last 15 months has been similar. During 1Q2008, prices were relatively steady. By March 2008, lumber production in the Northwest was down 20 percent, a result of shift reductions, downtime and shut downs. Almost immediately thereafter, fuelwood prices began climbing (See Figure 2). The higher prices were the result of continued high demand for both paper and energy production. The upswing came to an abrupt halt, however, in November as the pulp and paper industry began feeling the effects of the recession. Pulp and paper companies use chips to produce paper, and when their production fell, there was a glut of wood chips on the market. As a result, energy producers began substituting chips for fuelwood.

A glut of electricity from other sources was also a factor. Most of the energy produced in the Northwest is hydroelectric. In the spring, the runoff from rains increases the amount of electricity produced by hydroelectric plants. Traditionally, plants creating electricity from wood and selling it to the grid take their scheduled maintenance to coincide with this seasonal event. This decrease in demand also drove prices lower.

How have these events affected prices? In November, before the paper slump, prices were up 37 percent in real terms and 39 percent in nominal terms. From there, however, a jagged market correction began taking shape. In April 2009, the increase over the 15-month period stood at 18 percent (in both real and nominal terms). 

Seasonal rains and the glut of chips are both temporary events. Excess inventory will work its way out of the system, and demand will improve as well. We’ve already seen indications that worldwide paper demand has taken a favorable turn. New plants are scheduled to open and add demand to the system. When these events occur—beginning in the summer—fuelwood prices will continue on the trend line they established before November of last year.

What we’ve seen happening in the Pacific Northwest demonstrates that just as the definition of biomass is fungible, biomass itself is a fungible commodity, one that can be substituted for an equal amount of a like commodity when quality, availability or price make it necessary to do so.

Future coverage of trends in Forest2Fuel will focus on different bioenergy feedstock types and track the trends in prices as additional bioenergy capacity comes on-line.