The US South Becoming the Wood Fuel Source for Europe

The South is becoming Europe’s wood basket, not for traditional lumber products, but for wood fuel in the form of wood pellets. Increasing demand is being placed on wood fuel these days with no end in sight. Wood fuel or wood waste has always been a reliable energy source for pulp and paper mills. Many mills have co-generation plants. Likewise, wood chips and shavings have been used to heat steam for dry kilns and produce electricity as sawmills for years. It’s only been in the past few years however, that wood waste has attracted the attention of power producers, wood pellet manufactures and the animal bedding industry in a big way.

There is a lot of talk—and some action—around wood fuels, woody biomass and cellulosic ethanol today. No doubt that there is more talk than action, but in a recent Forest2Market survey, wood procurement managers cited the rising demand for wood fuel as one of their concerns.

Senior procurement managers are edgy because the issue is not isolated to wood fuels. If the demand for wood fuel exceeds supply—which is likely this year—it is logical to assume consumers will start chipping (no pun intended) away at the next available product class, pulpwood, and directly compete with pulp mills for furnish. This will likely raise the cost structure of the entire industry.

Only one cellulosic ethanol plant, intending to use wood fiber as a feedstock, has been announced for the US South. Almost certainly though, more announcements are waiting in the wings. A competing trend that assuredly will drive more ethanol producers to wood fiber feedstock is the rising cost of corn. Not so much that the rising cost of corn affects the economics of corn based ethanol (although it does), but rising corn costs drive up the cost of food on the table of the average American—a politically untenable recipe.

Cellulosic ethanol is an unproven technology and may never pan out. Even so, the burgeoning demand for fuel in Europe, driven by historical use of wood fuel and government mandates (derivatives of the Kyoto Protocol), will drive prices upward over the near term.

The fact that most consumers of wood fuel prefer dry material will slow the increase in consumption. In fact, pellet manufactures use dry wood material. It is logical to assume if producers cannot procure dry sources (planer shavings, dry fines, etc), they may convert to wet material. Some will, but it is costly to convert. Currently, a pellet plant using dry material, costs between $1 and $1.5 million dollars to build. If a plant pays for a dryer and the requisite emission permits, the capital requirements triple. Add this to the energy cost to dry the material and the economics quickly fall apart. At this point, it is likely the whole process would be a net energy consumer, adding to, not detracting from, greenhouse gas emissions.

Forest2Market believes the wood fuel industry will grow rapidly over the coming years. Resource availability will constrain growth and, in the near term, there will be a squeeze on dry material. The reason: sawmills will produce less lumber this year than last and therefore fewer by-products. This, along with the new demands put on the resource, will send prices 20-30% higher. High prices for dry material are bad news for the MDF and particleboard plants, opening the door for China to steal US market share.

Forest2Market has the only transaction based wood fuel pricing service available today. Currently, through our FOB Delivered Pricing Service, F2M reports on over 90 consumers of wood fuel – representing over 20 million tons annually. In line with the comments above, wood fuel prices have increased steadily over the past three quarters. F2M anticipates this trend to continue will be covering the wood fuel market in more detail in this publication and other studies going forward.