Alternative Fuel Demand Boosts Prices of Forest Products

January 4, 2008; Charlotte, NC

Power companies in the South and Pacific Northwest will drive prices for wood fuels higher as new facilities are built to produce an energy alternative to fossil fuels, experts in the forest products industry said Friday.

But the supply of wood chips – a byproduct of lumber production used at pulp mills and power facilities – is dropping as residential construction drastically slows in the weak housing market. The reduced supply has raised prices by almost 10 percent since the third quarter of 2006.

“The supply of wood chips is already low because of the problems with the housing market,” said Pete Stewart, president of price information provider Forest2Market. “Increased demand from power facilities will continue to increase prices.”

The current increase in demand for wood fuels is coming from forest products companies in the U.S. that have either updated or installed new boilers that run entirely on biomass – plant material such as wood chips, bark and tree limbs. Forest products companies burn wood fuel to power their operations.

Southern forests are facing additional pressure from Europe as utilities overseas, bound by the Kyoto protocol to reduce greenhouse gas emissions, import wood chips to produce power. The weak dollar has made it cheaper for Europe to import wood fuels to satisfy their energy needs.

The U.S. has not signed Kyoto, but individual states are mandating a reduction in carbon dioxide emissions from power companies.

In the Pacific Northwest, the dynamics are slightly different. The majority of wood chips are sawmill byproducts used by the region’s pulp mills. Generally, wood-fueled boilers are fed hog fuel, which is made of bark and other wood waste unsuitable for pulp production.

“With the startup of new power facilities, the forest industry will have the opportunity to earn additional revenue by collecting forest biomass to supplement residual hog fuel,” said Gordon Culbertson, Forest2Market’s Pacific Northwest region manager. “Many companies are seeking creative strategies to develop biomass as an economical source of fuel.”

Nevertheless, prices for wood chips in the Pacific Northwest are increasing because sawmill production is idled by poor lumber demand. To fill the void, small saw logs that would have otherwise been used in lumber production are being chipped.

The demand for wood fuels throughout the country will continue to grow. U.S. utility companies are planning to build biomass-fueled power facilities to reduce greenhouse gas emissions and avoid the rising costs of oil. These facilities should come online in the next two to four years, which will further increase competition for wood chips.

Based in Charlotte, N.C., Forest2Market produces delivered raw material price benchmarks to the forest products industry in the Pacific Northwest and 12 Southern states. Benchmarks for specific species of roundwood, chips, and wood fuel are based entirely on transaction data.