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MARKET WATCH

When Will the Skies Clear over Pellet Markets?

Posted by Pete Stewart on June 7, 2012

For what seems to be generations now, we have been talking about bioenergy. The threats; the opportunities; the subsidies; the oversupply; the undersupply; the pending legislation; the grandfathered legislation; ROCs, SOX and NOX.

“Mr. Fox, Sir, I simply cannot take it anymore!

While the tweetle beetles battle in a puddle full of pellets,

Panamax’s pellets stutter and Tilbury's fires clutter;

EU markets sputter – about legislation, regulation and disunion;

The experts – Rotterdam to Rockingham – huff and puff about this stuff:

Enough, Enough!”

Well, I am not sure why I just made you suffer through that, but here is my sense of the pellet market and where we are:

  • Fundamentally, demand for pellets is growing.  Current EU demand is 12 million tons and is likely to double in 5-10 years.
  • No technology issues exist – pellet plant equipment is commercially available around the globe.
  • Supply of raw material exists in the US, Brazil and elsewhere.

Governmental supports are in place to subsidize demand.

  • EU member states are happy to tax themselves.
  • EU laws demand renewables.
  • EU utilities make money and support the process.
  • Average EU citizens have bought into the green society.

These factors and circumstances have compelled utilities and investors to build pellet plants in the US and then export those pellets to Europe.  Pretty classic stuff: demand begets supply. As with most new markets, progress is sinfully slow, however.  Again, the reasons are classic:

  • Global financial crisis and tight budgets
  • Tight credit
  • Slowly developing legislation
  • Slow to develop supply chains
  • Many competitive energy products (coal, natural gas, nuclear power and wind, etc.)

The fact is that emerging markets – such as the market for pellets – are tough; they are highly volatile and fraught with unmeasurable risk.  That is right, the risk cannot be measured.   I am reminded of the year 2000. The year Forest2Market started, 55 start-ups existed in the forest products industry.  I know of three that have survived.  Failure rates are and, I would argue, need to be staggering.

For pellet entrepreneurs and timberland owners who wish this market would develop quickly, I am sorry to say that this wish will not be granted.  Why?  Simply said, there are still too many risks that cannot be measured.  If risk cannot be measured, it cannot be quantified.  If it cannot be quantified, it cannot be priced.  If it cannot be priced, projects will not be financed, leaving a market of all equity players and a much smaller pool of participants.  So, what are the unmeasurable risks?  Well, here is an incomplete list:

  • European debt crisis is in absolutely uncharted waters.
  • Looming European recession and its unknowable effect on US.
  • A US dollar that is strengthening against the euro, making pellets from the US more expensive.
  • The adoption of austerity measures by European governments.
  • Support systems (my euphemism for outright government subsidies) that only support the most attractive projects.

In 2008, Forest2Market published its first study on the US South’s bioenergy market.   In that study, we estimated that, by 2011, the total market demand for wood bioenergy (outside the forest products industry) would be 8 million tons, with pellets making up 3.9 million tons of this total.  Looking back, we were close.  Today, about 3.25 million tons of wood are going to pellet facilities in the US South.  Though this might seem slow, it is actually miraculous growth considering that we started from a base of 200,000 tons in 2007.

In this bioenergy study, we also developed a forecast of demand for wood energy products (again, not including the forest products industry). By 2020, we wrote that we expected demand to rise to 18 million tons (1/2, or 9 million tons, pellets).  This is about 10% of what the pulp and paper industry will use by 2020, or roughly equivalent to the demand of the OSB industry in its heyday.

F2M still stands firm on this forecast.   If we are correct, by 2020, the market share by end use for wood fiber in the US South will look like this:

  • Pulp and Paper – 80%
  • OSB – 10%
  • Pellets/Wood Energy Products – 10%

This will allow plenty of room for everyone and a healthy market into which timberland owners can sell trees.

Well, Sir, Mr. Fox, that’s an outcome that suits me very much! Editor's note: apologies to (and in appreciation of) Dr. Seuss and Fox in Socks.

Learn more about Forest2Fuel, Forest2Market's bioenergy products and services.


Comments

David Rutherford

06-19-2012

This is interesting but not something we have not heard or seen in a fragmented industry. However, that being said does the same line of thought prevail in the pellet to fuel developed in the United States. While the technology to produce pellets is a well established process the ability to turn pellets into fuel additive or fuel is far from a proven technology. Are we on our way to develop a provable process or are we just spinning our wheels.

David R.


Comments

When will the skies clear over wood pellet markets

06-25-2012

[...] will the skies clear over wood pellet markets? By Pete Stewart - Forest 2 Market · Image by Bikinid60 / [...]


Comments

Harry Watt

06-27-2012

Wood pellets are superior to any fossil fuel and we all in the forest products industry agree on that.  Wood chips for energy is a better solution as it eliminates the need to long distance transportation in most of the US as our high population and demands for space heat and hot water allows wood chips to be a local solution.  In my county in North Carolina I estimate we spend $70 million a year heating just homes.  Why the potential demand is far greater than any supply we could have chipping removals from thinnngs, final harvests and landfill reclamations.  We now have the technology in small scale automatic feed wood chip hot water boilers and the industry would be far better off moving to wood chip boilers on a small scale in a local market that going the high energy demand/high capital cost of pellets.  Wood chips makes more sense given the realities of the economy.


Comments

mike monte

07-03-2012

We heat most of a two-story with pellets burned in a home-size pellet stove.  We used to have a $3000 heat bill in the worst month of a northern Wisconsin winter.  That dropped to $1,000, and with some more winterization efforts I expect to pay less.  The building is brick, old and energy inefficient, two stories and has a front door opening and closing all day long.  I’m happy to have wood pellets and think they are very under-used.

Topics: industrial wood pellets

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