Pellet producers offer insight on 'shortage'

By Anna Simet | March 06, 2014

Pellet retailers and consumers in some Northeast and Midwest locations have learned a lesson this heating season, as many have run out of pellets and are facing difficulties securing additional supplies.

The general consensus amongst pellet producers on what, exactly, that lesson should be is that ordering or buying pellets too late in the season leads to inaccurate demand estimates.

Although the winter has been unusually frigid—albeit not the coldest on record—and has upped demand some, pellet producers insist current industry capacity is fully capable of meeting and exceeding market needs.

Cory Schrock, plant manager of White Pigeon, Michigan-based Fiber By-Products, emphasized that the shortage has nothing to with lack of capacity. “Most producers aren’t operating at full capacity, but that’s because they aim to supply what the market demands,” he said. “Producers have an average operating capacity of 50 to 60 percent, because that is all the market requests of us. Couple that with one of the coldest and hardest winters on record so consumer usage is up, and skyrocketing propane prices, and consumers have turned to wood pellets.”

For most consumers, pellet stoves aren’t primary heat sources, but when propane reaches $3 to $5 per gallon—such as it has in Michigan, which usually sees $1.30 to $1.60 per gallon—most cannot afford to use it, Schrock says, so they turn to their pellet stoves.

He adds that consumers in the region have likely doubled their typical consumption this season, jumping from about three tons to close to six tons.

Jonathan Kahn, CEO of Strong, Maine-based Geneva Wood Fuels, said the pellet shortage “isn’t a true shortage,” and echoed Schrock’s sentiments that there’s enough production capacity.

At least, there is in the Northeast, he said.

Kahn agreed that demand has increased from last year, partially due to the unusually cold winter, but also because of more pellet appliance sales.

 “There were 50,000 new stoves added into the [U.S.] mix this year, though—predominant purchased in the Northeast—so I’d venture that 150,000 to 200,000 new tons of new demand was added,” he said, adding that customers who have bulk delivery set up are not being affected by the shortage, as distributors can accurately plan for their needs.

The real issue is that consumers began buying too late this year, from Kahn’s perspective. “It’s been easy to blame the big boxes [retailers], and ask ‘why don’t you have more?”, but it’s a chicken and egg scenario. If more consumers had gone to the stores to make purchases in July and August like they have in previous seasons, then eventually, Home Depot, Lowes, or Wal-Mart would have gotten the message. But they didn’t this time, because they didn’t perceive that their customers needed it. At the end of the day, the customer is the lynchpin—it’s their buying habits, it’s what they do.”

And unfortunately, pellet producers can’t risk increasing inventory based on speculations alone; they need assured buyers.

“We’re able to produce some inventory and have it sitting there, but we need guidance from the retailers,” Kahn said. “Working capital is very dear, we have to be very precise with our allocations, and we can’t just make 100,000 tons to sit there waiting for the consumer to decide to buy. We feel terrible that there is this frustration on the customer end, but that’s a giant risk.”

 In the West, Chris Sharron, president of Western Oregon Wood Products, which operates two mills in Banks and Columbia City, Ore., that total 80,000 tons of annual capacity, said he believes there will be a lot more planning for next season, both from the retailer side and the manufacturer side. Due to the spot shortage, his company is taking orders outside of its typical markets, he said, but is being “extremely cautious. The last time we did this, along with other manufacturers in the west, we experienced a bit of a shortage ourselves—albeit very brief. Once we realized the risk to our own markets, we immediately curtailed shipping elsewhere and we were flush again within 30 days.”

Like Shrock and Kahn, Sharron noted that there is plenty of capacity in the country, and emphasized that there is not a need for new plants to service the residential market. “Last time, mainstream media exploited the shortage, and it spawned construction of a number of new plants,” he said. “Had the media contacted us or other manufacturers about the brief shortage, they would have learned the reasons and maybe would have reported accordingly. Accurate reporting could have saved millions of dollars of private investment and millions of dollars of taxpayer money, for those plants subsidized with grant monies. Instead, these new plants came on line about a year later, only to realize there wasn’t enough market to support the added production.”

He added that the owners of the new plants didn’t call it quits, but were aggressive in trying to gain a piece of the market. “And, of course, the veteran plants were aggressive in protecting market share. This led to price wars, and was happening at the start of the recession. Lumber mills were slowing down and, therefore, generating less byproducts, leading to historically high prices.”

As a result of a lack of understanding as to what was truly going on in the market, many of the new plants didn’t survive, and many of veteran plants suffered tremendous losses, Sharron added.

A more accurate gauge of what real residential market demand is would be key to better planning, which it all comes down to, according to Kahn. “That’s what the industry needs, and we need to figure it out.”

Shrock said he believes some manufacturers, including Fiber By-Products, will up production some this summer to prepare for next season to be like this season.

But is next winter likely to be a match for this one, polar vortex and all?

“Probably not, and we may end the season with a lot of inventory, you just never know,” he said. “But this year we produced more than what we thought the market was going to need from us, and our retailers are coming back and saying ‘we need more,’ and it’s too late for that. I can’t tell you enough that the shortage is not because of capacity, but the circumstances of this season. It caught everybody off guard.”

Biomass Magazine staff writer Chris Hanson contributed to this report.