There has been a consolidation trend in the U.S. the past couple years. Has that leveled off, or will it continue to some extent? SW: I think we will continue to see some more consolidation. The low-hanging fruit, so to speak, has already been picked, but in my opinion, we are still more likely to see merger and acquisition (M&amp;A) activity than we are new greenfield mills. WS: Recent years in the heating pellet sector were challenging due to a combination of excess supply, warm winters, and low fossil fuel prices.&nbsp; Profit margins for small, independent pellet mills were very tight, or even negative.&nbsp; Some mills failed financially and closed, and others were made available for acquisition. In the past year or so, demand for heating pellets has increased and the gap between supply and demand has almost closed. Normal to colder-than-normal winter weather has allowed operating mills to run at full capacity in many locations.&nbsp; I would expect to see M&amp;A continue, but also we may see a few new projects in some regions. We're also we&rsquo;re seeing some overseas companies buying stakes in wood pellet plants in North America. Why is that an ideal scenario for both parties, and should we expect to see more of that? SW: For overseas buyers, it provides them with a bit more security of supply. If you own a portion of a pellet mill, you have more control over the risks associated with the business. There can also be cases where a pellet mill investment may not make sense on its own, but if you look at the return from investment in a pellet mill&mdash;plus, say a biomass power plant overseas&mdash;you get a nice package. WS: In Japan, the large traditional trading houses are engaged in supplying pellet fuel to small, independent biomass power plants, some of which they also own or are joint venture partners in, and for co-firing at the large utility power stations. Some of the trading houses are investing upstream or are considering investing upstream. This is not an unusual strategy for them, as they have invested upstream in other sectors such as lumber production, coal, steel, etc.&nbsp;&nbsp; Speaking of trends, are there any others worth mentioning, in the domestic or global wood pellet industry? SW: Strong markets in Europe&mdash;demand has definitely caught up to supply, which means it may be time for new, greenfield mills. Combine that with expected growth from Asia, and we are entering a second phase of industrial pellet capacity expansion.&nbsp; WS: The U.S., Canada, Vietnam and the Baltic nations have dominated the industrial pellet markets.&nbsp; They will continue to be major suppliers.&nbsp; However, we expect to see other jurisdictions with good fiber characteristics&mdash;sustainable and competitively priced&mdash;and good logistics increase their role in global supply.&nbsp;&nbsp;&nbsp; Let&rsquo;s talk oil oil and pellet prices in the U.S. How has competiveness been in the past few years, and what&rsquo;s projected for the future? SW: Despite historically low oil prices, pellets have maintained their cost advantage over oil in most cases. There were one or two seasons (2014-'15 and perhaps 2015-'16) where oil was cheaper in some markets, but that was a unique case. Most forecasts, including the U.S. EIA, call for increasing oil prices but at relatively modest levels&mdash;in the $60 per barrel range. WS: We also expect to see resurgent growth in demand for pellet boilers in the U.S. Northeast. Those states consume about 84 percent of all heating oil used in the U.S. Of those states&mdash;and the rest of the country&mdash;Maine is the most heating oil dependent. About 68 percent of every dollar spent on heating oil leaves the state. At three dollars per gallon, the 61 percent of Maine&rsquo;s homes that use heating oil cause $602 million per year to leave the Maine economy.&nbsp; The economic multiplier effects that accrue from converting central heating systems to modern, efficient, and fully automatic pellet boilers using regionally produced pellet fuel will have significant positive economic impacts.&nbsp; State policies supporting the investment decisions to install pellet boilers will have very good paybacks to the states. Domestically, very little new capacity has been built over the past several years. There have been some proposals, but very few plants made it to the finish line. Can you discuss the main challenges new-build projects face right now? How is Canada different? It seems much more capacity has come online there in the past few years. SW: We are really talking about two separate markets&mdash;the domestic heating market and the industrial export market. For industrial exporters, two things happened: Demand did not materialize as quickly as some had hoped, and nearly all power station commissionings are delayed for one reason or another,&nbsp; and the strong U.S. dollar really hurt exporters. The U.S. South went from a low-cost position in the industry to being higher cost than regions like the Baltics, all because of currency. With new demand materializing and supply constraints in many other competing regions, new U.S. industrial capacity is all but inevitable. For domestic heating markets, capacity overshot demand many years ago, and the markets are still trying to get back in line. Most domestic market capacity came on line in response to strong demand including 100,000-plus new stove shipments each year. For the past several years, the market has improved, but at a much slower rate, and there is still excess capacity in the market. Do you think there is a future possibility of economically shipping pellets from the U.S. West Coast? SW: There is certainly a strong economic case for shipping pellets from the West Coast to Asia. There are likely a few really good opportunities for export mills on the West Coast but overall the market is relatively constrained from a fiber standpoint. Unlike the U.S. South, West Coast mills have to rely on sawmills for their feedstock as roundwood pulpwood is in limited supply and quite expensive. Even when it comes to mill residuals markets for chips are quite strong, including exports to Japan, so pellet mills are left competing with particleboard and MDF and other industries for sawdust and shavings. Combine that with a flat outlook for lumber production in the West, and opportunities will be limited. In a recent paper, you highlighted that year-on-year growth of pellet imports from 2017-&rsquo;18 is projected to be about 26 percent. Can you discuss what&rsquo;s attributed to this? SW: We see a resurgence in absolute growth plus some good seasonal affects. Korea, Japan and the Netherlands all grew in terms of absolute power plant supply while places like Denmark and Italy had cooler winters, which lead to increased demand.&nbsp; Looking at major drivers in 2019 and beyond, can you give some specific examples of policy or projects that are expected to have an influence on global trade? SW: Asia is really expected to be a major driver moving forward. The role that cofiring plays in both Japan and Korea will greatly influence the magnitude of market growth. New demand from dedicated biomass plants is quite certain while cofiring at major power stations adds a lot of volatility to the outlook. Looking way into the future, the way Europeans handle power plants that have been converted from coal to biomass&mdash;Drax, for example&mdash;after their current subsidies run out, will have a huge impact on the market in decades to come. WS: I think that over the next five years the consequences of climate change will become increasingly costly and impossible to ignore.&nbsp; It is my opinion that even the U.S. will finally have policy by 2025 that supports carbon emissions reduction.&nbsp; As I have said many times, a rational and pragmatic component of the transition to a more decarbonized power sector is to leverage existing large utility coal power stations by cofiring pellets with coal.&nbsp; Those power stations lower CO2 emissions while providing needed baseload and peaking power that wind and solar cannot supply. Perhaps someday battery storage will deal with the intermittency and variability of wind and solar.&nbsp; But in the meantime, a solution for renewable low carbon on-demand power already exists. By the mid 2020&rsquo;s the U.S. may become a significant user of industrial wood pellets in its coal power stations. Does the global landscape look competitive, or will demand eventually exceed production? Are any new countries emerging as major suppliers, and will there be any new major consumers? SW: Demand is definitely getting to the point where new capacity will need to be developed to meet it. Over the last few years the bulk of new capacity has come on line in Southeast Asia in order to supply Japan and, mostly, Korea. Other regions like Australia and Brazil will also play a role in an increasingly global market. &nbsp; WS: In any sector in which there are long lead times to develop production capacity, there are bound to be overshoots and undershoots in supply.&nbsp; It takes at least 18 to 24 months from the time the decision is made to build new pellet production capacity until startup. Then there is a period of three to 12 months (or more if there are deficiencies in design, equipment, and operations protocols) to ramp up to full capacity.&nbsp; We are in a period now where demand for industrial pellets is expected to exceed supply, and thus there are many new pellet production projects in the pipeline. Millions of tons per year of new production will be needed over the next several years. Aside from the Atikokan Power Station, there aren&rsquo;t any power plants in North America converting to wood pellets, and many of the larger-scale biomass-using stations have closed. What would it take for this to become feasible here? SW: In the U.S., it would take a federal policy that incentivizes renewable energy, particularly in states that currently object to such policies. The Clean Power Plan would have gone a long way in promoting biomass markets in the U.S. since states and utilities in coal country would quickly realize that cofiring wood pellets would be one of the most cost-effective ways to meet their targets, while also saving jobs at power plants, and creating more in the woods and at pellet mills. Unfortunately, the CPP essentially died with the election of our current president. Eventually, I would hope we will see another federal policy that promotes renewable energy, but it will likely take years, if not decades, before any new policy is actually implemented.&nbsp; WS: Seth and I have slightly differing opinions on how soon North America will seriously embrace a strategy to move toward decarbonization of the power sector. As my comments above note, I think the real financial impacts of the consequences of climate change by the mid-2020s will motivate national policy in the U.S. and Canada. The policy could be based on penalties for emitting CO2 , as there are now for sulfur, oxides of nitrogen, and other polluting byproducts of combustion. Penalties, such as a high enough tax on carbon, create incentives to avoid CO2 emissions.&nbsp; Policy could also be based on a guaranteed higher rate for electricity generated by carbon beneficial methods. When one of those policy schemes is implemented, coal-fueled power stations in the U.S. and Canada will begin to use pellets. Any regulation that makes power stations internalize the external consequences of their production will make power more costly. That is the price of preventing pollution. In this case, the pollution is causing massive changes in the environment that will cost way more if unmitigated, than marginally higher electricity prices. The advanced or black pellet industry always seems to be just a few years away in North America. A few projects pop up here and there, but there is never much buzz about them. Any perspective on that? WS: In general, any alternative to plain vanilla white pellets must be competitive on a cost per unit of energy basis&mdash;for example, dollars per gigajoule (GJ).&nbsp; From our point of view, it is past time for the evolution of pellets from version 1.0. Pellet fuel has been the same for decades. FutureMetrics has looked at several so-called black pellet technologies. In our opinion, the Norwegian company Arbaflame has evolved to a competitive version 2.0 pellet. The key to their competitiveness is the highly optimized use and conservation of mass and energy. The mass losses in the thermal treatment process are captured and converted into a biochemical stream. In effect, the plant is a combination pellet and biochemical factory. The revenue stream from the biochemicals allows for a price for the waterproof pellets that is competitive with white pellets on a dollar per GJ basis. We think this technology will become mainstream. &nbsp; Author: Anna Simet Editor, Pellet Mill Magazine asimet@bbiinternational.com 701-738-4961

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In a Q&A with Pellet Mill Magazine, FutureMetric's Seth Walker and William Strauss shine light on domestic and worldwide wood pellet markets. 

Surveying the Global Wood Pellet Landscape

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