Fiber Factors

Wet weather, the China trade war and new commercial trucking laws could soon impact fiber supply and prices for some producers, if not already.
By Anna Simet | May 21, 2019

When it rains, it pours.

As of late, the saying has had a dual meaning for some U.S. domestic market pellet producers. Not only did many regions in the central and eastern states see the wettest year on record, but a series of market forces have and may continue to impact fiber availability and prices for some.

The effects of excessively wet weather—relentless rainfall that broke many annual precipitation records—first posed challenges for loggers, keeping them out of the woods, thus trucks of wood from mills, and extending what is dubbed as “mud season.” The fewer trucks available, the fewer loads of fiber, and the more competition to get it. “It took until about mid-January to beginning of February before we actually took a hit from the wet weather,” says Jeremy Watson, BioMaxx vice president of production and procurement. “We knew it was coming, though—we have sources in the logging industry. When the saw mills drop log inventory because they can’t get them, that changes production a lot,” he says. That means producers like BioMaxx have to pivot. “We prefer to run on 100 percent sawdust, as it takes less energy and produces a better pellet, but when sawmills can’t produce, we have to switch to wood chips,” Watson says. “So the wet weather was definitely the start of the situation we’re in.”

BioMaxx owns and operates two wood pellet plants—PA Wood Pellets in Ulysses, Pennsylvania, and Dry Creek Wood Pellets in Pittsford, New York. Total, the plants can produce around 80,000 tons of wood pellets annually—notably, hardwood pellets, which the company has been manufacturing for more than 25 years.

“The whole fiber side of the business has changed dramatically in a six-month period, but overall, the story is that there are difficulties out there, based on the fact that where we are sourcing our product from is struggling,” says Dan Wetzel, BioMaxx vice president of sales and marketing. “It’s having an effect on us and other manufacturers, and there are changes we have to make to flex with that.”
The next part of the equation is the ongoing trade war with China, the effects of which began impacting fiber suppliers last fall.

Hardwood Lumber Tariffs
For U.S. hardwood exporters, 2018 started off strong. “But things fell off a cliff after tariffs were announced in the summer,” explains Tripp Pryor, U.S. Hardwood Lumber Export Association international program manager. “By the end of 2018, we were only down 16 percent by volume compared to 2017, thanks to a record start of the year for exports to China. But so far in 2019, we’re down 51 percent across all species, and we’re down 60 percent for all wood products.”

In simple terms, China was taking in more than half of all U.S. hardwood exports—about half of grade lumber production in the U.S., according to Pryor. That is, before retaliatory tariff rates of 5 to 15% went into effect. Rates of 25% were set for April, but temporarily frozen in midst of negotiations.

 “When one out of every four boards we produce is going to a single market, any disturbance is bound to send shockwaves throughout the industry,” Pryor says. “There are other factors involved—China’s currency devaluation and slowing economy also play a role—but the retaliatory tariffs imposed on U.S. hardwood products are the single largest reason we have such a difficult climate in the hardwood industry today. It makes a lot of sense for hardwood producers to slow down production because prices haven’t been stable and demand has been fickle. It does make sense there is increased competition for sawdust with many companies scaling down production in the face of global trade challenges.”

Blue Ridge Lumber Co., a hardwood sawmill in  Fishersville, Virginia, produces over 35 million board feet of lumber annually, also supplying mulch, sawdust and other byproducts to customers. The company’s sales to China saw an abrupt stop in the wake of the trade war, according to president Tom Sheets. “It made a bad situation worse,” he says. “China’s economy was already shrinking and the tariffs caused an abrupt disruption in the market, resulting in an uncertain demand, therefore lower prices. Our pricing to China is off 20 to 30 percent.” The hardwood industry is a friendly causality on both sides of the water in this trade dispute.”

Sheets says while some other markets have been active and prices have begun to recover somewhat, some production has left the market indefinitely. “It’s had to have made a difference in the availability of wood fiber from pallets to chips to sawdust,” he says. 

Pryor agrees with Sheets that there are other global bright spots for exports. “But even Vietnam, which now is a larger market for American hardwoods than Mexico and imports more lumber by volume than the entire EU, can’t fully replace losses in China. The only market that could replace that demand is the U.S., where we have seen wood consumption per capita drop as laminate flooring and plastic substitutes have taken over.”

While the initial round of tariffs didn’t affect BioMaxx or the lumber market, the second round did. And, if the 25 percent tariff were to hit, “it would shut down some saw mills,” says Watson. “We have had two of our major suppliers tell us, ‘We’re causing our own problems, so we’re going to reduce our own production. The tariffs aren’t bothering us too much, because we’ve shared the cost with our buyers—each took half and it’s been okay, just as long as the next one doesn’t come.’  But they also said they were not going to flood the market with lumber; rather, they would reduce labor and production hours. For our main supplier, that meant almost 50,000 feet a day they weren’t selling because they pulled back 40-hour weeks—that’s a huge amount of raw material.”

And, Watson adds, there are at least three pellet plants pulling from that supplier. “Loyalty goes a long way to a point, but when your prices go up by 20 or 25 percent when we have those kind of increases, something has to happen,” he says.

 Hamer Pellet Fuel is another facility facing fiber constraints. The plant’s parent company operates four sawmills and two kiln dry facilities, and has been producing hardwood lumber for over 70 years, according to Sales Manager Todd Webb, who has been employed at the company for 16 years, half of which he has been managing sales for the pellet plant. 

With the decline of the U.S. furniture manufacturing industry, less material has been available in the past 10-plus years, Hamer says, and while the current situation is making the situation much worse—the wet weather and tariffs—so there are also contributing issues in the trucking industry. “We came off two on the wettest years on record—the Northeast region—but we also have a transportation crisis in this industry,” he says. “There aren’t enough trucks available to the general manufacturer, you can only get so many. You might have all of the volume you need, but you can only get so many trucks. It also creates a rising cost as to what you have to pay to get that truck, and if not another pellet fuel competitor, it might be someone with higher margins.” 

Trucking Complications
Wilson and Watson reiterated Webb’s views on trucking. “That’s the issue that’s affected our market— the new law for these electronic logging devices (ELD),” Watson says. “It’s really, really hurt us. We’re not saying it isn’t a good thing overall, but it wasn’t looked into it enough to understand the whole situation—these guys can only run about 150 miles a day roundtrip.”

In short, the new ELD mandate—aimed at making for safer driving conditions and protecting drivers from being forced to work too many hours—requires electronic ELDs for drivers who are required to maintain records of duty status, and track a driver’s hours of service, as well as data about the vehicle and its driver. Critics say the new law costs thousands of dollars annually for compliance, leads to greater driver turnaround and requires more driver training and device maintenance, among other issues. And, drivers complain that work hours are capped, even though half of the time on-duty might be at a loading or unloading site and not on the road, so their paychecks are shrinking. And, beating the clock becomes of utmost importance, creating more hazards on the road.

In the case of hauling fiber, Watson says that now, they sometimes just don’t have enough time. “We use a lot of local guys to haul raw material, so they make a loop and they are back home, but now, they end up being about 50 miles short. Or even our guys who haul our heating pellets—they can’t come into Buffalo and drop a load, and run all the way back to Massachusetts. They run out of time, and they might be just an hour short. So this has really affected the raw material side, and also the finished side.”

The pellet industry is low-margin and relies heavily on trucking, Wetzel reiterates. “Now, drivers are driving less, and people aren’t being hired. New drivers don’t really exist—there is a massive issue with the number of truckers there are right now, and the hours they can drive.” 

Meanwhile, impacted producers are rolling with the punches, which includes changing fiber sources if they can.

Pivoting and Planning
Switching from dry saw dust to green fiber is a possibility, but it’s an added cost. “We’re hauling 50 percent water to our plant, then,” Webb says. “That green material now has to go through another manufacturing process, a drum dryer, so it’s an added energy cost.”

Webb says fiber costs have gone up substantially from last year. He suggested an analysis of  the U.S. EIA’s Monthly Densified Fuel Report data—which requires pellet producers to report feedstock purchases and average weighted cost for roundwood timber, sawmill residue, wood product manufacturing residue, and other residuals—but the EIA does not release data on a regional basis. Rather, each region’s data is added together and averaged, and that information is provided to the public. Being the pellet industry and fiber markets vary greatly by region, Pellet Mill Magazine made a request to learn more about regional feedstock pricing data, but EIA declined, citing reasons of confidentially and business sensitivities. The report is released about three months behind, so though no drastic price jumps have yet been reflected in the report, that could change in the coming months.

According to BioMaxx, costs for the company are up about 10 percent from a year ago. Now, the company is bringing in wood chips. “That that puts a different problem in front of us,” Watson says. “We’re running into the paper and chip board companies as competitors. Composite board manufacturers use a certain percentage of fiber, and they’re pulling from that same stream as paper, chip and pellet manufacturers. That’s where we have lost most of our fiber to in the past three months. We’re actually bring round wood now, too.”

All of the aforementioned challenges combined have created bidding wars, Webb says. “Financially, pellet mills can’t source pellet fuel 250 miles away from the plant,” he says. “And even though you may have sawmills or a secondary manufacture close to your plant, someone else not even in this industry will now reach into those markets and bid for that raw material.”

Unfortunately, raising the price of hardwood pellets may be inevitable for some. “If the next tariff hits, we’ll have to,” Watson says.

Webb adds that because of the trade war driving costs up and availability down, the real crisis hitting pellet fuel manufacturer may be that homeowners have other heating options in their homes. “The reason most people put in a pellet heating unit in is to save money over that other heat source,” he says. “If they aren’t saving, they might back away.” 

 As to anything in the industry’s control that can be done, Webb says educating the consumer to buy pellets year-round could make a huge difference. “First, they’ll save money, typically,” he explains. “Purchasing pellets in April, May or July, they can get them at a lesser price than fall or winter, and then there won’t be that situation where they can’t get any.”

“We base a lot of our marketing on that,” Wetzel says. “The more we can level it out, and make it not just a high-point, low-point market, the better off it is for everyone. Independent retailers make the biggest chunk of our business. The utmost importance to Big Box retailers is that they just want product in the heating season, and it does make it that more difficult.”

Letting Big Box stores influence consumers’ decisions about when to buy product is counterproductive to market expansion, from Webb’s perspective. “It could create false senses of shortages when they don’t have them anymore, when they could buy pellets at a hearth dealer or local distributor.”

Consumers buying product year-round could help producers secure more raw material during this time of the year, a scenario that also weighs less on the timing and availability of trucks, he says.

As an industry, how can we achieve this? “We can’t change the retailer’s business model, but the consumer can,” Webb says. “If the consumer buys from a local retailer, we can spread out our ability. If we are out there moving more fuel month by month in the spring, summer and fall, we will try to run more. If it comes to a stop then we stop, and we don’t secure additional raw material that might be available right now, but not later.”

For now, with eyes on China and potential tariff increases, Watson says BioMaxx is working out its strategies. “You can’t have just one,” he adds. “You have to have two or three plans, because things change so fast.”

Editors note: At press time, China’s Ministry of Finance announced that it would increase tariffs on 5,140 U.S. goods starting on June 1, in retaliation to U.S. increases on Chinese products the first week in May. In its initial reaction statements, the National Hardwood Lumber Association says although not confirmed at these levels yet, it seems likely that U.S. wood imports to China will be tariffed at the rates announced prior to the freeze—oak species at 25%, cherry and ash at 20%.

Author: Anna Simet
Editor, Pellet Mill Magazine