Pellet Capacity Shake Out

Challenging market conditions and the realities of bringing large production facilities to nameplate capacity are thinning a once-crowded pellet project development herd.
By Tim Portz | February 23, 2016

At the beginning of 2015, Biomass Magazine was tracking 46 different pellet production projects in various stages of development, not already in active construction. Together, these 46 projects represented over 9 million tons of production capacity, and industry insiders began wondering and worrying about rampant overbuilding.

For Mike Curci, North American capital sales manager at Andritz, this activity made for a busy year. “Last year alone we spoke with probably 35 to 40 different projects in the early stages of development,” he says. “Possibly 85 percent of those received a budgetary quotation and further details from us.”

Andritz, a leading manufacturer of pellet presses and other material handling equipment, supplies equipment recommendations and pricing as development teams work to understand the capital costs required to get a plant built and operating.

As 2015 played out, however, the dollar strengthened, mild winters characterized most of the pellet-consuming world, and low-cost producers gobbled up emerging demand in Asia. Simultaneously, stories about start-up challenges for similarly sized production facilities began to circulate. Investor confidence began to unravel.

Throughout its 2015 plant data confirmation efforts, Biomass Magazine confirmed that development activities had ceased at 16 of the 46 pellet projects under development but not yet in construction. Together, these 16 projects represented over 5 million tons of annual production capacity. For the facilities Biomass Magazine was able to reach, over half cited lost investors and lost funding as the primary reason development stopped.

For Don Land, co-owner of Process and Storage Solutions, these findings are not surprising. “The thing is, when you’re looking at wood pellet plants, the big issue is the relatively small number of plants out there with large capacities (350,000 tons) that have had success,” he says. “There were different problems with projects that stopped, but for investment bankers and the companies out there  putting money into the industry, the problem they’re having right now is seeing a lot of struggles, and plants that take two, three, or up to five years to get up to nameplate capacity.”

From both Land’s and Curci’s perspectives, a handful of recurring themes are emerging from these halted projects. First among them is planned capacity. The average capacity of the 16 projects that Biomass Magazine learned are no longer under development was 325,000, and five of the projects were targeting annual production of over 500,000 tons. “Developers are landing on these planned capacities because they believe that production volumes at that level will be necessary to land an offtake agreement with a European utility,” Land says. The assertion makes sense. An offtake agreement with a utility with a sizeable balance sheet provides lenders and project investors with confidence, and pellet buyers have shown a preference for procuring pellets from large, multifacility producers. The challenge, however, lies in the feedstock logistics required to consistently feed a facility with that kind of capacity. “If I build a plant right here where I’m standing, and I’m looking to produce 500,000 tons a year, I’m going to need 1 million to 1.2 million tons of green product per year,” Curci says.  “In order to get that, based on where I am, I’m going to have a radius of 75 or 100 miles to procure all of that material, being mindful that I’m in Florida and everywhere I turn I’m looking at pine trees.”

This challenge, Land observes, extends beyond projects being developed, and includes projects that have already been built. “There’s not a single new plant that I know of that has been able to reach their nameplate capacity within two years,” he says. “You just can’t open a facility, throw open the gate and expect that the amount of material you’ll need will just show up.”

For Curci, plants planning on outputs of this scale will struggle with what he calls the “Three Ms” of pellet plant project development: money, material and market. “I’d say 50 percent of the phone calls I receive are from people who don’t have all Three Ms in place and well understood,” he says.

The project development funnel within the pellet sector did not completely empty, but the projects that remain look different than those that struggled and ultimately failed to maintain momentum.  According to Biomass Magazine plant data, 30 projects are still under development, representing over 4 million tons of capacity. Just five of these 30 are being planned with capacities over 300,000, and the average capacity amongst the remaining projects is less than 150,000. “What we’ve seen work are those 180,000- to 200,000-ton facilities,” Curci says. “The logistics are far easier to manage, and the capital required is significantly less.”

What remains to be seen is whether foreign pellet buyers will have any appetite to engage in offtake agreements with producers in this capacity class.

According to both Land and Curci, the projects that stand the best chance of maintaining investor interest, successfully capitalizing and moving into construction are plants that recognize the impact of inbound and outbound logistics, and allow that to influence their development strategy. “I think you’re going to see the small- and medium-sized mills have more success,” Land says. “You’re going to see them on waterways and close to good rail infrastructure that connects them efficiently to a port. Finally, I think the projects that are ultimately successful will be staffed by people with a working knowledge of wood processing.”

Author: Tim Portz
Executive Editor, Biomass Magazine
[email protected]