Feedstock Sourcing for Project Success: US South Advantages

The U.S. South offers global bioenergy producers vast forestry resources and minimal feedstock volatility.
By Stan Parton | March 07, 2019

Just how large is the global wood bioenergy market as we close in on 2020? Growth of the European bioenergy market represents the genesis of any real, quantifiable demand over the past decade—demand that has been largely fueled by imported wood pellets from the U.S. South. In 10 years, U.S. wood pellet exports have increased from less than 200,000 tons in 2008 to over 5 million tons in 2017, as a response to this growing demand.

U.S. pellet exports have played a significant role in facilitating large-scale coal-to-biomass conversions and cofiring projects in the U.K., but growth in the European industrial pellet market is decelerating. We expect to see some more growth in European industrial markets over the next few years as new conversions come online in the U.K. and cofiring resumes in the Netherlands, however, growth in that market will likely plateau within the next five years. The near-term opportunity for further development in industrial wood pellet exports lies within Asia.

Though the environmental policies vary from country to country, overall demand for bioenergy in Asia is creating mandates that encourage the construction of biomass renewable energy plants. With an ample supply of feedstock available in the global market, as well as existing supply chains to deliver these feedstocks, the risks associated with entering this space have decreased considerably. However, some risks are inherent when embarking on any investment endeavor.

The largest risks with earlier stages of project development, including the ability to raise the necessary capital and to demonstrate profitability over the long-term, are associated with identifying reliable, sustainable, affordable and bankable supplies of wood feedstock. Reducing the risks associated with feedstock procurement can help wood bioenergy companies meet these challenges.

In general, sustainability and quality guarantees—as well as reliable deliveries—for wood pellets and fuel chips come at a price premium. Because of the various risks to supply and costs, Asian biopower producers must require their biomass suppliers to utilize strong procurement strategies that mitigate risk, including supply chain risk assessments, cost analyses, subsupplier diligence processes and contract negotiation strategies.

In the current global market, the U.S. South offers clear advantages for Asian biopower producers looking for a sustainable, quality resource via an existing supply chain and competitive cost structure.

US South Forest Industry
With over 100 wood fiber pulping and pelletizing mills and 200-plus solid wood manufacturing facilities, southern forests are the most utilized, yet the most sustainable forests in the world. With reliable access to dense stands of conifer species, active timberland management and very little log price volatility, the regional timber market is mature and developed with prices for timber highly related to demand for lumber, panels, paper, containerboard and pellets. The region is a popular destination for wood products companies of all kinds based on two market dynamics: abundant access to timber and a private timberland ownership profile that fosters a competitive, free market.

The U.S. South land base consists of 437 million acres, of which approximately 37 percent is timberland. The total inventory of stemwood is 12.1 billion metric tons, which is almost evenly split between hardwoods and pine. However, pine makes up 75 percent of total harvests (198 million metric tons per year), while hardwood makes up 25 percent (68 million metric tons per year). In total, only 2.2 percent of pine and hardwood inventory is harvested annually, assuring a sustainable supply.

A majority of the timberland in the U.S. South is owned by private land owners, nonindustrial private forest landowners, timber investment management organizations (TIMOs), and real estate investment trusts (REITs). Private landowners there have similar goals, in that they are concentrated on maximizing cash flow and value through intensive forest management practices and the sale of timber. Timber management is driven by the supply to high-value products such as saw logs for dimensional lumber, which bears much of the cost of land management. This assures that lower-value timber like pulpwood is relatively low cost. 

Contrary to some opinions, increased demand for wood has not depleted southern forests. In 2017, Forest2Market conducted a landmark study for which it examined the impact on inventory from increased demand on the U.S. South forest for the 60-plus year period from 1953 to 2015. The Forest2Market report determined that while timberland acreage in the region has been stable over the period, annual timber growth has outpaced annual removals by an average of 38 percent, resulting in a doubling of inventory in spite of an increase in demand. Inventory increased from 142.1 billion cubic feet to 296.1 billion cubic feet over the time period. We found that contrary to assumptions, increased demand had driven increased inventory, not the opposite. Healthy commercial markets have driven active timber management resulting in increased inventory.

While some have questioned the impact exporting pellet mills are having on forest inventory and wood fiber prices in the South, any claims that this impact is significant are misplaced. Forest2Market data indicates that these impacts are eclipsed by the effects of a range of other supply and demand factors in the region, including increased demand from pulp, paper and panel manufacturers and supply restrictions.

At approximately 25 million tons per year, wood fiber removals for pellet demand represent roughly 7 percent of total harvests in the South. In 2017, removals of pine pulpwood for export pellet production represented only 17 percent of pine pulpwood removals, compared to 120 million tons for nonpellet production (pulp, paper and OSB). 

The competitive market and access to affordable pulpwood make the U.S. South an ideal location for wood pellet production. Many other global markets simply do not have established biomass supply chain infrastructure to serve a robust market for pulpwood at significant scale.

Plan for Feedstock Efficiency
Because supply agreements cannot regulate the delivered volume of feedstock, the onus is on bioenergy companies to understand and manage the interplay of factors affecting feedstock availability and cost within individual supply basins. No two supply basins are alike, which is why the U.S. South is the focal point of wood pellet production, and other regions are less so. Bioenergy project success will chiefly be determined by whether a company builds into its business plans—from the outset—a thorough understanding of the specific supply basin in which it will be operating. Essential guidelines include the following.

• Right-size the plant to the supply basin. There are two options: choosing the size of the facility and then finding a supply basin that will support the facility, or finding a supply basin and then right-sizing the plant to the available supply in the area. In the case of the U.S. South, pellet capacity is increasing as new facilities continue to come online to take advantage of the plentiful pine resource.

• Design plants with receiving capacities large enough to weigh and unload the required amounts of feedstock.

• Design plants with inventory capacity large enough to accommodate the normal market ebb and flow of material due to weather interruptions.

• Control price risk by indexing supply agreements to documented market prices. Just as companies manage the risk associated with variability in operational costs by indexing them to the producer price index, projects that manage feedstock price risk this way will be more bankable.

The single biggest factor for the success for a wood bioenergy plant will arise from how well it understands the nature and characteristics of the forest resources and industries within its supply basin. The global wood fiber supply chain is complex, and the economic cycles and seasonal patterns that govern supply and demand for wood fiber must be primary considerations. As such, the U.S. South offers global bioenergy producers ample resources and minimal feedstock volatility.

Author: Stan Parton
Manager, Bioenergy & Biochemical Practice
Forest2Market Inc.
[email protected]

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