Filling a 2 Million-Ton Hole

The war in the Ukraine has disrupted commodity markets across the world, including wood pellets.
By Tim Portz | May 25, 2022

The war in the Ukraine has disrupted commodity markets across the world, including wood pellets. Over the past decade, Russia’s wood pellet industry has grown into a significant player, contributing more than 2 million tons of wood pellets to the European market. As sanctions mount and sustainability licenses for Russian producers are suspended, pellet buyers across Europe now move to the challenge of replacing these volumes.

Apart from the fact that it is rooted in a much larger story of human misery, the market dynamics created by the sudden stoppage of the flow of Russian pellets to their traditional buyers is amongst the most interesting stories in the global biomass marketplace in a decade. On the surface, the stars have aligned and the solution to this very significant inventory and pellet availability challenge is plain to see. On one side of the ocean, the market is anticipating being short on pellets. On the other, producers serving domestic markets are emerging from a disappointing year, watching inventories swell and throttling back on production. Heating degree days lagged long-term averages in every pellet-burning region in the country, and U.S. producers experienced their lightest sales volume (just over 2 million tons) in four years.

While no one is expecting U.S. heating market producers to magically double their production next year and cover all of the Russian volume, all corners of the global pellet industry are being explored for their potential to contribute some meaningful volumes.

European pellet interests are not wrong to look toward heating fuel producers in the U.S. When limiting an inquiry to simply a review of the available data, a compelling case could be made that stateside heating market participants could contribute meaningful volumes to European buyers. Monthly production data produced and curated by the U.S. Energy Information Administration shows manufacturers in the East haven’t produced anywhere near full throttle in well over a year. The highest month ever recorded for production in the EIA’s East region was in October 2019, at 136,921 tons. The region averaged just 91,902 tons per month in 2021, suggesting that nearly 50,000 tons of production throttle was left untouched each month throughout the year. Turn every 90,000-ton month in 2022 into an October 2019, and producers in the region will have laid up nearly 600,000 tons of additional production in a year. It is back-of-the-envelopment tabulations like these that have wood pellet interests in Europe looking hopefully toward heating producers in the U.S. to satisfy a portion of this vacated supply.

These tabulations can reveal what may be theoretically possible, but they fall well short of successfully ramping up production in the right locations and moving product efficiently and cost effectively to market, connecting buyers and sellers who heretofore have not done business together. Layered on top of this are the economic challenges that U.S. producers have been managing for two years, including inflationary pressure across their businesses and increasingly tight labor markets.

Finally, stateside producers serving the U.S. heating and barbecue markets will have to perform some delicate calculus as they anticipate demand for the 2022-‘23 heating season. While recent trends point to shorter and milder winters, producers will have to weigh how much volume they feel comfortable setting aside for export. There is no doubt that some stateside producers will step forward to capture some sales afforded by this unique marketplace opportunity. As to answering questions about how to best integrate this new demand into stateside producers’ established book of business, work is already underway. While the opportunity to satisfy a portion of these volumes may not be viable for all U.S. wood pellet producers, it isn’t difficult to see how it might boost the fortunes of a sector that is emerging from a lackluster season. The economic opportunity emerging in Europe will inspire increased production here across the domestic fleet, and time alone will answer the questions of “By whom?,” and “How much?”

Author: Tim Portz
Executive Director, Pellet Fuels Institute
[email protected]

Printed in Issue 2, 2022 of Pellet Mill Magazine