Hand and Glove

Appalachian Wood Pellets and Malheur Pellet Mill grew out of existing sawmill operations that learned to leverage a colocation strategy for maximum operational benefits.
By Tim Portz | November 23, 2014

Upon examination, stark differences between Malheur Pellet Mill and Appalachian Wood Pellets become apparent.  Malheur Pellet Mill is situated in north central Oregon and draws on the area’s inventories of ponderosa pine, much of it harvested during stewardship activities on federal lands, while Appalachian Wood Pellets sits in a broad swath of privately owned, mixed hardwoods in northeastern West Virginia. Appalachian Wood Pellets markets its finished products to independent and chain retailers and must compete in a crowded marketplace. Malheur Pellet Mill is anchored by a handful of institutional customers it services with bulk delivery and has filled orders from Asian customers when opportunities presented themselves.

As different as these two operations are, they share a commonality that largely defines how each came to be and advance as businesses. Malheur Pellet Mill and Appalachian Wood Pellets both grew out of existing sawmill operations, depend upon them to operate, and are an integral component of  larger forest products operations.

The Great Recession of 2008 hit the forest products industry hard. Housing starts plummeted, and demand for dimensional lumber went with it. These market conditions were felt acutely in John Day, Oregon, and Malheur Lumber Company. The facility, long dependent on timber sales from the U.S. Forest Service, was struggling to stay afloat in 2012, as the economy continued to sputter and timber sales from the federal government withered. 

Recognizing that allowing the area’s only sawmill to fold would have a devastating effect on the local economy and virtually end any forest management that was occurring in the area, a unique coalition of loggers, business owners and conservationists successfully lobbied for a 10-year forest stewardship contract for the Malheur National Forest, making the economics of timber harvests from these stands work. The stewardship contract generates specific task orders for a particular section of the stand, and Iron Triangle LLC, the logging company that holds the contract, begins the work of sustainably managing the stand. While some of the felled trees are “sound and round,” many are not, and this presented a challenge for Malheur Lumber Company’s management team.

“We were not so sure we were going to be able to make lumber [out of it] but we had a beautiful facility and we wanted to keep people working in our community,” says Bruce Daucsavage, president of Malheur Pellet Mill’s parent company, Ochoco Lumber Company. Colocating pellet production capabilities alongside the existing sawmill operation provided an outlet for the trees and materials that were required to be removed by the stewardship contract but weren’t good candidates for conversion into dimensional lumber.

The pellet facility and the requisite infrastructure cost over $6 million. The Ochoco team pulled together some American Reinvestment and Recovery Act funds, state bonds, USDA monies and its own cash to get the facility built. “We involved a lot of folks in this little project,” Daucsavage recalls. “Local leaders in the community, our judges, our commissioners. The state of Oregon has been absolutely fantastic. It goes on and on. I looked under as many rocks as I could to find grants, low-interest loans, and of course, our own cash, and here we sit today, still trying to expand the facility.”

Well-steeped in operating sawmills, the team counted on an easy deployment of onsite pellet production. “We were naive, too. We thought ‘we can make the best lumber in the world from the best trees in the world. Making pellets, this has got to be easy.’  We were fooled. We made an assumption that pellets were a very simple product that were easy to make. They’re not. You’ve got to be on it constantly.”

Appalachian Trail

A sagging economy also catalyzed the development of Appalachian Wood Pellets, but for different reasons. “At the time, the byproducts markets appeared to be at risk,” says Appalachian Wood Pellets general manager Don Wagner. “The paper industry did not appear to be strong and had gone through some very hard times. So that was a big part of it, controlling our own destiny relative to the byproducts from the mill.”

While Appalachian Wood Pellets is colocated with the Allegheny Wood Products Kingwood facility, it is very much folded into the larger Allegheny Wood Products organization. With an annual throughput of over 170 million board feet, the company is a major player in the dimensional hardwood market, selling most of its inventory to OEMs who use it to build an array of consumer products.

Allegheny Wood Products’ journey into pellet production was the next evolution of a business model it has been pursuing for decades. “It was the continuation of vertical integration,” says Wagner. “When John Crites started his company 40 years ago, he was sawing green lumber. He would sell that to companies that would kiln dry it. They were getting the value-added marketplace rewards, and he recognized there was an opportunity there, so he started putting in kilns and drying his own material.”

When Appalachian Wood Pellets was brought online in 2008, the Kingwood facility was not operating at its maximum capacity and unable to satisfy the fiber requirements of the newly commissioned pellet mill. Additional feedstock was trucked in from other Allegheny Wood Products facilities. As housing markets rebounded, Kingwood was able to begin operating at capacity, generating the requisite feedstock for the pellet plant. Fiber from other facilities is still trucked in, though only to meet species-specific blend ratios.

Wagner and his team leveraged the fabrication and machining expertise they already had on staff to get the pellet facility built and commissioned. “Obviously, any time you commission a facility like this you run into issues,” he says.  “The biggest issue that you have is not whether the Andritz mill will do what it is supposed to do, but you run into issues with material handling, when something is bridging or not carrying the design capacity from the manufacturer, whether it is an auger or a drag chain or whatever. We had those standard issues starting the new facility, challenges that needed to be overcome, but from the time that we bumped the first motor, 12 days later we went to seven days a week, 24 hours a day [production], and we’ve never looked back.”

Wagner’s and Appalachian Wood Pellets’ feedstock situation is enviable. “We do not buy raw materials from any outside source,” says Wagner. “I’ve had people say, ‘Boy I wish I had your scenario. You never want for raw materials.’ I tell them, ‘What you don’t understand is that works two ways. Not only do I get all of the raw materials I need right when I need them, but when I don’t need them, I can turn them off.” This competitive advantage is made possible by the colocation strategy executed by Allegheny Wood Products and Appalachian Wood Pellets. “From an operations point of view, they are absolutely tied together as one,” Wagner comments.

To Market To Market

Wagner’s role at Appalachian Wood Pellets is finding customers for the plant’s finished product. “I’ve got 35 years of marketing of consumer products,” he says. “I have a very good relationship with all of our customers nationwide.”

Leveraging that base of experience, Wagner has worked to win business from a handful of national big box chains. “That part of my business plan was challenged by the ownership of the company because of limited experience and horror stories they had heard about dealing with the big box retailers—and nobody likes what is happening in the marketplace as far as the big box retailers taking a larger share out of the retail pie—but its reality. I had to convince them of that.”

 “What I’ve had to deal with my whole life is ‘Where are the consumer dollars spent?’ And every year, more and more consumer dollars are spent at those retailers, which are getting better and better at getting those consumer dollars. Someone who comes into this industry with the attitude that ‘I’m not going to deal with them because they are hard to deal with,’ is going to lose.”

Charged with moving significantly less volume while being removed from large population centers, Daucsavage and his team have worked to grow their customer base organically within the community. “We like to keep our pellets as close to home as we can,” he says. “The schools, for example. There are two schools in our region, two hospitals, community centers and the airport, which, for heating, has replaced its bunker fuel systems with pellet burners. Now they’re heating their facilities with our pellets, so we deliver in bulk. For the community as a whole, this thing has turned out to be fantastic.”

Results Are In

Both Appalachian Wood Pellets and Malheur Pellet Mill are less than a decade old, and both are already achieving the operational and financial goals they’ve set for themselves. “We look at things in a different way than most companies do, because we are a partnership,” says Daucsavage. “The most important thing to our company is cash flow without a doubt. For the last couple of years, we have cash flowed and that’s fantastic. The bottom line is certainly important, but cash flow, is the most important thing. It works beautifully within the ownership structure that we have in place.”

“The financial results have exceeded our expectation,” offers Wagner. “A couple of cold winters have helped that. When we made the decision to go, it was a very bad market, but the market has swung. We have been able to exceed the production numbers that we expected.”

For Daucsavage, the economic success of the pellet production investment is complemented by the operational efficiencies gained and how it is supported by the stewardship contract. “We’re able to generate a revenue source and keep people employed in rural Oregon to keep those communities viable. At the same time, we’re improving forest health. It’s such a win-win.”

 For Wagner, who enjoys easier access to a more diverse market, the outlook and long-term prognosis is easier to diagnose. “This market is going to continue to expand,” he says. “We are always looking at opportunities. We’ve got an infinite amount of raw material available. We just have to look at the strategic opportunity afforded by our market basket of raw materials. We are very bullish on the pellet market, and we are looking to expand. We have demand that far exceeds our production capacity right now.”

Author: Tim Portz
Executive Editor, Biomass Magazine