Export Industry’s Impacts on Southern Forests, Markets

Forest2Market data disproves claims regarding the wood pellet export industry and its impacts on forest inventory and fiber prices.
By Tracy Leslie | April 23, 2016

Growth of the pellet export industry in the southern U.S.—from zero in 2008 to 3.6 million tons in 2014—has caused some to question the impact exporting pellet mills are having on forest inventory and wood fiber prices. Claims that this impact is significant and disastrous are largely exaggerated, however. Forest2Market’s data indicates that these impacts are eclipsed by the effects of a range of supply and demand factors in the region, including increased demand from pulp, paper and panel manufacturers and supply restrictions.

Impact on Southern Forest Inventory
Overall, forest inventory in the U.S. South increased by nearly 1.2 billion tons between 2000 and 2014. Data shows that pulpwood harvests for export facilities are a small fraction of overall harvests when compared to harvests for nonpellet facilities. In 2014, pellet exports from the South to Europe were 3.6 million metric tons, or 40 percent of Europe’s 9 million-metric-ton industrial pellet consumption.
The data also shows that wood fiber removals for this demand represent a minor portion of harvests. In 2014, removals of pine pulpwood for export pellet production totaled approximately 3.7 million tons, compared to 117.7 million tons for nonpellet production (Figure 1). Pellet removals represent 0.3 percent of the total pine pulpwood inventory and just 0.09 percent of total pine inventory (pulpwood and sawtimber).

Removals of hardwood pulpwood inventory for pellet production in 2014 totaled approximately 2.4 million tons. Comparatively, all other consumers of hardwood pulpwood harvested 33.6 million tons (Figure 2). Pellet removals represented 0.2 percent of the total hardwood pulpwood inventory and just 0.06 percent of total hardwood inventory (pulpwood and sawtimber).

What about the future? Many who believe that the export pellet industry is harming U.S. forests base that belief on an inflated view of how much demand from Europe will grow. Estimates based on outdated announcements of new facilities and not on actual demand from Europe do not realistically take into consideration recent developments in Europe, including changes in incentives in the U.K. and increased scrutiny of biomass projects by the European Union.

A realistic view of demand shows:
• Existing and under construction export pellet plants in the South have the potential to produce 7.4 million metric tons of pellets to meet demand from funded biomass projects in Europe.

• Applying the South’s current market share of 40 percent to the 8.5 million metric tons of increased incremental European demand would mean an additional 3.4 million metric tons would be supplied from the South.

• Adding 3.4 million metric tons to the 7.4 million metric tons of current production capacity, total South industrial exports of biomass pellets to Europe could rise to 10.8 million metric tons. To produce this additional supply of pellets would require an additional 7.9 million tons of wood fiber.

• The potential of 10.8 million metric tons of export pellets represents a total of 25.0 million tons of wood fiber, which is 1 percent of total South pulpwood inventory and 0.3 percent of all South inventory. By comparison, total removals—for all consumers—in the South in 2014 were 250.2 million tons, or 3.3 percent of total inventory.

Change Drivers in the South
These inventory numbers expose a single incontrovertible fact: Growth in European demand for wood pellets manufactured in the South is not the sole driver of change in the region’s forest products industry. The changes that are occurring are the result of the following:

Land ownership change: The divestiture of industry land ownership to financial and private ownership has resulted in stand-level management changes. The maximization of timber and land value has replaced the management strategy of supplying mills with wood fiber.

Sawmill ownership change: Sawmill divestiture has separated pulp/paper intercompany ties to residual chip supply, so sawmills are no longer operated to feed a pulp/paper mill.

Decline in newsprint and print paper demand; increase in containerboard, fluff pulp and performance fiber demand: Declining demand for coated and uncoated papers has resulted in the closure of 13 newsprint and paper mills and the conversion of several to pulp and performance fiber facilities. These closures were market-driven, not export pellet mill-driven. The conversion has led to declining demand for hardwood and increased demand for pine.

Housing market crash and the Great Recession: A recession-driven decline in sawmill residual chip production resulted in heightened demand for pulpwood. Sawtimber final harvests also declined, increasing inventories and reducing pulpwood supply. OSB production increased steadily as production shifted from older, less efficient mills to larger, more efficient mills.

Precipitation events: Strong deviations from average rainfall totals have caused pulpwood price volatility.

Pellet mill demand: Demand from pellet manufacturers has entered the market.
All of these variables interact to influence forest inventory levels and market price.

Wood Fiber Price Effects of Supply, Demand
Over the past 15 years, demand for pine fiber in the South has increased, while demand for hardwood fiber has decreased. Our analysis, however, shows that disruptions in supply have had a greater impact on wood fiber prices. During the housing crisis and economic downturn in the U.S., available pulpwood and sawmill residual chip supply declined significantly in the South. In certain years, significant precipitation events magnified supply restrictions.

In a competitive market, when supply is constrained in this way, prices for pulpwood will naturally increase. A look at market prices for pine and hardwood pulpwood shows that price trends cannot be attributed to export pellet demand, as similar price trends occurred in regions with pellet mills and regions without pellet mills:

• For pine pulpwood, nonpellet mill demand has increased by 5.9 million tons (from 111.8 to 117.7 million tons) since 2008, while pellet mill demand has increased by 3.7 million tons (from 0 to 3.7 million tons). The South’s average pulpwood prices increased 4.5 percent annually (Figure 1). Similar price trends occurred in areas with and without export pellet mill influence.

• For hardwood pulpwood, nonpellet mill demand has decreased by 2.5 million tons (from 36.1 to 33.6 million tons) since 2010, while pellet mill demand has increased by 2.4 million tons (from 0 to 2.4 million tons). The South’s average pulpwood prices increased 7.4 percent annually (Figure 2). Similar price trends occurred in areas with and without export pellet mill influence.

In this period of change—a recession that was particularly hard for the sawtimber market and an increase in demand from multiple consumers of pulpwood and residuals—the data shows exactly what the basic principles of economics teach us: Price is a function of supply and demand interactions. In the future, another principle of economics will also be manifest: Supply and demand will find equilibrium in markets where there is increasing pressure on price, and prices will normalize as a result. This will be true regardless of the size of the export pellet industry or any other new entrants.

Author: Tracy Leslie
Director, Forest Biomaterials and Sustainability, Forest2Market