Siting a New Facility: Costly Mistakes

Successfully bypassing numerous potential project development pitfalls requires a deep understanding of the wood fiber supply chain.
By Stan Parton | February 28, 2018

As part of Forest2Market’s business, we track emerging industries that use wood-derived feedstocks. We began serving bioenergy in 2006, and over the years, added biofuels and biochemicals to our practice. Along the way, we have uncovered a number of market dynamics to help project developers better understand the wood supply chain and the economic and biological sustainability of wood-derived feedstocks. We have also uncovered major project development pitfalls that have the ability to consume capital, and sink new projects before they even get off the ground.

Understanding the feedstock supply chain of biobased projects is a critical first step before moving to the site selection phase. At a minimum, developers need to have fact-based answers to a series of questions, including: What are the market drivers of supply?  Where should I site my plant to assure long-term sustainability? What is the competitive demand in the market and how easily can that demand be displaced? How much excess supply exists? How do I track sustainability? How do I hedge feedstock price volatility? How do I make my debt or equity partners comfortable with supply chain risks?

From this exercise and analysis, developers are able to create a list of important criteria so that each potential project location can be thoroughly and objectively ranked. While governmental economic incentives are helpful inducements in determining prospective site locations, an approach that places these considerations ahead of feedstock considerations could jeopardize the success of a project in the long run.

This is the case because feedstock costs compose an enormous part of the overall operating cost of a facility. Siting a new project in an optimal wood basin is critical to ensuring that a sustainable and affordable wood supply is available throughout the life of the project. The following are mistakes to avoid when siting a facility.

Relying solely on local suppliers for market information. Wood markets are dictated by local supply and local demand, yet this does not position local suppliers to accurately assess the market. The view held by each local supplier is limited to the opportunities surrounding only his or her supply, not the supply available throughout the entire marketplace. New biobased project developers must be aware that existing forest products companies are the most reliable buyers in the wood fiber supply chain; pulp and paper mills alone are part of a $10 billion industry that receives 9.5 million truckloads of logs each year. Suppliers will continue to give precedence to these established and reliable buyers, even as new opportunities emerge.

Accepting “free land” from an economic development committee. Great as it may sound, there is no such thing as free land. Economic development committees have a vested interest in attracting new business to their regions. However, committee members are simply not qualified to offer unbiased assessments of the wood basin, infrastructure and many other factors that contribute to the success or failure of a wood-consuming, biobased manufacturing facility. Ultimately, the cost of factors such as low inventory and high competition from other facilities in the procurement zone could significantly outweigh the money saved on a land deal.

Equating the number of trees with the availability of wood fiber. A heavily forested area can create the illusion that a region enjoys ample feedstock supply. It is important to realize that not all trees visible to the eye are available for harvest. Questions about who owns the trees, or whether the trees are located in harvestable areas, must be answered to accurately assess the available wood fiber supply. The age class and species density of the forest must also be considered when assessing supply over a 20-year period.

Assuming wood costs will rise or fall based on the historical trend line. The cost of wood depends on demand and the age classes of trees available to meet that demand. For example, stumpage prices can temporarily spike when new demand enters the market and pressures current forest resources.

Ignoring local competitors’ capacity to pay. Pulp and paper mills, OSB mills, bioenergy and biochemical manufacturers compete for the wood-derived feedstock available in a supply region. The higher profit margins that some facilities enjoy compared to other facilities allows them to absorb higher feedstock costs and still remain profitable for sustained periods of time.

Ballparking feedstock prices without a dependable forecast. To produce an accurate forecast, the starting price (weighted average market price at a precise moment in time) should be based on the highest-quality transactional data available. By starting the process with a specific price based on the actual market, the forecast will deliver a greater level of accuracy. Figure 1 highlights this accuracy (the light blue line shows the model’s forecast price, and the dark blue line shows actual wood fiber prices).

Project developers who know—with a high degree of confidence—what they will pay for wood supply for the next 24, 36 or 48 months have the ability to better optimize wood procurement—both volume and price, manage inventory more effectively, and align facility feedstock and output with raw material price trends.

Avoiding these six potential pitfalls requires a deep understanding of the wood fiber supply chain. As the housing market recovers, the pulp and paper industry flourishes, and bioenergy and biofuels and biochemicals markets continue to develop, competition for wood fiber will intensify in local supply areas. The onus is on project developers to locate their projects in areas that assure a sustainable and affordable feedstock supply, which will ultimately lead to a successful project.

Author: Stan Parton
Manager, Bioenergy & Biochemical Practice,
Forest2Market Inc.