Fiber Supply Critical to Pellet Project Success
You can’t run a wood pellet mill without wood. This seems obvious, but I frequently hear from people who think they have identified a technology and customer combination that will make for a successful project, but yet they haven’t given much, if any, thought to their wood supply.
Of course, identifying wood supply is critical to a pellet project’s success, and should be one of the earliest steps taken when evaluating opportunities. Whether building a pellet mill to serve the domestic heating market or offshore export, finding a location and developing a wood supply strategy that allows for a consistent and reliable supply at a price the mill can afford and suppliers can profit is critical to a project’s success.
Many developers— often at the urging of financial backers—seek to find long-term contracts that lock in the volume and price of wood for years. In a few places, such a strategy might actually work.Unfortunately, many of the contracts that I have seen cross my desk as part of due diligence simply don’t—and can’t—provide the certainty and surety that the developer wants it to.
There are a few reasons for this:
• It is hard to find a wood supplier that is sufficiently creditworthy to stand behind a long-term contract. Yes, there are good organizations, run by good people, with years or decades of experience in the forest industry. I am sure they will do everything they can to honor a contract (or, perhaps more importantly to them, a handshake). However, many companies just don’t have the financial resources to stand behind a long-term contract, and if a supplier can’t back a contract, it is of limited value.
• Wood supply relies upon a fragmented supply chain, with landowners, foresters, loggers and truckers all participating before wood gets to the mill. It is uncommon to find a firm that has all of these components, and it’s very hard to contract a credible promise to supply something you don’t own or control.
• Wood used for energy is low-grade, and just isn’t worth as much as other products coming off a logging job. Landowners make much more money selling sawlogs for lumber production than wood for pellet production. The money from sales to pellet mills may be important, but it often isn’t the primary focus for assuring long-term profitability.
Given these challenges, wood pellet projects should instead concentrate on developing a system and infrastructure to manage a wood supply that is consistent, reliable, and provides for stable volume and price. In truth, this is important with or without a long-term wood supply agreement. Elements that a project should consider include:
Diversity of supply. Make certain that there are multiple suppliers, perhaps providing multiple types, of feedstock. This way, failure of a single supplier doesn’t have catastrophic results for the pellet mill.
Surge capacity with existing suppliers. Make certain that suppliers can “turn up the volume” for short periods of time, to account for interruptions from other suppliers.
Significant wood storage capacity. Allow for buying when supplies are plentiful and to provide a buffer against any short-term supply interruptions (e.g., weather, or market-related downtime at a sawmill that provides sawdust as a feedstock).
Clear price expectations. Make the price something that loggers know and can make enough money to justify investment in equipment. Sometimes efforts to squeeze the price down as far as it can go has short-term benefits, but almost always causes some suppliers to leave a facility and results in a higher, more volatile price in the long-term.
Reflect supplier costs. Suppliers use diesel in the harvest, processing and transport of wood to a facility. They also have no control over diesel costs. Communicate to suppliers how changes in diesel—both increases and decreases—will be reflected in the price you pay them.
Pellet mills are simply the latest in a long line of forest industries that need significant and price-stable volumes of wood. No matter what a supply contract does or doesn’t say, a project’s real success can be best addressed by giving careful thought and planning to wood supply.
Author: Eric Kingsley
Vice President, Innovative Natural Resource Solutions LLC