By Robert Wright
The announcement of new pellet production capacity in the US South continue and may even be accelerating now that the uncertainty of renewable obligation certificates in the United Kingdom appears to have diminished. Recently announced new capacity exceeds 2.3 million tons of finished product, representing nearly 5 million green tons of roundwood demand.  As major conversion projects advance, they are followed, in close order, by the announcement of new pellet production capabilities that will be required to provide a stable source of fuel. There being little under-utilized biomass fiber in Western Europe, the focus for supply has shifted to the Americas and, more specifically, the US South.
We’ve seen two distinctly different types of development in the US South, those being undertaken by independent pellet producers, such as Green Circle, Enviva, and most recently Enova, and those being undertaken by large European power companies that are the ultimate consumers of the end product, most notably RWE and DRAX. The majority, if not all, of the independent producers typically have off-take agreements for some or all of their production capabilities. Green Circle was the first large scale production facility in the US South and has established a successful operational history, though not without always without interruption. Enviva initially acquired a number of smaller capacity production facilities, but has also undertaken the construction of new manufacturing capacity and the development of offshore transport capabilities. Time will tell if Enova will be similarly successful with the ambitious development program that they recently announced.
RWE and DRAX, two large European energy producers, have focused on developing their own production capabilities in the US South. RWE constructed the first facility in Waycross, GA and have been successfully operating for the better part of the past year and, more recently, DRAX has announced the development of pellet production and transport facilities in LA and MS.
Perhaps the most significant question is, how do you go about siting a facility that will require a million tons or more of raw material? Having spent the past 40 years or so involved with the forest resource, it’s fair to say that there aren’t many geographic locations in the US South where there are several million tons of available fiber that nobody seems to have any use for. While a simple analysis of growth and removals may indicate a large “surplus”, the availability of fiber in the US South is a much more complex subject than A-B. For example, not all of the fiber on private land is necessarily part of the open market as in the case where fiber supply agreements of varying lengths accompanied the forest products industry’s sale or spinoff of their timberland assets.
Perhaps one of the most important siting considerations for new demand elements is an in-depth understanding of who they will be competing with, for what component(s) of the forest resource, and what various competitors are willing, and able, to pay for their raw materials?
A manufacturer of a relatively low margin product, such as export wood pellets, may be feel some significant financial pain after an increase of just a few dollars in the cost of wood while another consumer of a higher margin product may be able to pay two or three times the current cost of wood and still remain profitable. Not that anyone WANTS to pay more for their raw material, but when push comes to shove, the reality is that some are more able than others to shoulder an increase in raw material costs that necessarily will accompany an increase in demand. Make no mistake about it, rising demand in each and every local market will be accompanied by rising prices which, in turn, will result in an expansion of supply, but there are limits to expanding supply.
The road ahead will not resemble that which is visible in the rear view mirror: future success will require an in-depth understanding of the available forest resource data as well as the make-up and dynamics of existing and anticipated local and regional demand elements. Demand for the pine resource in the US South has been weak over the past few years as a result of the weak economy in general and the housing market in particular leading some to believe that there are enormous surpluses of under-utilized fiber. The view may be substantively different as the economy recovers and demand from the traditional forest product begins its inevitable return toward pre-depression levels.  And traditional forest products demand will not increase uniformly: some sectors will expand significantly while others much less so.  Characterizing fiber demand in the local market and developing a solid understanding of the drivers that will influence its development in the future are important considerations and fundamental to developing future raw material price projections.