Low Oil Prices Soften Biomass Energy Market

– by Lisa Monroe, March 1, 2016, Pallet Enterprise


Photo: Pallet Enterprise

Back in 2009, an article in the Engineered Wood Journal predicted that the competition for certain types of wood fiber would reshape the wood fiber markets due to the increasing demand of wood fiber to produce electricity.

At that time, around 10 billion kilowatt hours of electricity were being generated in industrial settings across the United States. Then and since that time, there have been many announcements about biomass plants being planned or built, including several massive plants in Europe.

The trend is largely driven by global initiatives to reduce carbon emissions by replacing fossil fuels like coal with a sustainable and more environmentally friendly fuel source like wood pellets that can be burned to produce power.

Besides the wood to power trend, there have been several companies in the United States working to use the already existing technology to convert wood fiber into biofuels. These include ethanol and crude oil that can be processed into gasoline for automobiles and other vehicles.

In the past few years, there’s also been a lot more research into all kinds of new innovative uses for wood fibers. As reported in the Pallet Enterprise’s September edition by writer Rick LeBlanc, “Researchers are unlocking many uses for wood beyond the traditional markets…Wood fiber is being used creatively in the development of soon-to-be-affordable microchips, beer bottles, wood foam packaging material, super strong paper that can replace metal, 3D printing, multi-story buildings and more.”

Many of the products being developed or researched are taking advantage of cellulose nanofiber technology, which basically uses the minute fibers in wood combined with other materials, to make an even stronger material. While there hasn’t been much of a commercial impact yet, one or two products made with this technology are starting to trickle into the marketplace. The Mitsubishi Pencil Co., for example, now sells a $2 pen in North America, which is one of the first commercial products made in Japan with this technology.

Japan, like many other countries, is starting to take a closer look at cellulose nanofiber technology because of the country’s limited resources. Japan imports almost all the metal it uses in manufacturing, but with the new technology, organic substances like wood, and even food waste like orange peels, can be converted into materials that can be just as strong as steel.

While you would think that all these different uses for wood fiber – what used to be considered a wood waste by-product – would be driving up both the demand and the price of it, that’s not the case.

The reason is that recent drops in oil prices has basically thrown a monkey wrench into the whole market. Oil prices have dropped more than 70% since the middle of 2014 and are expected to stay low due to a global supply glut that doesn’t appear to be going away any time soon.

“The value of oil has thrown a huge amount of uncertainty into the market,” according to Tim Gammell, the editor of the North American Wood Fiber Review, a publication of Wood Resources International that has been tracking pulpwood and biomass markets in the United States and Canada since 1983.

Gammell, like many others, believes oil prices will to continue to run low at least for the foreseeable future. And as a result, wood fiber prices are also soft right now due to an overall fall in demand.

“With the prices of oil dropping, a lot of biomass plants are not running, and the whole market in Europe where a lot of the exports go is slowing as well,” he commented on the wood pellet market.

The weather is another player, Gammell explained. Depending on the severity of the winter in different geographic areas, the demand for wood pellets can rise or fall. In the U.S. Northeast, there’s a more solid, consistent demand for residential heating that will most likely continue, though at a slow pace until something happens that drives the market back up.

It’s also been “a terrible winter for forest access and supply” due to flooding in South Carolina, Arkansas and East Texas, which has had some impact on supply and demand, said Neil Ward of the Forest Resources Association (FRA).

Another factor to consider with the wood pellet market, according to Gammell, is that the profit margin is already low because of production, packaging and export costs, especially when shipping overseas, so there isn’t a lot of money to be made anyway.

As far as biofuels are concerned, there’s been a lot of government interest in that, Gammell said, but “again it’s hard to make a case right now when oil is so cheap. The oil prices have really taken the wind out of that sail.”

He pointed out that two of the largest biofuels startups in the United States in the past several years, KiOR, which opened a commercial scale cellulosic fuel facility in Columbus, Mississippi, in 2012, and Range Fuels in Soperton, Georgia, have both ended up filing bankruptcy. So while companies like this show that the technology can work, they are also examples of how difficult it is to make them profitable enough to keep them going.

KiOR developed a proprietary technology platform to convert biomass into renewable crude oil that is processed into gasoline, diesel and fuel oil blendstocks, according to the company’s website. Range Fuels was a company that shut down in 2011, after trying to develop technology for the conversion of bio-mass into ethanol.

Looking at the much newer technologies evolving around wood nanofibers, Gammell said, “I think that’s promising, but we’re way down the road yet until there’s a commercial impact.”

The impact might be big someday though, at least according to one prediction. In a recent Chicago Tribune article, the Japanese government estimated that domestic sales of products made with the cellulose nanofiber technology could reach as high as $1 trillion yen or $8.3 billion dollars by 2030.

Wood Pellet Industry & Concerns

And while you’d think that coming up with new ways to utilize something that used to be discarded would be a good thing, it’s also raised all kind of concerns, especially the wood pellet industry. These range from worries about where all the wood material is going to come from to how that affects competing markets for wood fiber, employment and even communities.

A recent study conducted by global forest products industry analyst RISI for the American Forest & Paper Association indicates that subsidies provided by the United Kingdom for burning wood pellets in power plants can have a significant impact on U.S. paper and wood products manufacturers’ ability to compete globally by raising the cost of wood fiber.

“The study clearly shows that U.K. pellet subsidies are market-distorting and significantly increase the ability of pellet producers and U.K. biomass utilities to pay for biomass feedstock here in the United States – from double to five times the going rate,” said American Forest & Paper Association president and CEO Donna Harman. “Without these large subsidies, it would be uneconomic for industrial wood pellets to be shipped from the United States to U.K. power plants. They would lose money if they had to compete in an unsubsidized market.”

This is a point of contention, according to Neil Ward of the FRA, because some feel that those producing wood pellets, especially the large capacity mills exporting to Europe, are “unfairly supported by subsidies…that are coming from offshore…price supports that are imposed by European Union countries to meet supply goals.”

The FRA represents and promotes the interests of forest products industry members that support the wood fiber supply chain, such as pellet mills, including larger operations like Enviva and Drax as well as some smaller ones.

It’s important to note though, according to Ward, that the “pellet market helps to balance out” the decline in fine papers and newsprint demand, which has dropped significantly in the past decade. The dissolving pulp grade, used for products like adult diapers, is really the only pulp and paper segment where the fiber demand is steady and even picking up, Ward commented.

New pellet mills are typically locating in areas where a paper mill has shut down, because these areas are usually strategically located near forest product mills. There is a bit of a difference in the actual raw material that is most suitable for each purpose though, he said; pulp mills prefer live green material while pellet mills prefer drier wood to start out.

This is good for communities because the pellet mills offer jobs that were lost when paper mills closed; however, “a pellet mill doesn’t employ as many people so it doesn’t create as much employment wealth,” said Ward, who pointed out that this is an issue often raised by opponents of wood pellets.

But even though pellet mills don’t employ as many workers, “the landowner value and logging is about the same,” he explained.

A major concern raised by environmentalists and some others is that U.S. forests, especially in the South, may be depleted to produce wood pellets for export to other countries to power energy plants. That’s because the majority of wood pellets produced domestically are shipped to other countries. In 2014, for example, 73% of the pellets produced in the U.S., around 4 million metric tons of pellets, were shipped to the U.K., according to U.S. Energy Information Administration (EIA) data.

Since the introduction of the European Union’s Renewable Energy Directive in 2009, demand for wood pellets has greatly increased, but since forestry is heavily controlled there, countries in the EU have turned to outside sources like the United States to furnish the fuel it needs to keep their biomass plants running.

Almost all of the pellets being exported to Europe from the United States are shipped from southeastern ports, with the bulk of these pellets produced in Georgia, Florida, Alabama and Virginia, which explains the environmentalists concerns about the increase in wood pellet demand impacting southeastern forests.

However, despite the fact that the majority of wood pellets being produced in the U.S. are coming from southeastern forests and eventually ending up in power plants in Europe, a report released late last year indicates there is no real threat to southeastern forests because of wood pellet demand.

That’s because only a small portion of the available inventory is being touched for pellet production, according to the report, which was created by independent forest analysts and economists using U.S. government and marketplace data, and commissioned by the U.S. Endowment for Forestry and Communities, the National Alliance of Forest Owners (NAFO) and the U.S. Industrial Pellet Association (USIPA).

“This study demonstrates in an independent, data driven manner that the industrial wood pellet industry is using an extremely small portion of the available inventory of sustainable low grade wood fiber in the U.S. Southeast,” said Seth Ginther, executive director of the U.S. Industrial Pellet Association. “It also demonstrates that the industrial wood pellet industry is taking the lowest value sustainable wood fiber for use as feedstock, and that the industry is a complement to some of the more traditional forest product industries.”

According to the study, the total removal of wood in the U.S. South for all markets only accounted for 3.3% of the total forest inventory, with pellet exports representing 0.08% of the total inventory.

In 2014, pine removals for industrial pellet production totaled 3.7 million tons or 0.3% of the pine pulpwood inventory and 0.09% of the total pine inventory; while hardwood removals for industrial pellet production totaled approximately 2.4 million tons or 0.2% of the hardwood pulpwood and 0.06% of the total hardwood inventory.

Realistic demand and market share outlooks suggest that U.S. industrial exports of biomass pellets to Europe could eventually rise to 10.8 million metric tons. Annual removals to meet this demand would total 25 million tons, which represents 1.0% of pulpwood inventory and 0.3% of total forest inventory in the South.

“This report should put any concerns about the fate of our southern forests to rest and allow landowners to continue doing what they do best – stewarding our forests to provide forest products and renewable energy while contributing to cleaner air and water and more abundant wildlife habitat,” said Dave Tenny, NAFO president and CEO.

“The value society has placed on goods and services from our forests is the reason the volume of growing trees in our forests has increased by 50% since the early 1950s,” he said.

Tim Gammell agreed that the argument by those concerned with deforestation in the U.S. Southeast is at best weak because most of the wood material for pellets is coming from pine plantations, not old-growth native forests. Pine grows in quick rotations, maturing in 20-30 years, and they are almost always replanted, he explained.

Ward said that some of the wood does come from hardwood forests, which is managed differently than pine because it stump sprouts and grows spontaneously after a harvest. So hardwood forests are not replanted, but will regenerate if the land is left as forests. So forests which weren’t previously managed may come under management, and “that’s an issue for some environmentalists,” he said.

Both types of forests, pine and hardwood, will grow again whether they’ve been replanted or are regenerating if they’re left as forests. “We’re more concerned about pressure on forests from development,” to convert forest land to shopping malls, apartment buildings, and golf courses, for example; because once the land is converted, it is typically never converted back to forests.

Gammell pointed out that while the economics right now don’t support heavier biomass usage, due to the low oil prices, the policies still do support it, meaning that many government initiatives around the word include increased use of wood to produce energy because it is a sustainable source that is widely considered carbon-neutral, although this is another point of contention with environmentalists.

For example, 115 groups recently made a declaration to the European Union demanding that wood biomass be removed from the next Renewable Energy Directive.

Carbon emissions from burning biomass for energy are often greater than the emissions from the fossil fuels they are supposed to replace, said a press release from the Center for Biological Diversity.

While arguments can be made on both sides, one thing that is for certain is that biomass- to-power conversion is a topic that is around to stay, and one which we’ll hear a lot more about in the future, hopefully in addition to some more interesting and new uses for wood fiber.

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