Wood Pellet Market

    If you’re searching for a way to turn wood waste into profit, the next big idea may be as close as your wood stove. Pellet wood is making headway in the heating industry by becoming a staple in residential and commercial markets. With fuel costs on the rise, pellet fuel provides forest product companies another market for fiber and a new business to consider.

    Pellet Fuel Institute President Bruce Lisle lauds the industry’s success over the past year. In the wake of recent demand, pellet wood prices have doubled in regions across the U.S. With petroleum prices on the rise and spot shortages occurring on the east coast, manufacturers from the west and east coast retailers have adjusted prices to account for additional transportation expenditures.

     “By September 2005 the pellet industry shipped 15.2% more product than 2004. We also expect to ship a lot more in the third quarter.” Bruce explained that the increase in pellet fuel products may have as much to do with availability as it does with consumer demand for a cost-effective heating alternative. According to a 2005 industry survey of pellet wood producers, production increased by 35%. Bruce attributes this to the fact that facilities have stayed on line for long periods of time; in addition, several new production facilities have opened over the last year. Bruce concluded optimistically that “the combination of new facilities and increased production rates means that the industry could possibly reach 47% more capacity by the end of the fiscal year.

Market Influences

    Pellet wood mills across the U.S. are working at full capacity to produce as much product as possible to meet the increased demand.

    Everett Follette of Heartland Pellet explains that his Spearfish, South
Dakota facility has a yearly production goal of 26 thousand tons for the year. During a summer month, the facility typically produces only four to five
hundred tons but reaches a peak production at three thousand tons per month during the winter. Everett said, “We probably could double that, but we’re currently using all the sawdust that’s available to us.”

    While other lumber mills do exist in the area, many of them currently have long-term contracts with a local particle board manufacturer. As a result, the nearest available source of sawdust is over three hundred miles away. Naturally, freight costs immediately negate the benefits of procuring materials and increasing production. Everett cites Hurricane Katrina and recent natural gas hikes as the two main reasons for the increased demand this year.

    Lori Hamer of Hamer Pellet Fuel Co. in Kenova, West Virginia agrees that Hurricane Katrina was the catalyst for an unprecedented surge in pellet wood demand.

    Lori said, “We didn’t feel the pinch until after the hurricane hit in September. That’s when we went on allocation.”               Hamer Pellet Fuel Co. then restricted its shipments to maintain contractual agreements. Even with surplus from the previous winter, Hamer Pellet Fuel Co. acquired new customers in the New England area, which further exacerbated its shortage plight. Additionally, the unusually mild winter has posed production problems for its two plants, while not affecting its sales.

    “We’re able to produce more because there aren’t as many snow days, but [saw] dust is down,” Lori said.  “Sawmills are out of logs because they’re wet.”

    Local lumber shortages forced Lori’s company to import lumber greater distances, thus greatly increasing expenses to handle freight charges.

     “Dust cost increased well over 60%,” she says. Luckily for Hamer Pellet Fuel, supply overshadowed the peculiar winter weather, and it met its seasonal production goals.

    Terry Fauerbach of Hearth and Homes in Mechanicsville, Va. sells pellet stoves and pellet fuel. She can’t even keep up with pellet stove sales. “Back in October, manufacturers were so backed up, there was an eight to twelve week delay.” While understanding that the tremendous demand for pellet wood has catalyzed wholesale prices, she sells pellet fuel at retail for $5.49 per 40 lb. bag. “That’s the highest I’ve ever seen it,” Terri adds.

    While some consumers may balk at the price of heating system conversions, Terry insists that pellet stove systems will pay for themselves within the first two winters of use.

    “I know from personal experience that it only costs about $160 a month to heat a 1500-1800 square foot house, as opposed to the $400 a month I’m currently spending for natural gas.”

     Even though the United States experienced an unusually mild winter, average expenditures for the heating season were noticeably higher this winter. The Department of Energy estimated that prices for natural gas and heating oil would rise 43% and 32% respectively. Furthermore, propane was expected to increase by nearly 25%, while electricity remains relatively low with only a 3% increase from last winter. Overall, that’s almost a 33% average increase since the 1999-2000 winter.

    Prices for pellet wood are considerably cheaper than traditional forms of heating like natural gas, oil, and electricity. December forecasts for wood pellets made by the Pellet Fuels Institute suggested that wholesale prices range anywhere from $110-$164. As prices fluctuate along with demand, the prices of pellet wood peaked over the winter at approximately $200 per ton in some areas, or a dollar for ten pounds. At wholesale prices, that translates to $4 dollars a day to heat a home with a more efficient fuel source. Realistically, prices may reach to $7-$10 per bag by the time a forty pound bag reaches a residential pellet stove.         Traditional cord wood runs $80 per ton, but homeowners may have to invest at least four to five times that amount to get through the winter. The lower price of cord wood directly correlates with both its inefficiency as a fuel source and the amount of time spent on procurement and preparation.

Energy Tax Rebates

    The Energy Policy Act of 2005 makes consumers eligible for tax rebates for using energy efficient heating sources. Gas, oil, and propane furnaces and hot water boilers must surpass the U.S. Department of Energy’s annual fuel utilization efficiency rating (AFUE) 95, while also meeting installation criteria, in order to reap the benefits of a $150 tax credit. System efficiency averages 80%, which is still considerably higher than the majority of oil and natural gas systems, but wood pellet stoves are currently on the market that exceed the AFUE 95 rating.

    While the Energy Policy Act of 2005 requires additional action before consumers can reap the benefits of tax rebates, the proposal provides sound incentive for wood stove retailers and pellet fuel distributors to expand their markets.

    According to the Hearth, Patio, and BBQ Association, pellet appliance sales doubled between 2002 and 2004, from 33,978 units to 67,415 units. Stoves typically cost $1600 to $3500 and household heating system conversion may cost up to another $500, but the energy tax credit may convince consumers during the next few years to invest heavily in wood pellet fuel.

    Commercial and industrial heating systems that require natural gas, coal, or heating oil can also be retrofitted to accommodate wood pellets as a fuel source. The Pellet Fuel Institute claims that smaller heating systems producing 500,000 Btu/hr need to make only minute changes to the burner, plus the addition of a combustion conveying system and a storage container. Furthermore, larger systems that produce 3,000,000 Btu/hr typically pulverize pellets before feeding them into the burner, so the retrofit is even less of a hassle.

Pellet Manufacturing

    Pellet manufacturing is a fairly simple process, but does require considerable coordination. The process begins when materials such as sawdust and wood chips are delivered to a mill. Usually, the material is stored in piles, preferably protected from the elements, until it is transported via a front-end loader to an in-feed system. The in-feed system then separates chips from sawdust. Chips are then ground and recombined with the sawdust and transferred to a silo which is metered into a dryer. Air is fanned into the dryer to separate water vapor from material; the moist air is then exhausted. Fine and course sawdust are again separated, and the course sawdust travels through a hammer mill to compress the material. Fine sawdust is recombined with the compressed and then sent through a pellet mill, where pellets are actually formed in various sizes depending on the die size used. Pellets then cool and are conveyed to a storage facility, where they await packaging and transport.

    Pellet manufacturing systems are composed of pellet mills, dryers, coolers, conveyor systems and control panels. Steve Ross from Equipment Dynamics, Inc. estimates that the average cost for complete installation runs $2.5-3 million, depending on the size and design of the pellet mill. Most mills already have storage facilities available, that may reduce costs by several hundred thousand dollars.

    Equipment Dynamics is an authorized dealer of Bliss Industries, Inc. Currently, the B-200A-141 pellet mill is in popular demand for companies joining the pellet fuel business. Total drive power peaks at 300 hp, and the motor shaft runs at 1200 rpm. According to Steve, that’s enough power to produce four tons an hour. Even if pellet prices dropped back down to only $80 per ton, a small mill could still make $2.8 million in its first year if it operates every day. That means a pellet mill system could pay for itself in its first year of around the clock operation.

    Sprout-Matador, a division of Andritz, Inc., offers the Model 26 LM Pellet Mill which produces anywhere between four and six tons per hour, depending on variables like die size. Its 400 hp variation is considered the most universal and economical, producing on average 3-5 tons per hour for a base price of $350,000. That price, of course, does not include dryers, control systems, conveyors, or storage facilities.

    Earl McKibben, a senior systems engineer with Sprout-Matador, advises potential buyers to consider maintenance costs, which may lead to roughly $2.50 per ton just for the individual pellet mill.

    “Die life on wood waste will vary from a good life of approximately 3,000 tons downward, depending upon the amount of abrasive material,” said Earl. He adds that replacement costs depend on variables like whole size, and die thickness. The average 26” replacement die typically runs $3,000.

    The lucrative pellet fuel industry proves tempting for lumber companies hoping to expand their markets. Nature’s Earth Pellet in Reform, Alabama originally dealt with assorted wood pellet products like natural cat litter. Phil Cone of Nature’s Earth emphasized, “pellet [fuel] is a new end of our business. Since we’re a small company, we’re always looking to increase business.”

    This is the first winter season that Nature’s Earth Pellet has sold wood pellet fuel, and presently they maintain production of 100 tons a week. As a result, gross profits have increased by nearly $75,000 a month. Phil says he intends to expand next year based on the initial success by adding another line in the warehouse.

                Lori Hamer predicts that the industry will enjoy at least another few years of expansions, “[the industry] expects to be adding over 300,000 tons of available pellet fuel for retailers by next winter, and new plants are opening constantly.” Consumer popularity has the pellet fuel market booming, and taking advantage of the fledgling market could be a wise decision for some lumber and pallet companies.