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Wood pellet exporters gain advantage from new supply model

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Wood pellet exporters gain advantage from new supply model

August 03, 2012 - 07:39
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RICHMOND, VA, Aug. 3, 2012 (RISI) -As pellet exporters ramp up in the South (soon to be consuming 10 million tons per year of wood), strategic fiber sourcing should accrue to their advantage over traditional pulp and paper competitors.

Aggressive and well-financed exporters gain that advantage, in part, by deploying a new procurement model - one aligning them much closer to suppliers, all of them hungry for a market more reliable, and predictable, than pulp and paper.

And with loggers in severe financial distress and stumpage resources stretched thin in several areas, a new approach is essential, and appears underway in the South. Advantage pellets.

It seems only logical to have a strong supply chain. But this "new" notion stands in stark contrast to week-by-week practices among pulp and paper across the South, where low-cost and even lower-commitment "gate wood" is dominant. That method has sufficed lately as it has distinctly been a buyers' market for pulp and paper for at least two years, during which suppliers had no leverage - and pulp mills had few competitors - until now.

Long avoided by pulp and paper, new elements being rolled out among pellet players include guaranteed, long-term volume orders to loggers and timber owners, as well as binding commitments sufficient for bankrolling efficient but expensive harvesting crews.

The success of those new strategies will be tested over the coming quarters. Either way, pellet mill managers are betting big on freshly committed suppliers, most of them happy for any alternative to the status quo.

All wood buyers are watching.

To be fair, several traditional pulpwood consumers have "core" or "preferred" suppliers, but only for a fraction of their annual pulp furnish. And those commitments can be revoked overnight, some stunned loggers learned in recent months.

Still, new pellet producers have a steep hill to climb in the next few years: At least 14 million tons of demand growth is expected, a three-fold increase in the South, requiring hundreds of viable crews.

And, importantly, several pulp and paper mills can out-compete pellets, pricewise. Depending on finished product, some grades can afford considerably higher prices for woodfiber, sometimes double, according to RISI analysis. Advantage pulp and paper.

By the numbers.As the pellet sector matures into a major consumer, the South's share will jump to almost 7 million tons this year, up an impressive 38% from 2011, according to ongoing analysis by RISI (Figure 1).

Looking ahead, woodfiber consumption by the pellet group is expected to surge more than 300% in the South between 2011 and 2017, to at least 14 million tons per year, excluding any additional announcements (and some significant ones are expected soon). For details, see RISI's forthcomingNorth American Bioenergy 5-Year Forecast.