It’s common knowledge in the hearth industry that predicting sales of pellet stoves requires the skill of Nostradamus; sales are up one year and down the next. The same is also true of the availability of pellet fuel; one year supplies are ample, the next year there are shortages.

Unfortunately, the two products are seldom in sync. When pellet stoves are selling well, pellet fuel is often in short supply, which is exactly what occurred this year in the U.S. Northeast, North America’s strongest pellet stove market by far.

“The fuel shortages we’ve experienced this year result from a confluence of factors,” says Jennifer Hedrick, executive director of the Pellet Fuels Institute (PFI). “We had a long, hard winter in the East last season, and that depleted pellet inventories at all levels – mills, retailers and consumers. There was no inventory in the pipeline while consumers (understandably) placed much bigger orders, some three times as much as last year, in an effort to be prepared for the coming winter season. Now, with pellet sales flat in the West – there’s more production than demand – many of the western mills are sending pellets to the East to help out.”

“This always happens after a cold winter,” says Lori Hamer, president of Hamer Pellet Fuel. “Consumers waited until this September and then doubled up their orders. We’re running a lot more production hours to catch up, and we’re taking care of our regular customers, most of whom placed larger orders. We’ve now produced a huge increase, thousands of tons more fuel this year, even more than the big year of 2012.”

“Our delivery trucks are running flat out,” says David Nydam, CEO of WoodPellets.com, an East Coast pellet distributor. “Our biggest issue has been getting pellets. The mills are running at capacity, and smaller retailers are having trouble getting product. It has been difficult for anyone to get reorders.”

“Another problem was that last season never ended,” according to Rick Whiting, Retail Marketing manager for American Wood Fibers. “We blew out our inventory last November and December, and by January everyone was out. Demand stayed strong into April when we were still selling while trying to build inventory for this season.”

“It’s tough to play catch-up especially during our record shipments,” says Bruce Lisle, president of Energex America. “With customers loading up, we’ve had to run full bore for a year and a half to keep up.”

Whatever the reasons for the shortages, not every pellet fuel retailer is happy with the response they’re getting from some suppliers.

Tom Swan, co-owner of Black Swan Fireside Hearth and Home in Newtown, Connecticut, became so frustrated with the lack of response from one of his three pellet suppliers, a multi-mill northeastern-based producer, that he spent $60,000 on a tractor and trailer to pick up his loads at the mills (he didn’t want to provide the supplier with any excuses).

“We saw the shortages coming in May, so we placed our orders early, as that supplier pushed us to do. But in September we were supposed to get four truckloads but only received one.” In late September, Swan received a letter from the supplier saying, “We regret to inform you that we will not be able to fulfill your Q4 2014 request.” The letter cited “significantly stronger sales during the summer months … resulting in dramatically lower inventories than planned.”

Swan was fit to be tied after having his 15 truckload order suddenly and unexpectedly cancelled. “Demand for us is such that we could deliver a truckload a day to homes until after Christmas,” he says. Both of his other pellet suppliers – Energex America and Hamer Pellet Fuel – “stepped up to help.” He has already ordered 20 truckloads for delivery in the first quarter of 2015.

Pellet Demand Outstrips Production in the Northeast

Sawdust, raw material for pellets.

While some are hoping that pellet production will catch up to demand, forecasts say it may not. According to the PFI, domestic U.S. demand for pellets was 2.3 million tons in 2013, not including three million tons for export. Demand was expected to increase to 2.7 million tons in 2014 and rise to 4 million tons by 2018.

However, while U.S. pellet production doubled from 2010 to 2013, only marginal growth is forecast for the next three years, according to Seth Walker, associate economist for Bioenergy for RISI, an information provider for the global forest industry.

“Production capacity has never exceeded demand in the Northeast,” says Walker. “With 50 to 60 percent of U.S. pellet demand, the Northeast has always been a net importer of pellets. With only 30 percent of U.S. pellet capacity produced in the Northeast, demand in that region now exceeds capacity by 30 percent.”

As the East scrambles to find more pellets, the West has more production than demand.

“Sales were up through September, but they slowed in October because of our warm weather,” says Bob Sourek, owner and chairman of Bear Mountain Forest Products in Cascade Locks, Oregon. “We’ve been shipping product east for many years, but our customers can be assured we have plenty of pellets.”

Rob Davis, president of Forest Energy in Show Low, Arizona, echoes Sourek’s statements. “Now we’re hoping for a cold winter here in the West.”

“In contrast to the consumer panic-buying we’re seeing in the East, there is no sense of urgency in the West,” according to Ken Tucker, president and CEO of Lignetics with one plant in Idaho and two in the East. “Consumers in the East are freaking out over what happened last year, but the West is an entirely different animal. We actually have too much production in the West.”

Pellet Stoves Selling Like Hotcakes

With more than 1.5 million pellet stoves being burned in North American homes, according to the PFI, there is no shortage of demand for residential pellets. But the sales surge of pellet stoves in 2013 and even greater sales this year, will certainly increase the pressure on eastern fuel producers.

Pellet stove shipments were up 13 percent in 2013, and pellet insert sales were up eight percent. Matching this year’s consumer panic demand for pellets, through the first half of 2014, pellet stove shipments were up a whopping 161 percent with inserts up 79 percent.

The Northeast dominates U.S. pellet stove/insert sales, accounting for 53 percent of 2013 sales, according to the Hearth, Patio & Barbecue Association. The Great Lakes region is runner-up with 24 percent, followed by the Pacific region at 10 percent, the Central region at nine percent, the Mountain States at three percent and the Southeast at one percent.

Few Raw Material Shortages

New construction is stimulating demand for lumber.

Shortages of raw materials, at times a problem for pellet producers, have slowed some production this year, but not to any great extent. Western producers indicate they have plenty of raw materials, while those in the East report that, even with an upswing in new home construction and thus more sawmill activity, raw materials are in tight supply because the long, cold winter kept many loggers out of the woods.

Also, there is increasing demand for the same raw materials for other uses such as chipboard production; that has caused some increases in the cost of those materials. “Fiber is fiber,” says American Wood Fibers’ Rich Whiting. “There are new demands for our raw materials from huge pellet mills overseas for commercial-use pellets. And the growing gas and oil industries are using these materials as absorbents.”

“We lost some sawmills during the recession, and some in the East never started back up,” according to Gordon Murray, executive director of the Wood Pellet Association of Canada. “All Canada has raw materials in tight supply, except in Ontario.” But most pellet producers see the raw material problem easing as sawmill activity picks up due to continued increases in new home construction.

Pellet Prices Remain Fairly Stable

Even with some raw material costs going up, wholesale and retail prices for wood pellets have remained fairly stable, particularly in the West with its flat demand. “Pellet prices need to go up, particularly with the pressure of increased raw material costs,” says Rich Whiting. “Even at $300 or $350 a ton retail, pellets are still a bargain versus heating oil.”

But Marth Company’s T.J. Morice points out that some mass merchants are using pellets as a loss leader, offering retail prices as low as $200 a ton with $240 to $280 a ton commonplace. “We just don’t value heating with biomass as we should,” he says. “Pellets at $400 a ton is like propane at $2.16 a gallon.”

“Prices in the East have inched up a little bit, but nothing substantial,” says Energex Americas’ Bruce Lisle. “Current heating oil prices are the equivalent of pellets at $450 a ton retail.”

Retailer Tom Swan says his retail prices vary from $285 to $305 a ton depending on the quantity purchased. “Ten years ago, they were $265 a ton, but now I’m only making about 15 percent gross profit.”

Heating Costs Going Down, Temperatures Not So Much

Home heating costs from natural gas, heating oil, electricity and propane are forecast to be less this heating season, which might take the edge off the panic demand for pellets. According to the U.S. Energy Information Administration (EIA), heating with natural gas is expected to cost five percent less than last winter; heating with heating oil 15 percent less, heating with electricity two percent less and heating with propane 27 percent less. That’s while crude oil prices hover around $80 a barrel.

“Less severe weather means lower expected household heating bills this winter,” says the EIA. “According to the latest forecast from the National Oceanic and Atmospheric Administration (NOAA), temperatures are expected to be warmer than last winter. The extreme weather patterns last winter elevated demand for all heating fuels.”

“A repeat of last winter is not particularly likely,” says Mike Halpert, acting director of NOAA’s Climate Prediction Center. But it should be pointed out that NOAA did not predict last winter’s weather extremes.

Commercial and Export Markets

For most readers, wood pellets bagged for residential use are their primary interest, but pellets for commercial use are becoming a rapidly-growing market for pellet producers. “The commercial market is steadily increasing while the bagged market goes up and down,” according to Energex America’s Bruce Lisle.

This growth in pellet markets other than residential is one reason the PFI recently left the covering of the HPBA to become a stand-alone trade association. “The mission of the PFI is to be poised for developing new markets for pellets,” says PFI’s Jennifer Hedrick. “As the markets change, we have to look at other uses for biomass, not just the residential market. Pellets are becoming a more attractive commercial biomass for use in schools, poultry production and hospitals. We’ll continue to see growth in this market, but still not the same growth as outside the U.S.”

While the domestic commercial market for pellets is growing, it pales in comparison to the enormous growth in the export market for wood pellets. Almost half of U.S. pellet production, or three million tons, was exported in 2013 to the UK and Europe, and that number is expected to shoot up to eight million tons by 2018, according to Hedrick. That demand is being driven by the policies of the European Union requiring that at least 20 percent of the power consumed in the EU be produced by renewables by 2020.

Exporting is even more dominant in Canada, with more than 90 percent of its production going overseas, says Gordon Murray.

“We’re projecting that the total overseas consumption of wood pellets will grow from around 25 million tons now to 50 million tons by 2020, with most of that growth in Europe. In contrast, we see the North American market growing only six percent by 2020. North American consumers are still too in love with fossil fuels.”

Murray points out that electricity generation is the cause of such high wood pellet demand overseas. However, in Italy, the most rapidly growing pellet heating market in the world, according to Murray, heating with pellets is less expensive than using natural gas, heating oil or electricity, with residential pellet consumption this year expected to be 3.2 million tons.

It’s no wonder that Italy has such high demand for premium wood pellets for heating. For the past six years, Italy has averaged 200,000 pellet stoves sold per year, while the U.S. market has averaged 50,000 stoves, according to RISI’s Seth Walker.

While the vast majority of pellets produced in Canada and in the southeastern U.S. are being exported, most of the long-time U.S. pellet producers continue to pursue the domestic market.

“We looked at exporting,” says Lignetics’ Ken Tucker, “but our plants are too far from seaports. Plus the margins are less, there is too much red tape and there is a fair amount of risk. Some newer producers are doing it because they have never developed a domestic market.”

“Most of the low hanging fruit in the export market has been picked,” says Walker, “but exporting is full speed ahead.” Lest anyone think that North America is the only supplier of pellets to Europe, think again. The largest pellet supplying country to the hot Italian market is Austria with another 50,000 tons coming from other European countries. The Balkan states are Europe’s largest pellet producing region, and Europe in total produces more wood pellets than North America, according to Walker.   

More Mills Qualify for PFI Quality Mark

Pellet Fuels Institute PFI Graded fuel label on a bag of Curran pellets.

Six pellet producers have now qualified for the PFI standards program and can now display the PFI Quality mark on their products. These producers are American Wood Fibers, Curran Renewable Energy, Forest Energy Corp., Lignetics, Marth Company and New England Wood Pellet; these fuel manufacturers now account for almost half of the U.S. pellet production, according to the PFI.

“We’re making a big deal about being qualified, and we’re promoting it,” says American Wood Fiber’s Rich Whiting. “We’re absolutely sold on it. The program has made a significant improvement in our product quality. Our customers in this commodity market are pleased that we qualify. It’s also a good thing for stove manufacturers, with better, more consistent performance from their stoves when PFI Quality pellets are burned.”

Whiting does have frustration with the possible confusion between the PFI member logo and the PFI Quality mark on the product, allowing some non-qualified suppliers to tout the member logo as a quality mark. The PFI standards committee is addressing that concern during its periodic reviews, revisions and improvements to the program, according to Chris Wiberg, manager of Biomass Engineering Services for Timber Products Inspection and co-chairman of the standards committee.

“We’re planning a distinctive new membership logo,” he says, “something completely different from the quality mark, something that strips away all product guarantees from the membership logo.”

Forest Energy Corp., the latest pellet producer to qualify, is concerned that most retailers don’t know about the PFI standards program and the quality mark, says Rob Davis, president. “If the pellet stove manufacturers would request that only PFI Quality-marked pellets are to be used in their stoves, it would make the program almost mandatory and help the performance of their stoves.”

“We have information on each ton we have produced going back 10 years, so it was easy for us to become PFI Qualified. We believe in it,” says Marth Company’s T.J. Morice. “When raw materials are in short supply, being PFI Qualified you can only put certain things in your pellets, but mills that are not PFI Qualified can use anything in their pellets including pallets and trash wood.”

A number of other pellet producers are working toward qualification for the PFI standards program, but not all are planning to jump on board. “We’re not PFI qualified,” says Hamer Pellet Fuel’s Lori Hamer. “Our own in-house testing is more stringent, testing every five tons produced rather than the every 1,000 tons produced as per the standard. So we don’t see any advantage for us, and it would involve extra cost that would drive prices up.”

“All the pellets we sell are premium grade with quality well beyond the PFI standards,” according to WoodPellet.com’s Dave Nydam. “We view the PFI standards as a minimum standard. The PFI standards are good for our industry, but they are not a major factor for us since everything we sell exceeds those standards.”

In addressing this year’s pellet shortages, “It’s time to realize that the wood pellet business is not a six-month industry,” emphasizes PFI’s Jennifer Hedrick. “It has become a 12-month industry, and we all have to plan ahead. Dealers can’t wait until the fall to get orders in.”

We might add, and mills must honor and fulfill the orders they accept.