1. Can You Say Polar Vortex?
It wasn’t just cold, it was downright Antarctic. And we heard the same story repeated again and again from our customers – “I thought I had ordered enough wood pellets to get me through this winter, but I came up a ton short”. Now multiply that same experience by the 500,000 stoves in New England and you start to see why there was such a drastic shortage.
The problem was made worse by the extremely cold weather in the Midwest as well. Pellet consumers in the Midwest consumed much more fuel than normal; fuel that might have found its way to the Northeast market. And sadly – according to data on weatherunderground.com, cold temperatures in the Northeast have simply returned to their longer term averages. Does this mean that we should expect this kind of winter every year? Let’s hope not. But maybe you should buy enough pellets each year to get you comfortably through one of these “arctic” winters. Remember, if you properly store your wood pellets they can last many years.
2. Fossil Fuel Head Fake
Most of the pellet stoves in New England are used to supplement the home’s primary heat source – typically gas, heating oil, or propane. Because using wood pellets to heat your home takes more effort than using fossil fuels, consumers must weigh this added “hassle” of wood pellets against their estimated savings.
When the spread in price between pellets and fossil fuels grows, consumers tend to utilize more pellets for heating. But a strange situation developed last year. Decisions were made last spring and fall (2013) regarding which heating fuel to pre-purchase based on low gas, oil, and propane prices. Many consumers chose to purchase smaller quantities of pellets figuring they would rely more on fossil fuels for their primary heat source. But when the prices for gas, oil, and especially propane began heading higher in the early part of winter, consumers began to switch to the now much less expensive option of wood pellets. In basketball, they call this a ‘head fake’. In this market it’s called “pellets sold out”.
It’s no coincidence that the last time we saw pellet shortages was in 2007-2008 when the price of oil rose to almost $150 a barrel. The quick lesson here is that being prepared is your best protection from these “head fakes”.
3. Pellet Exports
Did you know that over four million tons of pellets were exported to Europe in 2013? Granted, much of this export volume is for commercial grade bulk pellets used to replace (or co-fire) coal at European electricity generation plants – and not for home heating.
But these large mills are competing for some of the same raw materials used to produce heating pellets – thereby reducing the amount of wood fiber (a key ingredient) used to produce regular heating pellets. And if you’re a banker looking to invest in this green energy sector, which mill are you going to lend money to help expand their production? The mill with a ten year supply agreement to a German utility – or the mill that sells pellets to a bunch of mom-and-pop stove shops? That is why we are seeing tremendous new investment and capacity of utility pellet plants down south where labor and raw materials are less expensive; and relatively little expansion of mills producing heating pellets.
But it isn’t just utility pellets being exported to Europe. Pellet stoves and whole-house pellet boilers are very popular in many countries including Germany, Italy, and Austria. And because local European mills have failed to keep up with this demand, pellet fuel suppliers have turned to the United States and Canada for a new source of supply. For example, some wood pellet suppliers right here in the Northeast are already shipping large volumes of bagged pellets overseas. It’s hard to estimate how much volume is being redirected to European customers, but it’s significant – and getting bigger every year. And isn’t it interesting that exports get so little attention and media coverage in relation to this shortage?
4. Horsing Around
Still another competing use for wood pellets that gets little attention is its use as horse bedding. Equine wood pellets provide a couple nice advantages over traditional shavings including being easier to store and more economical. Equine pellets also do a better job of absorbing horse urine – ala cat litter – and have been demonstrated to absorb up to 3 times as much as shavings. And because they are free of any chemicals, mold resistant, and dust free – many consider wood pellets to be healthier and safer for horses.
Granted this market is still relatively small, and probably didn’t have as big an impact on the shortage as those reasons already discussed. But supply agreements with large stables are both profitable and highly valued – and would merit suppliers keeping these customers well stocked with horse pellets ahead of heating customers.
5. Box Stores Don’t Get A Free Pass
You can’t explain away pellet shortages without mentioning the effect that the mighty box stores have had on this industry. Box stores have become a major supplier of wood pellets in the last five years. Their aggressive pricing has gotten them many customers – but at a major cost to the stores themselves, the rest of the industry, and the customers.
By selling pellets so cheaply (and in some cases below cost), box stores have engaged in a form of ‘predatory pricing’ – defined as setting pricing so low as to drive competitors out of the market. These low prices create much higher demand for box store pellets than would otherwise exist. Many pellet retailers find it difficult to compete against the box stores and have all but given up trying. As a result, the number of competitors in the pellet market is now much smaller – and consumers are provided with less choice.
Mills that sell to the box stores usually compete on price alone – and have tremendous incentive to cut costs. But here’s the rub. Cheaper bags and skids, lower quality raw materials, and reduced quality control standards are just some of the ways mills might adjust to the box store pricing pressure.
Furthermore, pellet mills that don’t sell to box stores are also being affected as they struggle to compete against these subsidized box store prices by focusing on other alternative products (like wood bricks) or ‘higher end’ premium pellets. Pellet mills like these typically produce lower volumes, and are unable to quickly scale up production to meet higher demand.
6. Stove Sales Growth
With the last run-up in energy prices in 2008, pellet stove sales reached as high as 100,000 annual units – and consumers were put on waiting lists for new stoves. But as oil and natural gas prices have come down significantly in recent years, so too have the sales of pellet stoves.
2013 saw the return of sales growth with the corresponding spike of natural gas and propane. Some estimate that between 50,000 to 60,000 new pellet stoves were added in 2013. This translates into over 150,000 new tons of pellets required to feed them – the equivalent of two medium sized pellet mills total annual production. And with new state subsidy programs becoming available – this number is only going to grow.
7. Drill Baby Drill
Pellet exports and horse bedding aren’t the only new uses for wood pellets that are having an impact on this shortage. Pellets are now being used commercially by the oil and gas industry for a number of important roles. First, wood pellets make a great cleaner for absorbing oil and solvent spills. And because they are better and cheaper, pellets are replacing traditional clay based products that had been in use for decades.
Wood pellets are also used to filter and clean water used in fracking, as well as helping to slow the fluid loss for drilling operations in porous layers. And as a result, drillers are able to use much less water in the process.
Ok, so some of our heating pellets are being used by the oil drillers. But at least you can take solace in the fact that they are also being put to use in helping to clean up our environment.
8. Another Mill Bites the Dust
Making pellets is dangerous work. If the dust from the manufacturing process isn’t managed properly, it can cause explosions and create dangerous fires. Unfortunately, that’s exactly what happened to a few mills this winter. In fact, fires and explosions affected two mills right here in New England. One mill was able to quickly recover from a fire – but the other mill has been shut down and has long since stopped shipping any new pellets.
9. Pellet Shortages Beget More Shortage(Mike Stobe/Getty)
As soon as the media started covering and reporting on the pellet shortages, what little availability disappeared almost overnight. Should we be surprised? Much like food and water, heat can be considered a must-have necessity that can easily lead to hoarding, desperation, and price gouging. We saw examples of gas shortages with hurricane Katrina, and again with Sandy. Even a big winter storm here in New England can cause a stampede to the grocery store where the shelves quickly turn empty. The same psychology was unleashed this winter with pellets. When pellet retailers start arming employees with guns – as some news sources reported – you know things have gone from bad to worse.
10. Pellet Mills
The wood pellet industry is historically a tough, low margin business that is hard to turn a profit. Pellet mill producers simply can’t afford to have very much unsold inventory in their warehouses come spring. Excess inventory can be devastating to a mill’s financial health (at least in years where there isn’t a pellet shortage). Therefore each year, they carefully estimate how much production they’ll need to meet demand – and try to minimize any overproduction and excess inventory.
This job of estimating demand is made much harder by the fact that so many pellet consumers now wait until the last minute to buy their fuel – long after the mills have finalized their production plans. So when we endure an extremely cold winter like we had this year and demand is underestimated – it’s too late. Six months prior, the mills have already bought (or contracted) the raw materials needed to produce their volume targets. Even with mills only running at partial capacity – many pellet mills are simply unable to dial up more production. In many cases, there just isn’t any raw materials to do so.
An important takeaway in all this is that we may not have a capacity issue with the pellet mills. Rather, we have an order timing and weather prediction issue. But with so many new and competing uses for wood pellets, future shortages can’t be ruled out. By buying your pellets in the Spring (or early Summer), you’ll not only secure your fuel ahead of the crowd, you will also help the mills better plan for winter demand.