Key Succes Factors in Wood Pellet Production in France

Executive summary
Wood pellets is a growing market in France (see Wood pellets in France), and the key success factors for a producer are:

• Raw materials: the secure access to raw materials at attractive prices over the medium term
• Logistics: the location of the production plant(s) in areas with easy access to raw materials
• Economies of scale : the size of plant must be about 50.000T capacity in 2013. Bigger is better as long as there is access to raw material nearby.
• Distribution: vertical integration into distribution can create barriers to entry for this commodity product

In addition to competition from local producers, there are potential imports from countries with large forest and large scale producers (Russia, Canada or the USA) into Europe.

The product
Wood pellets are essentially a commodity. There are two main types of pellets: industrial pellets used in power plants or large factory boilers, and pellets used in residential homes. This article focuses on residential pellets, since industrial pellets are not commonly used in France because wood chips (plaquettes) provide a better alternative (http://www.enplus-pellets.eu/wp-content/uploads/2012/04/Industrial-pellets-report_PellCert_2012_secured.pdf)
Most residential customers will require certified pellets since the warranty on their equipment may become void if they burn non certified products. In addition, high quality pellet generate less smoke and ashes, which are both positive attributes for a residential user. There are currently 2 main labels, the French "NF Qualite Haute Performance" and the German DIN+ label. Since boiler / stove producers tend to be located in Northern Europe, the DIN+ certification is the most used. Certification provides with minimal characteristics in terms of energy content, pellet size, presence of particles, and many other parameters.
Packaging does not allow for a significant differentiation. Low volume users will buy 10kg plastic bags, which can have a brand / image on them, while large users will have their pellets delivered by blowing trucks: pellets are "blown" from the truck into the storage area of the customer through a large plastic hose (for 1T+ delivery)
Since most if not all pellets are now certified, there are very little differentiation.

Cost structure


Suppliers
The critical raw material is wood by products, which the key to DIN+ compliance. Too much oak or too much bark, and the pellet is not compliant anymore. It is also key to be placed close to the raw material supply since about 45% of it consist of water and therefore it is heavy to transport. This means that areas with large pine forest are excellent production location (Franche Comté, Auvergne, Vosges, Landes).
Wood pellets producers compete with other users of saw dust such as particle boards, cellulose manufacturers. In addition, raw materials represents approximately xx% of total costs for a large size manufacturer. It is therefore key to secure access to a steady supply of raw materials at attractive terms.
Producers located within a natural region of supply and having secured access to reasonably priced materials are at an advantage.

Size
As usual, size does matter. There are 2 main steps in wood pellet production: the elimination of excess moisture (heating using a large boiler) and the compaction of raw material into pellets. Both production steps benefit from enormous economies of scale. For example, the cost of a 1T/hour press is only 20% more than that for 500kg/hour. Efficient plants should work continuously to maximize equipment utilization and minimize the heat ramp up time on the drying equipment.
Plants with a production capacity in excess of 100.000T/ year have a distinct advantage. This number may increase over time with the development of the market.

Customers
There are 3 types of customers for a pellet producer
1) Wholesalers
2) Energy product distributors
3) Individual customers
The sale price is different by customer type, mainly reflecting different sales and the logistics costs. It is preferable to sell directly to customers or to distributors and create a direct relationship and some barriers to entry.
Prices are fairly standard and they are published in Germany (http://www.depi.de/de/infothek/zahlen_und_fakten/) and at an Amsterdam based stock exchange, ICE Endex (http://www.iceendex.com/market-results/futures-markets/iceendex-wood-pellets/)
Having a proprietary distribution network (with the associated sales force, cost of storage and logistics) can be a differentiating strategy.

International markets
Competition can take many forms, but local (French) producers should be mindful of the threat of imports. Wood pellets usually don't travel long distances (more than 1000km) unless transported by ship to minimize the transportation cost. This allows for international competition in border regions (for example pellets produced in the Belgium Ardennes region and exported in Champagne). In addition, some French retailers have started distribution of Russian pellets which are shipped out of St Peterburg.Vyborg has recently opened a 1MT/ year plant in Vyborg (http://www.canadianbiomassmagazine.ca/index.php?option=com_content&task=view&Itemid=132&id=2375). Along the same line, German energy producer RWE has built a 750.000T/year pellet plant in Georgia (USA) to fire an Amsterdam power plant (http://www.gabiomass.com/). Overall the USA is now a large exporter of pellets into Europe (http://www.canadianbiomassmagazine.ca/content/view/4084/133/).This is mainly industrial pellets and is marginal for residential pellets at the moment, but it needs to be monitored.

Wood pellets market in France

Wood Pellets in France (2012)

The Market

The Product

The ongoing expansion of fluctuating renewable energy sources, particularly wind power and photovoltaic creates a need for “base load” controllable power plants able to stabilize the grid. Biomass is therefore becoming an increasingly critical part of renewable energies.

Wood pellets are a type of fuel made from compacted wood dust. Wood dust generally comes from sawmill residues, but also from recycled materials (e.g. wood boards) or from wood cutting residues (e.g. branches)

The manufacturing process is very simple:

1)      “Fresh” sawdust is gathered and stored (humidity at 45/50%)

2)      Some of it is burned to reduce humidity levels to about 10%

3)      It is then grinded and compacted into a pellet using a high pressure press (diameter of 6 to 8 mm)

4)      Wood pellets are stored and delivered in bulk or in bags.

Compared to traditional logs, wood pellets present several advantages as a fuel:

1)      It is consistent in quality and this is certified (norm DIN 51731). This enables fine tuning of the boilers to increase yield

2)      With very low humidity, pellets generate far less ash (lower burner maintenance) and emissions. They provide approximately 4.7 to 5.2 MWh/ tonne (allowing for a smaller storage area). One ton wood pellets is approximately 0.42 TOE (ton of oil equivalent).

3)      Therefore pellet boilers can be fully automated like boilers using other energies (gaz, electricity or oil) and can also be used in co-generation installation

Compared to woodchips, pellets provide a consistent quality fuel at a slightly higher cost. Woodchips currently require much bigger boilers than wood pellets and make them unsuitable for residential homes.

Compared to fossil fuels, wood pellets have the enormous advantage of being a renewable resource, and to generated far less CO2 emissions since theoretically emissions are captured by forests that will be used as fuel in future years. The downside is higher particles emissions compared to natural gas for example.

Finally, wood pellets can be torrefied to both increase the energy density and make the product hydrophobic. This reduces transportation costs and simplifies storage, and is the preferred form of pellets used in coal plants.

The Competitive Position regarding other energy sources

With an average cost of €224 /ton in 2010 and energy content of 4.7MWh at 95% efficiency, wood pellets cost €4.5 / 100kWh, which compared favourably with other domestic usage energies, as shown in the following chart. Wood pellets are not only a renewable resource, but at current market price, it is competitive with other energy sources for residential heating. Larger industrial boilers (e.g. district heating) can use woodchips or torrefied pellets. Wood chips are cheaper than wood pellets for industrial / large residential applications, with a cost of €3.3 / 100kWh in 2010 (at 80% efficiency).

According to the web site econologie.com and to various manufacturers, wood pellets are the cheapest source of residential heat both on a €/KWh basis as well as when taking both maintenance and the installation cost and amortization into account. The following table calculates the cost for a 120m2 house in Picardie.

The only other contender is heat pumps using thermal energy transfers (€3.4 to 4.9 per 100 kWh), which has different utilization characteristics and cannot be used as the main heat source for a residence.

These figures are highly dependent on the boiler efficiency, which is higher than 90% in the most recent technology.

The main disadvantages of wood pellets are:

• The fairly high cost of efficient boilers compared to gas or oil (which is partially compensated by subsidies from the government both on a national and local level),
• The operations of the boiler, which requires weekly clearing of ashes and a yearly thorough cleaning done by a professional.

The market

In 2010, residential and office buildings consumed 68 million TOE, and this is relatively stable for the last 5 years although the mix of energies in moving toward gas and renewable. Total wood based energy production is 10M TOE (15% of the total), of which about 8 M goes to residential. However, wood pellets are only used for residential home heating, they are too costly for larger installations (public swimming pools, hospitals, etc). 

In 2009, there were 90.000 wood pellets boilers installed in France, and total consumption was 310 000 tons (average consumption 3.4t per year). Wood pellets are only a small proportion of the total wood burned every year in France, but the market has grown fast in recent years.

While the residential wood pellets market is local with regional trade, the industrial pellets are traded globally.

However, compared to Germany, France is still well beyond per capita consumption. All forecasters agree on growth, with varying 2020 market size: SNPGB at 1.6Mt, Ademe 2.0Mt, Pellcert 2.6Mt and convergence with Austria or Italy 3.0Mt, representing cagr of 12% to 21%.

The wood pellet market is highly seasonal, with sales mainly in Q3 and Q4, reassortment in Q1 and very little action in Q2. This induces significant swings in sales and working capital over the year, which has a significant impact on the cash position.

In 2012, there were 61 pellet producers in France for a total production of 495kt and a capacity of 1040 kt, while there were only 47 in Germany for 1750kt production and 2600 kt capacity. Not only utilization rate was lower in France, but the average size was also much smaller (55kt per unit versus 17kt in France).

To participate in this interesting market, there are 3 publicly traded companies available on the Paris Stock Exchange : Cogra, EO2 and Moulinvest. I will analyze them in separate blogs.