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.