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WPAC – Timber Tenure Tensions

Downtown Vancouver, in British Columbia (BC), Canada was the place to be for a two-day briefing on the Canadian wood pellet industry. Whilst some of the generic topics on the agenda were the same as for other recent pellet conferences, the issues in the discussions were entirely from a Canadian perspective. In short it proved an ideal opportunity to gain an understanding and specific insight into the Canadian and BC situation.

Held in mid-November over 320 delegates hailing from Europe, Asia and North America made their way to Vancouver for the final major international pellet industry event of 2014. On paper the Wood Pellet Association of Canada (WPAC) conference agenda with important generic topics like health, safety, sustainability and global market updates was similar to the recent USIPA conference in Miami, USA and the Pellet Industry Forum in Berlin, Germany. Indeed several speakers presented or were panellists at all three events, for example Arnold Dale from Ekman & Co., and Henry Pease from RWE. However what made the WPAC conference different was that the issues in the discussions, formal and informal alike were entirely from a Canadian perspective and at times seemingly specific to the BC pellet industry.

Growth potential

There are 11 pellet plants in operation, another two under construction and a further five or so have been announced. The lion’s share of current Canadian production is produced and shipped out via ports in Vancouver and Prince Rupert both of which have developed sizeable pellet receiving and storage terminals.

Seth Walker, Bioenergy Economist with RISI and main author of RISI’s 2014 Global Wood Pellet Demand Study published earlier this year, provided the global pellet outlook.

– On a global basis wood pellet demand is estimated to grow from an estimated 23 million metric tonnes in 2014 to 50 million metric tonnes in 2024, Walker suggested.

For Canadian producers the main takeaways from Walker regarding Europe were the projected plateauing of volumes to the UK power market, post Drax and other coal conversions – currently the largest export destination, and the European heat market, a market that has seen historic steady unsubsidised growth. Especially Italy, the second largest export market for Canadian producers, as according to Annalisa Paniz from AIEL, Canadian producers can leverage on strong national brand perception amongst Italian consumers.

– A bag of ENplus pellets with a maple leaf on it sells. So much so that there have been cases of less scrupulous pellet dealers blending Canadian pellets with cheaper product and passing it off as Canadian, commented Paniz.

Another takeaway from Walker is the promise of exponential demand growth, albeit from a low level, from South Korea, and the possible emergence of Japan; both markets for which BC producers are uniquely well positioned for.

– These emerging and diversifying markets present opportunities and flexibility from rolling contract expirations for BC producers, concluded Walker.

Coal conversion opportunity

Closer to home Dr. William Strauss, President of FutureMetrics, reiterated key points he made in October during the USIPA conference about the need to develop a North American industrial pellet market as a means to utilise existing excess pellet production capacity and mitigate both export market growth uncertainties and domestic heating market demand fluctuations. Judging from the response his presentation was better received in Vancouver than in Miami, perhaps due to the Ontario Power Generation (OPG) conversion projects.

– The potential for significant growth for industrial pellets is in the conversion of North American pulverised coal power plants. We all know it can and is being done. Here in Canada are the two large-scale North American “proof of concept” operations, OPG’s Atikokan and Thunder Bay plants in Ontario, said Strauss.

Strauss pointed out that there were hundreds of other plants throughout North America that could be converted economically to use pellets to produce low-cost, dispatchable, renewable and job-creating electricity. Whilst the vast majority of these plants are located in the US, Canadian pellet producers would be able to supply many. Furthermore, there are conversion opportunities in Canada too, OPG being a case in point, not to mention co-firing opportunities across the board.

– We need to engage with our policymakers and regulators at the provincial/state and federal levels to educate them on the significant positive characteristics of this strategy. To this end a dedicated, consistent, and unified voice is needed, urged Strauss.

MPB tightening BC fibre supply

Against this backdrop of a “huge potential for growth” as Clark Roberts, Assistant Deputy Minister, BC Ministry of International Trade remarked during his welcoming address, presentations and ensuing discussions between Canadian forest industry representatives and pellet producers proved enlightening. In short the issue is about future fibre supply, its long-term availability and affordability for all industrial users. Not least pellet producers looking to capitalise on pellet market growth potential and expand production. Here it would seem that the Council of Forest Industries, COFI, and WPAC, are at loggerheads.

Yet the whole discussion may seem odd at first given the forest resource base in BC and Canada as a whole. The Province is the largest exporter of softwood lumber to the nation’s largest trading partner, the US. This comes with it’s own particular challenges; the US housing market, the softwood lumber dispute and the mountain pine beetle (MPB). In the period 2004 to 2006 BC sawmills exported over 25 million m3 of lumber per annum to the US, by 2009 it had dropped to less than half, where it has remained since. This has resulted in mill closures, job and revenue losses.

The shear size of the Province and the terrain make large areas economically unfeasible to harvest, exacerbated by the enormous areas and volumes devastated by the MPB. This in turn has decimated the commercial harvest value of infected stands with the end result being that the cost of fresh undamaged pine fibre is increasingly limiting availability.

According to a 2012 MPB “status and projections” report for the Special Committee of Timber Supply, some 700 million m3 or over half the stock of merchantable pine in BC, had been killed in the Province since the outbreak of the current infestation cycle that started in 2000. Though the annual rate of MPB infestation is dropping from the 140 million m3 peak in 2004, it is still estimated to flat-line at around 5 million m3 per annum by 2020.

– BC is losing out. BC Interior is the only major North American market region to show a noticeable rise in domestic sawlog prices, the average SPF (Spruce Pine Fir) sawlog climbed 22 percent from the previous quarter to CA$62/m3, said Ken Shields, Board Member of the Council of Forest Industries (COFI).

It is worth mentioning that Ken Shields is a man with several hats in the Canadian forest world; he is Chairman, President and CEO of Conifex Timber Inc., a public Canadian company operating in the forestry, sawmilling and green energy sectors. In addition Shields is a board member of the Forest Products Association of Canada (FPAC) and he is Chairman of the Canadian Bioenergy Association (Canbio).

According to Shields the gap between sawdust and shavings supply from sawmills and current demand for these residuals in BC is already in the order of at least 1 million m3 and this gap will not be closed. For hog fuel, the other sawmill residue, supply still meets demand though not for much longer, 2015 or 2016 demand is expected to exceed supply. The remaining option for pellet producers, according to Shields, is to use in-forest biomass such as logging residues and unmerchantable timber such as MPB wood.

– We’re committed to remain a competitive supply region. Fibre security and affordability are of crucial importance to all of us in this room. As industries we need to collaborate and maintain a market-driven fibre supply chain. The one-pass system enables the greatest fibre volume at the lowest cost, ended Shields referring to the WPAC-criticised area-based tenure system.

Rob McCurdy, CEO, Pinnacle Renewable Energy suggested that there is much room for improvement in the one-pass system endorsed by Shields.

– Leaving aside MPB wood, some 25 – 35 percent of the logged fibre still remains in the forest so there is still a lot of work that needs to be done, responded McCurdy.

Operating six plants in BC with a total annual production capacity in excess of 1 million tonnes, Pinnacle are currently the largest pellet producer in Canada. McCurdy noted that historically, pellet mills provided an ideal solution to an environmental issue of sawmill residuals. Many plants are sited in close proximity and in partnership with sawmills. Now that this “white gold” is all but spoken for as shown by Shields, additional sources such as logging residues are going to be needed.

– What is the shelf life of the remaining Beetle kill? What do we do in the mix forest? What do we do with the remaining forest when the old model of economics of whole log does not work?, McCurdy asked acknowledging that it is a complicated issue with many stakeholders.

– It will require change, by all of us, to ensure that we optimize all of the fiber from our forests, ended McCurdy.

“Use it or lose it”

– We have 12 million m3 of wood a year available in Ontario and would like to see more pellet production, pitched Ralph Spaans, Business Developer with the Ontario Ministry of Natural Resources, breaking the “agree to disagree” deadlock in the BC fibre supply discussions using Rentech’s Atikokan and Wawa pellet plant investments as examples.

From New Brunswick (NB) a Province on the far eastern side of Canada, Jonathan Levesque, VP Marketing & Development for Group Savoie shared fibre supply nuances from NB.

Apart from the obvious difference in geographical size – NB has a total land area of 7.2 million hectares (ha), which is almost a half million ha less than what BC has in protected forests – there is also a significant difference in ownership structure. In BC around 95 percent of the 55 million ha forest estate is under public ownership whereas in NB roughly 47 percent of the 6.1 million ha forest estate is under private ownership.

– The 1982 Crown Land Act has a best use principal such as job creation and product diversification when allocating unused volume. This includes a “use it or lose it” clause as Crown allocation can be revoked if its not used within 12 months, explained Levesque.

Group Savoie are a vertically integrated wood products company with four production sites in NB including a 70 000 tonne-per-annum pellet plant in St-Quentin. As a whole Group Savoie processes over a half million m3 of roundwood per annum to produce products as diverse as hardwood chips and lumber, flooring, kitchen cabinet components, pallets and pallet components, tonewood (for guitars) as well as briquettes and pellets from the residues generated within the Group.

– Roughly 75 percent of our annual fibre need is guaranteed through a Crown sub-license. This enables us to work to long-term contracts with customers as well as plan for future growth and make investments into production expansion or product diversification like pellets, said Levesque.

The system isn’t perfect. According to Levesque the stumpage rates are one of the highest in Canada and based on “fair market value” with the definition of “fair” varying between the government and industry.

– The “use it or lose it” clause is a double-edged sword. It forces everyone on the supply chain to be efficient which is good but it can also be a real challenge to fulfill when wood product markets are slow. The allocation of unused volume itself can get a bit too political as sometimes the best use principal doesn’t seem to apply, concluded Levesque.

WPAC 2015 is to be held the beginning of November in Halifax, Nova Scotia (NS).

4660/AS

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