The wood pellet sector in US has many advantages that other sectors might envy as they, too, navigate business during the pandemic.
First, as producers of a home heating fuel, the risk of an immediate demand shock is low. As stay-at-home provisions were implemented across the United States, demand for transportation fuels plummeted, and oil and gas prices quickly followed. If sheltering in place had any impact on demand for home heating fuels, it was likely an increase, as homeowners found themselves heating their homes all day instead of just evenings and weekends.
Second, as the outbreak really began to accelerate in mid-March, the home heating season was well on its way to winding down. Consumers had the pellets they needed to get through the last few weeks of a winter that had been fizzling for a month anyway, and orders from retailers were drying up. Any factors with the potential to negatively impact wood pellet demand for the coming heating season have five months to sort themselves out. The most obvious threat is the potential for ultra-low heating oil prices next fall. The speed and depth of oil’s price fall has been dizzying and heating oil prices have fallen with the price of crude, but will these historic lows last until next fall? As states move to reopen their economies in the coming months, gasoline demand will begin to recover and, with it, the price of oil. While everyone suspects wood pellets will have to compete with cheaper heating oil next season, no one can say with certainty just how cheap heating oil is likely to be, or if it will be cheap enough to motivate those consumers who have retained their oil appliances to use them.
For now, the biggest risk facing the US wood pellet sector is the availability of wood fiber from upstream forest products manufacturing. As sawmills, pallet operations and flooring manufacturers throttle back to match their own demand turn downs, their chip and sawdust output slows. For some producers, these impacts are already being felt, but it is far from universal with some producers finding that other manufacturers with whom they normally compete for wood fiber are not currently operating as they are not classified as an essential business. As surprising as it may sound, there are wood pellet producers with access to more fiber than they can currently use. Historically, wood pellet output ebbs in March and April, but it doesn’t stop altogether. In 2019, US producers manufactured 280,000 tons over the period, and to ensure adequate supply this fall, the industry will need to hold as close to these production figures as it can. Additionally, demand for wood products will need to recover quickly or the challenge of fiber availability will become more widespread as the sector ramps up production to lay in inventories in anticipation of the early buying season later this summer.
Finally, US wood pellet manufacturers have found the deployment of social distancing guidelines at their operations to be minimally disruptive. Producers have moved to contact free inbound and outbound trucking, have stepped up plant cleaning protocols and have closed their offices to vendors and package delivery.
The coronavirus pandemic has brought with it economic challenges previously impossible to imagine, and the idea that any industry will escape without injury seems like a fantasy. That said, the wood pellet sector must take good fortune where it can be found. Next fall, people will need to heat their homes, regardless of what happens with the pandemic. So long as upstream forest products manufacturing recovers and generates the fiber wood pellet producers rely on, the sector will be well-positioned to serve them.
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