Is the fragmented U.S. wood pellet sector poised for consolidation?

A new paper from FutureMetrics predicts that it may be, for two reasons: price pressure on producers serving northern heat markets, as a result of lower heating oil prices, as well as price pressure on those same producers from competing, larger industrial producers in the south.

According to data from BBI International/Biomass Magazine, there are about 121 pellet plants in the country that report production to be at least 15,000 tons per year. Of those, about half report production to be less than 60,000 tons per year, and 75 percent report fewer than 100,000 tons annually.

Dipping oil prices and large producers in the south are likely to edge out some smaller producers, or serve as catalysts for consolidation, according to paper author William Strauss. Giving examples of Rentech’s acquisition of New England Wood Pellet, the merger of Bear Mountain and Lignetics, as well as a few others that are evaluating merger potentials but he could not yet name, Strauss said in many cases, plants in similar geographic locations—and in some cases, perhaps not—find cost savings and efficiency in merging, thus increasing their competitive abilities.

“The large, industrial producers in the Southeast are taking a look at the domestic heating markets and have been talking about diverting some production there,” Strauss said. “A lot of that was [initially] in Europe and the Italian market, but the last few winters have been very warm in Europe, so that market hasn’t been quite as robust as was thought. They’re looking for diversification.”

Additionally, the weak U.S. dollar has likely piqued those larger, exporting producers’ interest in stateside sales.

With that interest comes not only selling some excess production into the premium markets, but the potential to buy some smaller U.S. premium pellet mills, according to Strauss.

“I think, over the next five years, we will see some consolidation, as well as some shake out,” he added. “Some high-cost producers are going to be hurting, and I think this is going to be a very interesting winter, who knows what it will bring.”