Winter 2014-‘15––Record cold temperatures across much of the nation. Third-consecutive year of strong growth in domestic U.S. heating demand for pellet fuel. Spot seasonal shortages of pellet fuel, due to the inability of manufacturers to produce and ship at a rate to meet demand, attract consumer scorn and negative media coverage. Record-high propane prices, due to supply chain distribution bottlenecks, drive strong growth in pellet appliance sales in heavy propane states. Many pellet manufacturers invest new capital in expanded capacity, anticipating continued strong interest in pellet fuel as a mainstream heating option.

Winter 2015-‘16––Record warm temperatures across the entire nation bring heating degree days down 20 to 25 percent compared to normal in some northern states. Sustained low-heating oil, propane and natural gas prices across the nation lead to stagnant growth in pellet stove and boiler sales as cost savings evaporate. Exchange rate with the Canadian dollar at a 12-year low drives stiff competition for U.S. pellet manufacturers in some Canadian border states. Huge bagged-pellet inventories at manufacturer, retail and consumer levels that are not getting used may carry into 2016-‘17 season, straining cash resources. Exchange rate against the euro makes overseas export an untenable option for those manufacturers desperate to move inventory into other markets.

After years of post-2008 recession and a steady climb back to profitability, the winter of 2015-‘16 is a real kick in the shins for the U.S. domestic heating pellet industry. Plants throughout much of the country are responding to a perfect storm of factors that have combined to leave many manufacturers with no choice but to reduce output or suspend operations entirely.

Chief among these factors is the dramatic drop in conventional fossil heating fuel prices, now in its second full year, as global demand stagnates and North American and global supplies reach record inventory levels. When it’s cheap to burn conventional fuels, many folks stop burning pellets, and growth in stove and boiler sales dries up. Layer on top of this the “winter that wasn’t,” and sales of all heating fuels are dramatically off-normal.

To be sure, a “normal” winter and market conditions after the superheated demand of 2012-‘14 was actually welcomed by some manufacturers. It would have helped to settle the market and allow distribution networks to mature further. It would have brought inflated notions of valuation more in line with reality and allowed some orderly consolidation to proceed in this industry of many small players.

But no one anticipated or welcomed the perfect storm that has unfolded over the past six months. It drives home just how vulnerable the domestic pellet heating industry can be to factors over which it has little control and is challenged to plan for.

Another warm winter and a shakeout will surely follow.  Manufacturers without the financial wherewithal to operate for extended periods at partial capacity or carry inventory may find themselves facing a very difficult situation. And not just the fuel manufacturers, but the stove and boiler builders (and importers), the installers, the bulk fuel distributors, and the retailers and service industry that was developing as pellet heating continued its welcome transition from niche curiosity to mainstream heating choice.

Having worked the past 10 years to help bring pellet heating to this level of consumer acceptance, it is disheartening to see this happen. So much good progress has been made bringing clean combustion technology, efficient distribution and competent manufacturing to our industry, and educating consumers and policy makers about the environmental and economic benefits of this heating choice.

Veterans of this industry have seen it before. The strong will survive. And, thankfully, more and more consumers are committed to pellet heating by philosophical choice, not economic convenience. The long-term prospects remain favorable for this fuel. Fossil fuels are finite, and ultimately unsustainable—their cost will increase in time.  Market forces, and state and federal policy will continue to drive consumers toward more sustainable and climate friendly energy choices, of this, I am sure. 

Readers of this column can do one thing right now as we ride out the perfect storm: Clasp your hands, look skyward and pray to whomever you choose for a brutally cold winter in 2016-‘17. Lots of degree days in the next year are urgently needed.

Author: Charlie Niebling
Consultant and Partner
Innovative Natural Resource Solutions LLC
603-965-5434
niebling@inrsllc.com