It's the Weather, Silly

BY TIM PORTZ

Earlier this year, in Issue 2 of Pellet Mill Magazine, I authored a column titled “Filling a 2-Million Ton Hole.” In the article, I offered some back-of-the-envelope calculations to frame up how North American wood pellet producers who serve the domestic heating and BBQ market might contribute to easing the European supply shock created by the Russian invasion of Ukraine, and the resulting sanctions on Russian goods—wood pellets included. I closed the column by noting that stateside producers would have to perform some tricky calculus and make some bets on the length and depth of winter when making decisions about how much, if any, of their production they would be willing to commit to opportunities overseas. As the industry plunges headlong into the heart of the home heating season and consumers fire up their pellet appliances, we are being reminded that despite the year’s unique marketplace dynamics, it is the weather that drives demand. The industry has successfully increased early pellet buying with its end users. By the end of summer, most pellet users have purchased some, but likely not all, the pellets they will need for the season. Instead, consumers delay the purchase of the remainder of their supply until later in heating season, buying as necessary. It is this late season “top off” that separates the years with strong sales numbers from those with disappointing results. The back half of the 2021- ‘22 heating season offers a stark illustration of the impact of mild temperatures on pellet demand. U.S. heating pellet sales for February through April were just 250,000 tons, well off the February through April average of 345,000 tons. Consumers with one eye on their remaining pellets and the other on unseasonably warm forecasts simply skipped or significantly curtailed their late season top off. Compare those numbers to the second half of the 2018- ‘19 heating season, when the February through April top off yielded pellet sales of 437,000 tons, nearly 75% more than the lackluster top off the industry just experienced. Interestingly, pellet sales in the first half of the following heating season were brisk as well. The reason for that, retailers have shared with me, is pellet buyers remember running short the prior year, and beefed up their first purchase the following year. In October 2019, pellet sales were an eye-popping 283,000 tons, just short of the 289,000 highwater mark for pellet sales in any month since the U.S. Energy Information Administration started collecting the sales data in 2016.

Last year, the Pellet Fuels Institute launched its PFI Heating Degree Day Index to provide producers and retailers alike with an at-a-glance snapshot of how the winter is shaping up when compared to the year prior and longterm averages. This year, the PFI HDD Index reveals that winter got off to a colder start than last year in all pelletburning regions, with the exception of the Pacific Northwest. That said, pellet-burning regions are lagging longterm, accumulated HDD averages, all by more than 20%.

Lackluster heating seasons impact the sales totals of two calendar years. Last heating season’s soft sales resulted in annualized pellet sales of just 1.7 million tons for 2021, the lowest annual total in the report’s history. The back half of the 2021- ‘22 heating season was slower than the front half. Through July, pellet sales total just 774,000 tons, well off an average of 915,000 tons through the same period.

While the heating season will be all but over before a clear picture of how the year unfolded emerges, I suspect that producers—hoping to avoid two consecutive years where sales fizzled—are taking opportunities to move pellet volume overseas when and where they can. The industry exited July with an inventory position of over 300,000 tons, the most since 2018. Paired with a trend toward warmer winters, it isn’t surprising that the question for producers with access to ocean freight egress has moved beyond “Should we take opportunities in the export market?,” and toward “How much volume should we commit to export opportunities?”

Author: Tim Portz Executive Director, Pellet Fuels Institute tim@pelletheat.org www.pelletheat.org