The Wood Pellet Industry: Industrial and Heating Market in North America Part II
Unlike the industrial sector which is driven mostly by government policy, the heating side depends on the relative cost of heating fuels. Historically pellets cost less than other forms of heating in most regions. However, after the crash of fuel prices heating oil and propane prices have recently emerged as the lowest cost heating fuel. At about $62.50 per barrel, heating oil prices are comparable with wood pellets even at more than $200 USD per ton pellet price. Despite the cost benefits, the market has not grown the same way as energy.
The market for home heating of pellets does not grow nearly as much. Right now 21% of heating wood pellets come from North America, with a 15Mt supply of pellets. This surplus exists on top of an already over capacity North American production environment means wasted capacity. Over supply of US and Canadian production capacity by the end of 2016 was around 12.7 million tones per year.
If the cost of oil rebounds from 2018 onwards, heating pellets may resume traditional growth. However, increases in winter temperatures especially in Europe and the continued expansions of solar and wind may be enough to reduce demands for oil. Some are forecasting an increase in demand of 9.5 million tons by 2025. In most of Europe, where many countries have high taxes on heating oil, demand is more driven by weather than by oil prices. A lack of demand in heating pellets comes from two areas the low price of traditional heating fuels and the potential for more mild winters due to climate change. Due to the warmth of 2015’s winter in Europe demand fell noticeably, as heating requirements were 20% below average. Pellets have a use beyond heating, but is it enough to re-engage the market?
Lessons for Asia
The heating market for Asia will likely never take off due both to shorter Winters and rising temperatures. Most Asian urban populations tend to aggregate in warmer environments. In terms of production the demand for heating comes mostly from the EU who can depend on already overcapacity market from the US and Canada.