Wood markets are dictated by local supply and local demand, yet this does not position local suppliers to accurately assess the market. The view held by each local supplier is limited to the opportunities around only his or her supply, not the supply available throughout the marketplace. A case in point is the time a supplier informed a project developer that the suppliers in an area were so mad at a particular wood buyer (who consumed one million tons annually) that they would deliver wood to the pellet facility at $1 per ton less than the price the original buyer paid.
While it is certainly possible for a supplier and buyer to fail to see eye to eye, it defies logic to believe suppliers are willing to give up $1million a year ($1 less per ton x 1 million tons). Pulp and paper mills are part of a $10 billion industry that receives 9.5 million truckloads of logs each year. As such, they are the most reliable buyers in the wood fiber supply chain. It is more likely that suppliers will continue to give precedence to these established and reliable buyers even as new opportunities like bioenergy emerge.
“An economic development committee offered me free land so that I don’t have to purchase a site for my facility.”
Great as it may sound, there is no such thing as free land. Economic development committees have a vested interest in attracting new business to their state. Committee members are simply not qualified to offer unbiased assessments of the wood basin, infrastructure and many other factors that contribute to the success or failure of a wood pellet facility. Ultimately, the cost of factors such as low inventory and high competition from other facilities in the procurement zone could significantly outweigh the money saved on a land deal.
“The state economic development committee did a study in 2010, and it said there was more than enough affordable supply in the state.”
Generic reports from economic development committees are quickly dated. Within a year of publication, consumption levels and the competitive landscape can be significantly different.
Also, procurement zones generally span acreage in more than one state. Any study that sets a border at the state line instead of focusing on a particular procurement zone cannot accurately assess the amount of feedstock available for any one project.
“Drive 20 miles in any direction from my site, and all you’ll see is trees, trees, trees.”
A heavily forested area can create the illusion that a region enjoys ample feedstock supply. It is important to realize that not all trees visible to the eye are available for harvest. Questions about who owns the trees or whether the trees are located in harvestable areas must be answered to accurately assess the available wood fiber supply. The age class species density of the forest must also be considered when assessing supply over a 20-year period.
What do private equity investors want?
The answer is simple; they want the facts, numbers and science that, together, demonstrate the developer has done everything in his or her power to minimize and mitigate the risk associated with a facility’s supply.