By Brian Dunn
Western Canada has been very successful at exporting wood pellets to Europe, something Eastern Canada would like to emulate. “Until 2012, B.C. was the largest wood pellet exporter in the world, shipping 1.6 million tonnes from Vancouver that year and was only recently overtaken by the U.S. Southeast,” Gordon Murray, Executive Director of the Wood Pellet Association of Canada, recently told a Montreal workshop entitled “Logistics and Export Strategies in Eastern Canada.” By comparison, exports from Eastern Canada barely top 100,000 tonnes.
He attributed the West’s success to a spirit of cooperation among pellet producers, co-mingling of product and economies of scale, with CN playing a major role by handling all traffic going into Fibreco Export, a dedicated shipping terminal for wood chips and pellets in North Vancouver.
“Why are we not exporting more from Eastern Canada? Is it because of pricing? Fibre costs are higher, but we’re not taking advantage of economies of scale. Do we want to change the situation and what do we have to do to make it happen?,” Mr. Murray asked about 90 people in attendance, three times the anticipated numbers, which he said indicated a great interest in correcting the situation.
Global wood pellet production totalled 22.4 million tonnes last year, with the EU accounting for roughly half and North America producing about eight million tonnes. Most of the 1.6 million tonnes of Western Canadian pellet exports went to the EU last year with the biggest markets being the U.K., Belgium and the Netherlands, which primarily use them in electrical power generators and co-fire with coal.
“Because we use larger ships out of Vancouver than in the East, we get great rates. I think shipping rates are only about 10 per cent higher (through the Panama Canal) than shipping from the East,” explained Mr. Murray. Most Eastern Canadian exports go through Belledune and some through Halifax. The EU home heating market consumed 6.1 million tonnes in 2012 and the market is expected to grow by 10 per cent annually, according to Mr. Murray.
“Our Austrian counterpart claims demand exceeds supply which presents a good opportunity for Canadian exporters and we are working with the International Marine Organization to try and keep shipping costs down,” he added.
The EU market for wood pellets is growing, yet Eastern Canada is not a major participant, agreed Jean-François Arsenault, Principal, CPCS, an Ottawa-based consulting firm specializing in transportation. Logistical constraints seem to be a major factor, he added. Some of the things that surprised him when examining the Eastern market included the realization that rail is much more cost competitive than he thought, even over short distances, and that a vast majority of pellet producers didn’t have rail spurs. He said virtual consolidation, where producers have the same client but not enough product to complete an order so ships would top off at different ports en route, would provide “significant” savings at minimal costs, while physical consolidation is necessary to generate infrastructure-related savings.
Producers in Eastern Canada are small and are operating at only 50 per cent of capacity, producing 600,000 tonnes as compared with capacity of 1.18 million tonnes. Despite these numbers, current producers are planning to add 680,000 tonnes of new capacity, while new projects could add another 1.63 million tonnes. “Eastern Canadian Exports could reach1.39 million tonnes, but logistical constraints and unfavourable market conditions, including low prices for pellets in Europe, are preventing this export potential from materializing,” said Mr. Arsenault.
While Eastern production is mostly concentrated in Quebec, new projects in Ontario will change that balance, but most current producers have no viable rail options, he added. Loading equipment and storage at plants may be an issue, although not so much if using truck transport. However, truck transport costs some 7-11 cents per tonne-kilometre versus 2.3-8 cents for rail, depending on distance. Trucks are competitive with rail under 200 kilometres, but more expensive beyond 200 kilometres.
A dedicated pellet terminal with year-round accessibility is essential to lower costs, but there are currently no dedicated terminals in Eastern Canada, Mr. Arsenault noted. New facilities are expensive to build. But the savings are significant – $20 a tonne at current terminals versus $12 a tonne at dedicated terminals with their unloading and loading equipment and storage facilities. Potential St. Lawrence ports could include Montreal, Quebec, Trois-Rivières and Bécancour.
For a dedicated terminal to be cost effective, it needs to handle a minimum of 250,000 tonnes of product annually, suggested Mr. Arsenault. Los Angeles-based biomass company Rentech is building two pellet production facilities in Northern Ontario (see www.canadiansailings.ca/?p=6684) and has signed a 15-year agreement with Quebec Stevedoring which is building a $20 million dedicated loading facility at the Port of Quebec. The port is also preparing to build a 75,000 tonne storage facility with an option for an additional 37,000 tonnes. The first phase is expected to be completed by July, 2014, according to Rentech which has also formed a “strategic partnership” with CN to transport the pellets from Ontario to the port. Rentech was looking for a long-term commitment after it secured a 10-year contract to supply Drax Power Ltd. of the U.K. with 400,000 tonnes of pellets annually for its power stations.
Because land transportation costs are “significant,” plant location is important although input location must also be considered, said Mr. Aresenault. “Rail is generally more competitive than trucks, so plants and terminals must be planned accordingly. Physical consolidation across Eastern Canada is not economically possible because transport costs to Atlantic Canada are too high. But virtual consolidation with the Atlantic Provinces would generate benefits if Ontario and Quebec volumes are not sufficient.” However, any consolidation would be a challenge as there is no export-focused producer in Ontario or Quebec to take the lead, plus there is a lack of export expertise hampered by long distances between producers.
Some of Mr. Arsenault’s recommendations included sharing the expertise of western producers, promoting the industry to investors to facilitate financing, appealing to governments for better access to funds for production and logistics facilities and raising producers’ awareness of existing funds such as the Ministère des Transports du Québec’s Greenhouse Gas reduction program.
CN is a major player in the wood pellets industry. In fact, it is the largest rail mover of exported wood pellets in the world, moving 16,400 cars of pellets last year, according to Uri Szyk, Market Manager, Sales & Marketing – Industrial Products at CN. More than 95 per cent of Canadian production is exported, he added. Western Europe consumed 23.8 million tonnes of pellets last year. By 2020, that figure could reach 135 million tonnes. The main drivers are EU regulations that call for a 20 per cent use of renewable sources of energy, a 20 per cent reduction in greenhouse gas emissions and a 20 per cent improvement in energy efficiency.
Today’s energy buyers are looking for large scale capacity and long-term contracts and they want to receive Panamax size vessels at destination ports, noted Mr. Szyk. “The key criteria is building a reliable and robust wood pellets supply chain that will feed their energy plants for the long term.”
To build an Eastern Canadian export gateway, economies of scale must be created for small and mid-size producers and a critical mass must be created with one or two larger pellet producers to act as consolidators and to attract smaller producers, suggested Mr. Szyk. A reliable supply chain must also be built that will attract energy buyers to source pellets in Eastern Canada and CN is open to explore capital investment opportunities for things like track infrastructure, he added.
“With paper markets on the decline, sawmills in Eastern Canada need a new home for their wood chips to make their operations viable. Wood pellets are a perfect fit,” Mr. Szyk concluded.
In terms of other export opportunities, ACS Logistics said the highest demand it has seen is in the residential market in Italy which prefers pellets sold in bags of either 15 or 18 kilos. In fact, Italy is the world’s fastest growing market for residential wood pellets, according to Mr. Murray.
Because Italy produces just a small fraction of its pellet needs, the country’s imports increased from 472,000 tonnes in 2009 to 1.2 million tonnes in 2011, with Canada only accounting for one per cent of those imports, he added. But Canada’s shipments to Italy have increased from 10,000 tonnes to 40,000 tonnes in recent years.
“With Italy increasing its demand for high quality Canadian wood pellets … our partners in Italy, the Fanfani Group and ACS Logistics have been able to identify and help create new business between both countries, increasing the container movements to this growing residential market,” said Carm Sciglitano, Business Development Manager at ACS (Associated Cargo Specialists).
“Containers carrying wood pellets in bags can accommodate 1,383-1,400 18 kilo bags in a 40 HC container or 1,750-1,795 15 kilo bags, making it approximately 26 tonnes per 40 HC container in either case.”
The Montreal workshop concluded with the formation of an advisory group from all stakeholders including port authorities, producers, terminal operators and logistics companies to explore export opportunities. “We’ve been asked to build a business plan and we want to keep the momentum going,” said Mr. Murray of the Wood Pellet Association. “We plan to sit down with logistics companies such as CN and Quebec Stevedoring to figure out our next step.”