Hakan Ekstrom's  Instablog

Demand for wood pellets in Europe has gone up dramatically the past few years as power companies on the continent have switched from using fossil fuels to renewable energy alternatives. Importation of pellets from North America increased over 60 percent from 2011 to 2012 with the US export volumes more than doubling, according to the North American Wood Fiber Review.

The wood pellet export industry in North America has grown exponentially in a relatively short period of time. The export value has increased from an estimated 40 million dollars in 2004 to almost 400 million dollars in 2012. This fairly new trade development is the result of Europe's quest to reduce its dependence on fossil fuels and to reduce CO₂ emissions. Energy generation from renewable resources has, with varying pace, gone up in all countries in the EU the past decade.

Woody biomass, including wood pellets, is one energy source that has attracted both much attention and investments in a number of countries on the European continent. With limited domestic wood raw-material sources, countries such as the UK, Belgium and the Netherlands have increasingly relied on the importation of industrial wood pellets to reduce the usage of coal at some of their power utilities. The relatively high costs for wood pellets in Europe have resulted in increased interest in importing pellets from British Columbia and the southern states of the US where wood raw-material costs are lower than in Europe.

A record volume of 3.2 million tons of pellets was exported from North America to Europe in 2012, according to the North American Wood Fiber Review (woodprices.com), which compiles and publishes pellet trade volumes based on surveys of pellet exporters and customs data in North America and Europe, each quarter. From the US South, shipments were up over hundred percent compared to 2011, while Canadian exports increased 25 percent year-over-year.

The expansion of pellet production has been particularly noteworthy in the US South where there have been 14 new pellet plants that are either new or planning to expand production in the coming year. Location and capacity of the new plants are reported in the latest issue of NAWFR.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The lumber market in the US really took off in late 2012 and early 2013. Lumber prices in February were more than 60 percent higher than in late 2011. Increased lumber production has put upward pressure on sawlog prices and in the US Northwest, Douglas-fir sawlog prices reached a five-year high in the 4Q/12, according to the North American Wood Fiber Review.

Seattle, USA. Lumber production in the US and Canada improved during 2012, with total output in 2012 being eight percent and five percent higher, respectively, than in 2011, according to WWPA. Sawmills in the Western region have been more fortunate than mills in other regions in North America since they have been able to ship lumber both to markets in the US and to Asia.

The US housing market is continuing to improve, with higher house prices, lower inventories and limited sales of foreclosure homes (increasingly turned into rental properties). These developments have resulted in an increased number of housing starts and higher demand for lumber. Canadian sawmills, which export a majority of their lumber to the US, have been ramping up production during 2012 to meet the higher demand for lumber. This has been particularly true for sawmills in the Eastern provinces where production in the 4Q/12 was up 16 percent year-over-year.

The US lumber price developments during 2012 and into early 2013 have been quite remarkable with the Random Length Lumber Price Index increasing by over 60 percent from late 2011 to March 2013. This development has been drawing the attention from sawmills far away from the North American continent. With substantially higher prices and a predicted increase in the demand for lumber in 2013, many foreign companies hope to be able to increase shipments of lumber to the US shores in the coming year.

The strong lumber market has pushed sawlog prices upward throughout North America. As reported in the North American Wood Fiber Review, prices for Douglas-fir sawlogs in the Western US reached a five-year high in the 4Q/12 and prices continued upward in the 1Q/13 because of higher log demand both from domestic sawmills and from log buyers in Asia.

Sawlog prices have also inched up in Coastal British Columbia and Eastern Canada as a result of tighter log supply. Pine sawlog prices in the US South have been surprisingly stable since 2010 and, in the 4Q/12, were close to the lowest level in almost 15 year. However, with the improved housing market in the US and higher lumber prices, it can be expected that sawmills will increase the consumption of logs and that the Southern states will follow the rest of North America with upward trending log prices during 2013.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Sawlog prices in Europe were generally lower in 2012 than in 2011 because of lower log demand from the sawmilling sector, reports the Wood Resource Quarterly. Many sawmills on the continent have been forced to reduce production as a result of the weak lumber market. Log prices fell the most in the Nordic countries, while prices in Eastern Europe were steady or even slightly higher toward the end of 2012.

Seattle, USA. Sawlog prices have trended downward in most major markets in Western Europe the past two years in US dollar terms, but this trend was broken in the 4Q/12 when prices increased slightly mainly as a result of a weakening US dollar. In the local currencies, log prices were practically unchanged in the 4Q/12.

The biggest price declines have been seen in Sweden where pine sawlog prices fell over 15 percent from the 4Q/10 to the 4Q/12 in both the local currency and in US dollar terms. Spruce log prices have declined over 25 percent during the same time period. In Finland, Germany and Norway, prices have dropped a more modest 5-10 percent over the past two years, as reported by the Wood Resource Quarterly. Sawlog prices fell during 2012 because sawmills were cutting back production in response to the weaker demand for lumber throughout Europe.

While log prices have fallen in both US dollar terms and local currencies the past two years in Northern and Central Europe, prices for sawlogs in the 4Q/12 in Eastern European countries, including Estonia, Latvia and the Czech Republic, were generally higher than in 2011. This development has mainly come as a result of the relatively strong lumber export market which kept the log markets healthy.

The only major market in Eastern Europe where log prices have fallen has been Poland. From the 2Q/11 to 4Q/12, average prices have fallen over 20 percent and the country has now some of the lowest conifer sawlog prices in Europe, according to the Wood Resource Quarterly.

As a consequence of slowing lumber production, log trade declined in Europe during 2012, which also had a dampening impact on log prices on the continent. Net log imports to Western Europe fell from over 14 million m3 in 2011 to an estimated 10.8 million m3 in 2012. Much of the decline in imports was those from Russia and the Baltic States.

Sawlog prices might be close to the bottom in the 1Q/13, and they are likely to remain at these levels as long as the European demand for lumber continues to be weak.

Despite the recent price declines, current price levels are higher than the ten-year average in all major markets throughout Europe.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.