This story is part of the softwood lumber series.
To learn more about export opportunities for companies in this sector, please read Canada’s softwood industry needs innovation for long-term growth, not just a hot U.S. housing market
Byproducts of lumber production, wood shavings and sawdust used to be considered waste and were often disposed of in so-called beehive burners, which spewed smoke and ash directly into the atmosphere. A couple of decades ago, innovative thinking on how to better use these byproducts led to the creation of the energy pellet industry, and opportunities for companies including Granules LG Inc. of Saint-Felicien, Quebec.
Owned partly by the Mashteuiatsh First Nation, Granules LG started in 1995 with an inaugural production of 4,700 tons worth of pellets. The company soon gained a reputation for its high-quality product. Facing a small Quebec pellet market, Granules LG’s capacity soon overtook local demand, making exports to the U.S. an integral part of the firm’s growth strategy.
In 1999, the company began selling into the Northeastern states, where the demand was greatest, due to the relative lack of hydroelectricity and natural gas. Wood pellets, being cheaper than oil for home heating, soon caught on.
“We found someone in the Eastern Townships who was bilingual and had a lot of connections and was selling Christmas trees to distributors in that area. That’s how we got started in the U.S.,” says General Manager Ken St-Gelais.
The U.S. has remained a strong market. This year, the company is on track to produce more than 125,000 tons of pellets, about 30 per cent of which will go to the Northeastern states. About 45 per cent of Granules LG’s pellets are still sold in Canada.
The remainder are destined for Italy, Granules LG’s newest export market, which it began shipping to in 2007, when its capacity again outpaced demand.
“Italy is a big importer because they don’t have big forests and the cost of petrol is high, so wood pellets are a good thing,” St-Gelais says.
A second sale to Italy in 2012-13 came about when the company connected with a Montreal customer who had an Italian partner. Granules LG shipped 30,000 tons in bulk and 30,000 tons in containers across the Atlantic.
In terms of exporting, St-Gelais says there have been many lessons learned – especially the nuances of wording in letters of credit. Differences of interpretation and imprecise language cost the company $200,000 – a mistake it won’t make again. Granules LG has become more sophisticated about minimizing its risk of not being paid, partly by the types of contracts it uses and partly by tapping into EDC receivables insurance.
One thing the company can’t control, however, is the weather. While recent warmer than usual winters caused demand to fall in North America, the company’s Italian customers have helped to keep Granules LG’s 50 employees busy which in turn has helped the company maintain good relationships with its raw materials suppliers.
The company bases its distribution strategy on the pipeline model, St-Gelais says. “At this point we use the export market as a kind of a valve. We play with the valve to make sure we never stop production. We have to keep the flow of the fibre going.”
With Europe ahead of North America in terms of an appetite for clean fuel, Granule LG also has its eye on France and Belgium as possible export markets.
“The environment is a huge part of it,” says Gordon Murray, executive director of the Wood Pellet Association of Canada. “Wood pellets are a form of biomass and biomass is considered to be essentially carbon neutral. Compared to coal, it’s also has lower emissions of particulate matter (including) nitrous oxide, sulphur dioxide and mercury.”
Murray pegs the global pellet market at about 30 million tons a year and growing. Europe accounts for about 20 million tons of that market, with about half of that going to power generation as a replacement for coal and the other half for commercial, institutional and residential heating.
Canada is the world’s second-largest exporter of wood pellets after the U.S.
“We are optimistic that we will continue to see strong growth in global markets,” Murray says. “European power plants are continuing to convert from coal to wood pellets. Japan and Korea have recently adopted the same strategy, and are emerging in importance to Canadian pellet exporters.
“Now that our own federal and provincial governments want to reduce consumption of coal and heating oil, we think there will be a huge opportunity to expand domestic consumption of wood pellets right here in Canada,” he adds.