Putting the punch in pellets | International WoodFuels President Steve Mueller sees a budding market for his wood-based fuel

At the end of July, San Diego-based International WoodFuels announced it would open a wood pellet plant in the Waldo County town of Burnham adjacent to Pride Manufacturing Co., the last U.S. manufacturer of wooden golf tees.

The arrangement seems like a win-win. The two companies will share a log yard and operating expenses. The pellet plant, which will create 35 jobs and produce 100,000 tons of wood pellets annually, will use Pride’s waste wood as some of the raw material for its pellets. Pride, which has been struggling to remain competitive with Chinese golf tee makers, will be able to save money on wood purchasing, enabling it to retain its 145 employees. Pride had been considering a move to China when it approached Matt Jacobson, president of Portland-based Maine & Co., looking for outlets for its waste wood to reduce costs. Jacobson, who is running for governor next year, played matchmaker.

“We’ll be bringing in 25,000 tons a month of logs,” says Steve Mueller, president of International WoodFuels, which has offices in Portland. “Sharing the log yard with Pride, which has a great staff, master millwrights and experienced operators, sure beats doing it ourselves.”

Mainebiz sat down with Mueller to talk about International WoodFuels, its business model, the wood pellet industry and, given recent headlines, just how susceptible to explosions are wood pellet plants? An edited interview ran in the Sept. 7 issue of Mainebiz. A full interview follows:

Tell me how International Wood Fuels arrived at the Burnham site and chose it for your first pellet mill in New England.

Our decision to select the Burnham site really was driven by, how can I put it, pure coincidence that we had been looking for a location in that region that had some infrastructure ideally, not just a blank site. I didn't really want a broken down old saw mill site. We were looking for a site that had good access to [Interstate] 95, that the community was comfortable with cause with plants blowing up and burning down, you're going to want to have some level of confidence in the community and we were introduced by Matt Jacobson through Maine Inc to some folks who have been there for 20 years I believe. They are the only manufacturer of wood golf tees in America. They have a log yard, they bring in whole logs so they were a true, like ourselves, a true processor of sustainably harvested whole log product and they had a lot of skills, have a 140 plus employees so there was a lot of very positive things about the potential for that relationship. We went through a process with them that took about six months to develop a strategic financial set of agreements that would allow them to actually benefit from our being there so that we weren't just benefiting there. It was a symbiotic relationship and benefits. They have a lot skill sets and technical resources: handling a log yard; mill rites; engineering; HR; you know, all the good things that if we went anywhere else it would take a lot of time and effort to create all of that. So it really was, for us, a perfect confluence of the right geographic location, access to pulp wood because we have the major mills not about 30 to 40 miles away so there's plenty of pulp wood available so I thought it was terrific.

Can you tell me a little bit more about what the arrangement is? Will you just be sharing some costs and will you be using the scrap wood that Pride has?

They don't have scrap wood. We take a whole log in and we take the bark off, that's the first thing we do, and it's the same thing that they do. They then will turn that into dowels and then turn that into golf tees, some of the shavings and saw dust material coming out of their process is ideally suited to blend in with ours. Of course, we're taking in about 200,000 tons a year of logs, they're taking in about 60,000 tons a year of logs so you know it's a relatively small portion of our needs but it was an amount of waste material that they were having to sell on the open market and, because it never hits the ground, it stays in closed containers, it's clean material. It will be partially, maybe 10% of our total volume but certainly it will be an important source of revenue for them because we can pay a higher price for it.

So you'll be bringing in much more?

Oh yes.

This is a $20 million dollar project. Can you tell me what kind of savings you're seeing from this arrangement?

It's not saving as much for us, we're just transferring some of what would have been our cost to the staff and operate over to them so the value proposition is really there. Their personnel being used partly for their operations and partly for ours, it just gives them more value. So it was a pretty straight situation that I thought really worked really well for us.

You mentioned the sourcing of the wood. With Maine having such a history with the pulp and paper industry, how would your demand for wood compete with the pulp and paper industry and how is International WoodFuels preparing for that? Is there any conflict there?

You know, public records would indicate that there is about 14 million tons of pulp wood logged in Maine. About half of which goes up to Quebec province. About half stays in the pulp mills in Maine. There are four pellet mills in Maine and we will be the fifth. Together we probably don't take 6%, I mean it's nothing. I mean if you took it on the 14 million it's probably 2%. It's a very inconsequential amount of the overall harvest but I will say it's important to the logging community because we take all year round, we operate all year round and we're a community based facility. We refer to our facilities as community energy facilities because we're creating in the local community a series of products including bagged product for the home, bulk product for schools and hospitals, and of course, we also install our own boilers. We are a part of the harvest program and we're only taking logs from sustainably harvest properties, which frankly is virtually all of what we have in Maine anyway.

Ok, let's talk about wood pellets for a second. Wood pellets have been around, but they haven't had as much focus until recently. What's happened and is the interest sustainable?

Well it goes back to the 1930s when the first pellet plants were built and we, you know America created and started the whole wood pellet industry back in the early 1970s and it migrated to Europe in the 80s and 90s and then came back to America so it's interesting. It's not dissimilar in many respects to wind energy which was started here in the 1990s and then migrated to Europe, became a bigger energy product because of greater subsidies and I think the 12 million tons a year of wood pellets that are currently manufactured and consumed in Europe, by comparison to our 3 million tons in America when we are what, twice the land mass and the same number of population, we probably got 40 times, I don't know what the right number is but probably 40 times the available biomass product. America's just had cheap energy and Europe has long since had subsidies and had high prices for energy so the economics for pellets in Europe were compelling long before oil jumped from $70 to $140, there are almost a hundred, there's 91 pellet plants in America and probably 10 to 15 a year being built, no one's viewed $140 oil is real and we don't view $30 oil is real but anything above about $40 dollars, $45 a barrel of oil puts your home heating oil over $2 and pellets match very nicely to anybody who's, this winter you're paying what $2.30, $2.40 a gallon for heating oil, pellet heating is a better deal.

I know you said not a single pellet produced at the plant in Burnham will leave the state Maine. Is there enough demand in Maine?

Actually, most of the pellets consumed in Maine come from places like Arkansas, Georgia, Wisconsin. I mean, 70% to 80% of all the pellets consumed in the state come from out of state so it's an economic exercise. For people to sell pellets at a hardware store or a home improvement center they need to make some money per ton and frankly the cost of shipping is so high that there's very little margin so you got to create more value and the only way to create more value is don't put it in the truck and drive it for 850 miles.

Can you tell me a little bit more about the International WoodFuels business model?How would you work with commercial and industrial customers?

I think that the fun thing about the business model we started was we didn't really really want to be just in the residential bag product business. We really wanted to create some new markets and the only way to create new markets is to offer different value proposition to the customer so we've been developing a program for the last 12 months to offer metered heat energy, just like your electric bill. Right now you don't even think about it you get your electric bill and you pay it. What we're offering is metered heat energy so that you could put a boiler in an office building, a church, a school, a hospital, and we become the number one boilers so we supply the pellets to we just heat energy, we don't sell pellets and since I've got a manufacturing facility in Burnham, we can easily put 30 or 40 or 50 boilers out there and guarantee heat energy for the next 10, 20 years but at the same time the customer doesn't have lay out $100,000, $200,000 for a system and the customer gets a reduced price if the price of oil rises. So what we've done is we put a floor on it, let's say $2 dollars per a gallon of oil is the floor. As oil starts to go up to $2.50, $2.70 and there will probably be a carbon tax on oil, so next year you'll probably see it at $3.10, $3.25. The customer doesn't pay that price, he pays a lower price in the future so.

You should be able to lock in a price?

It's a floating lock. I mean, it's a guaranteed discount is what it is and the discount just expands the higher price of oil.

A company or any kind of company with any kind of facility would call up International Wood Fuels and say "I'm interested in this" and with no capital costs or anything you would install a boiler and just start supplying them with wood pellets and just they would be paying a monthly bill and that's the model.

You got it.

Are you building this mill on spec or do you have customers already lined up in Maine?

No, we have virtually -- how can I put this? -- 100% of the production capacity of that plant will be fully committed and there is a portion for bag supply to local community based distributors, all of whom have very good names and very good reputations in Maine. There are certainly a number of heat energy customers that are probably another 10% or 15%. We don't even see that there's an issue as to, you know, would some of this be sold, not sold. I think most people have approached pellet manufacturing as a seasonal business. Let's you and I wanted to go and sell barbecues, you'd probably sell them in the summer right? If you want to sell pellets though, you'd sell them in the winter. We don't see the business that way and we see it as a 12 month business with a 8 or 9 month consumption cycle so that we're manufacturing pellets in April, May, June, July and August to make sure they're already presold and already available to the home improvement centers and the Ace Hardware's and the other community, you know the Hannaford's and everybody else who's selling renewable energy fuel product in the winter.

With that amount of demand and the fact that all of the production is already spoken for, is there room for expansion?

I think we're spoken for in terms of market segments and not presales. Our view is that we believe pretty strongly that there is no issue as to whether or not there's a market for it in Maine and whether or not we can sell it in Maine. I think we should serve the community first. It's our trees, it's our community. When people talk about pellet exporting to Europe, you know I look at it and say, first of all it's uneconomic. You can only lose money doing that. Shipping them out of state to you know Massachusetts or to Connecticut or Rhode Island, sure. I can understand that. Maine should be, if we looked two years forward from today, you would have say that Maine will be the Saudi Arabia of New England when it comes to renewable energy heating fuel. Today we're a significant importer and that's criminal. I mean, why are we not, why don't we have 10 pellet plants the size of what we're building? And every one of those employing 40 to 50 people and creating valuable community based jobs. Well the answer is that the economy's been a little tight.

Gov. John Baldacci is fond touting Maine's potential to become the center of the sustainable energy movement. How does Maine stack up among other states when it comes to attracting companies like International WoodFuels?

I'm thrilled to be there. We've basically put our companies entire corporate operation staff based in Portland. I committed out in San Diego to have our business in Maine as a regional headquarters and, though we have a plant that is almost completed in Virginia, and we'll have several other plants in parts of the U.S., I think that Maine will ultimately be our corporate headquarters.

Do you have any future plans right now that you can share?

Well, we're already funded and committed in building, half way through construction in Virginia and that's a 100,000-ton plant and that will be online the first of January. You know, we've got other plans for other locations but there sort of immaterial because that's just part of the, you know the growth cycle is always what it is. It takes time and costs money and we're relatively comfortable that our business in the future will grow based on communities. I'd love to grow more plants frankly in Maine. Maine is really the place where all of this should go.

We talked about the European market for wood pellets being higher. I think it was on your website that I read two-thirds of new construction in Austria is designed to handle wood pellet heating and more than 25% of Sweden's energy is coming from bio fuels, primarily wood pellets. The focus on domestic markets obviously is very important to International WoodFuels, do you see the demand growing? And is it organic or do there need to be some changes, whether with subsidies or federal energy policy, that will create that demand in the domestic market?

That's a great question. I could have paid you to ask that question. We think that the real beauty of this business is this it is not subsidized. It is actually based on the economics of the real world. Of buying round wood, processing it, turning it into a product, putting into a bag or putting it into a truck and shipping it out the door. You know, the demand in the U.S. today is probably, in my estimation, it's not totally universally agreed upon but I think there's between a half a million and a million tons of more demand than production. In America, transport is not easy by rail so 90% of pellets, maybe 95% of all the pellets are currently, we ship them by truck. Truck is relatively inefficient. You're lucky if you get 25, 26 tons on the truck. That truck can only drive a certain number of hours a day before they have to stop so the economics of shipping bagged product long distances is just terrible so what happens is, a really robust, highly professional pellet manufacturer in Washington state can't serve the Northeast cost effectively. If you look at all of New England, you have the alleged four pellet plants in Maine of which there's only two operating today, Corenth and Athens. You've got one in New Hampshire, none in Vermont, none in Massachusetts, none in Rhode Island (it's supposedly coming back online but the last one didn't work), none in Connecticut. Seven, maybe eight in New York, most of whom but for the two from New England Wood Pellets, are in the far western side of the state of New York, so you might as well be in the Rocky Mountains as far as that's concerned to try to get pellets easily into New England. Pennsylvania has got about 8 or 10 pellet plants, Virginia I think we have four. The message I'm getting to is, we have a shockingly few number of pellet plants in a region that contains 50 million people, 30% of whom buy heating oil for their homes so you just do the whole math. We know the state of Maine has like 96% of all homes are on heating oil. Massachusetts is 28%, Vermont it's 30, actually it's a little bit more but there's nobody there. New Hampshire is about 30. So when you look at the numbers where you'd want to be building pellet plants is a) where the timber is and b) where the oil heat market is. And so the strange part is that there's just been no development of those businesses. The export market for pellets for America has been much talked about, very few, there are three primary pellet plants in the United States that export: two very large dedicated exporters don't affect the U.S. domestic market, one modest size 140,000-ton plant, I think it's the second or third largest plant in the United States, in Georgia under contract. One in Mississippi, very small 55,000-ton plant under contract and that's it. End of story. And all four of those plants, I dare say lose money on every ton they ship overseas but because they're contracted business, they lose money but they lose it gracefully I guess. I don't know I never quite figured that out.

I read an article in the Wall Street Journal about the plant in Florida that exports 500,000 tons to Europe. One of the comments from the CEO of Propellets, an Austria-based pellet producer, is that we're looking at a totally artificial market. He said, "No power plant would consider using pellets for one minute if they didn't have to do it." That surprised me and I didn't know if you have a comment on that.

Well, I think that's true. I mean I don't think you're going to put chocolate ice cream in a vanilla milkshake either if you can avoid it. I think most guys running a coal fired power station don't want to throw stuff in there. And the beauty of a pellet vs. a chip for example a wood chip is a pellet is a specified technical product. It's 6% to 7% moisture content, you know, ultra low ash, stores well, flows well. Chips on the other hand are just the opposite. A biomass chip can be 60% wet, could be 30% wet. It's got a lot of ash in it, a lot of bark in it, locks up, bridges up, doesn't move very easily. So I think when you talk to the power industry, yeah, they've been forced into it in Europe. Here in the U.S., the only thing the utilities are being forced to do is to absolutely reduce their CO2 admissions. Now, if you and I were the owners of an industrial coal fired boiler let's say in Massachusetts or in Maine, and we could replace 10% of our coal with wood pellets and reduce our CO2 admissions instantly by 10%, where would we sign up? You know, it's like why wouldn't we do it? Well the answer is there's not one single pound available for that market. So the European market has residential, it has business heating and they have power generation or industrial boiler steam generation from pellets. Here in America, it's 99.999% residential home heating so the home owners, you and me, we want the pellets for our home. We don't want them going off the reservation to Europe or going somewhere else, to Japan.

You just said the vast majority is residential but International WoodFuels is targeting beyond the residential market, you're going to be working with industrial customers.

And we are primarily because in Maine, we have a lot of big customers using heating oil to make steam, to create products, that employ hundreds of thousands of people so they're either going to leave the state because they're energy costs are too high, or if we can find a way to do it with pellet steam or pellet hot water for them that's more economic than they'll stay here.

And 100,000 tons will be the annual production of the Burnham mill. How does that stack up? That makes it the largest of the other four mills in Maine, right?

I don't know, everybody claims how big their mills are. I mean I think Athens, do you have quotes from them as to what size Athens is?

I don't, but I read somewhere that the Burnham mill's production would be higher than any other mill in the state so far.

Yeah, and I'm not sure that George Soffron wouldn't tell you that he has a bigger mill than I'm building and it wouldn't surprise me. An awful lot of people want to be big, you know, they want to be big. They want to have big facilities. I'm not honestly sure and so I would say that at a 100,000 tons we'd be among, you know, the top, there's probably 15 to 20 plants in the United States that are bigger than we are. In Maine we might be, I think that Corinth claims at least 100,000 tons, I think Athens is in that range so let's just call us all equal. I mean, me, I don't care.

I've read your bio, but I was wondering if you could just tell where your past experience lies and how you came to found International WoodFuels?

My background has been in the renewable energy and energy business for 20 odd years. I mean, I've been owner of district heat and cooling plants, providing either water, steam or hot water to industrial and commercial facilities around the U.S. My previous company owned a series of 20 megawatt biomass power plants in New Hampshire and California and in Florida. We owned Industrial Gas Co. generation plants so my history has been on the renewable energy side as a private power generator. So, generally speaking, this was not a complicated step for me, it was just a step away from being interconnected to the utility because thermal energy is not utility connected where's everything else I did was grid connected.

You mentioned Portland being the corporate headquarters. Right now it's in San Diego, though.

Well San Diego is where I live. You know, it's where the business started. We run finances from here and marketing and sales from here but really, if you walk into the offices in Portland, we've got 12 people working in 800 square feet right now. We're hoping convince some landlord to let us move in to new space some time soon. We're working on that, hopefully move by October.

So San Diego is considered the corporate headquarters right now?

San Diego, we don't advertise it. I promote Maine.

You mentioned it earlier, it seems like in the past maybe four months there's been news reports of pellet mills catching fire or explosions. I think there's been two in the last four months and I was wondering does that happen often and how does that affect your insurance costs?

Well the first question is the only one that's relevant, the second one doesn't matter. I mean, the fact is that there's 91 pellet plants in the United States, been in business as long as 25 years, I think our safety record is as good as any other industrial, in a high dust, high hazard environment. I think the situations here in Maine are, as I said in the Sun Journal guest column that was published yesterday, we don't see this as even remotely close to normal and that we've had two plants go down in Maine when no plants in the United States, of which there are 90 or 89 other plants, none of them are offline. You know, do the math, divide 2 into 91 it's not a big deal. People get in car accidents every day, it doesn't mean the cars are unsafe. It sure doesn't mean that a pellet plant is unsafe. Now I'm, my board of directors and my folks and Pride sports all say, "Steve please try not to build a plant that's going to blow up or burn down". Our insurance company thinks it's anomalous because they've looked at 200 pellet plants and all of them from time to time will have something go wrong with them but nothing that's going to ... what happened in Strong is completely unknown. Nobody knows what happened. We have yet to hear any reports, there are independent investigations being done, whether they become public or not is not our business but I wouldn't ever ever ever think that something like that could happen in a pellet plant and I think all of us in the U.S. and in Europe feel the same way.

That's good to know. Anything else that we didn't touch on that you'd like to add?

I think Maine is a very, very ... it's ground zero for a whole new industry that we're very pleased to be part of. Very proud to be in Maine and you know, we've been treated extremely well by everybody from local folks right on up to and including the Governor and members of the Legislature and it's a real treat. Of all the states I work in, Maine is my favorite and as long as that print only stays in Maine, I'm safe. My friends in Virginia love me as well.

Whit Richardson, Mainebiz new media editor, can be reached at wrichardson@mainebiz.biz.