Consider Lewi’s management preferences and their impact on his strategic decision   making 

Volume 15

Issue 4

December 2017

Holson Forest Products Ltd.: The Challenge of International Markets

Case prepared by Jacqueline WALSH,1 Blair WINSOR,2 and Jose LAM3

Introduction

Ted Lewis is the president and owner of Holson Forest Products Ltd. (Holson), a sawmill and wood
pellet manufacturer in Roddickton, Newfoundland and Labrador. In 2011, Lewis expanded
Holson’s operations by adding a wood pellet manufacturing facility that would contribute to the
region’s economic development. Because of factors beyond the company’s control, however,
Holson has delayed production for the past five years.

In early June 2016, Lewis was reading the CBC news online. He sighed as he reread an archived
CBC article dated June 1, 2015. His wood pellet plant had made headlines in connection with the
amount of money the Newfoundland and Labrador (NL) government had spent maintaining the
Roddickton facility since 2008. The pellet venture had taken three years to plan. In 2011, the
production facility was completed with the help of a $10 million interest-free loan from the
provincial government.

Forestry had always been one of two main sources of income on Newfoundland’s Northern
Peninsula. Fishing, the other source, had all but died in 1992 with the cod moratorium. A business
plan supported the feasibility of Holson’s venture, but the production of wood pellets had been put
on hold for the past five years due to a number of unforeseen challenges. Although the plant had
sat idle for five years, Lewis was still confident that the pellet venture would guarantee the future
of his company and serve as a model for local economic development. Lewis knew time was
running out to bring his hard work to fruition, but he agreed with Todd May, his wood pellet
manager, who was quoted in the article: “We haven’t quit; we haven’t gone away; we haven’t
washed our hands of it – and we don’t intend to.”4

1 Jacqueline Walsh is an assistant professor at Memorial University of Newfoundland, Canada.
2 Blair Winsor is an assistant professor at Memorial University of Newfoundland, Canada.
3 Jose Lam is an associate professor at Memorial University of Newfoundland, Canada.
4 CBC News, “$200K spent on Roddickton wood pellet plant justified, says manager”, June 1, 2015, accessed July 11, 2016.

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The International Journal of Case Studies in Management is published on-line (http://www.hec.ca/en/case_centre/ijcsm/), ISSN 1911-2599.
This case is intended to be used as the framework for an educational discussion and does not imply any judgement on the
administrative situation presented. Deposited under number 9 40 2017 012 with the HEC Montréal Case Centre, 3000, chemin de
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Holson Forest Products Ltd.: The Challenge of International Markets

The wood pellet industry

The use of wood pellets as a source of heat and electricity generation is part of a global trend toward
the use of renewable energy sources. The growing popularity of wood pellets can also be attributed
to the increasing costs of traditional energy methods. In the mid-2000s, global wood pellet supply
was estimated to be 4 million tonnes, while the demand was estimated to be 30 million tonnes.1
The wood pellet industry experienced growing pains in the 2000s, manifested in price volatility,
quality problems, fibre supply shortages, and hoarding.2 In 2011, production capacity was nearly
29 million tonnes internationally, compared to just over 10 million tonnes in 2008. By 2020, the
total world market for pellets is expected to exceed 35 million metric tons.3

Wood pellets are compressed wood fibre made from sawdust, shavings, logging debris, diseased
and/or insect-killed trees and/or bark. The raw material used in the manufacturing process
determines the quality of the wood pellet. Wood pellets with low moisture content will burn longer,
hotter, and cleaner, so high-quality wood pellets come from clean, bark-free sawdust. Companies
that produce the cleanest pellets with the lowest moisture content are known as secondary pellet
producers. These smaller manufacturers typically operate logging operations, harvesting and/or
saw mills being their primary source of revenue. Pellets allow them to dispose of their internally
generated sawdust in an environmentally sustainable manner. Secondary companies usually
produce smaller volumes (less than 100,000 tonnes per year) of pellets. This is in contrast to
primary pellet manufacturers, whose main business is the production and sale of wood pellets.
These larger manufacturers buy their raw material from multiple third-party sources, thus lacking
quality control over the content.4 Large producers sell mainly to industrial customers who demand
high volumes and long-term availability.

Wood pellet consumers are generally categorized as either industrial or residential. Industrial
consumers include large manufacturing plants and utility companies looking for cheaper and more
environmentally friendly alternatives to fossil fuels. These larger consumers usually buy in huge
quantities and deal directly with pellet manufacturers or distributors. Residential consumers are
home owners or smaller businesses who have invested in (or are considering purchasing) wood
pellet stoves or furnace systems as an alternative source of heat to electricity and fossil fuels.
Residential consumers generally purchase their pellets through retailers or distributors and not
directly from manufacturers.

Although pellets come in a uniform size, shape, moisture content, density, and energy content,
different raw materials result in different pellet grades.5 Certification is not required by law in

1 Ernie Urbanowski, “Strategic analysis of a pellet fuel opportunity in Northwest British Columbia”, Executive MBA Thesis, Simon
Fraser University, 2005.

2 Henry Spelter and Daniel Toth, “North America’s wood pellet sector”, Research paper FPL-RP-656, Forest Product laboratory,
Forest Service, United States Department of Agriculture, 2009.

3 William Strauss, “Overview of the pellet markets: Global, national, local”, Data- RISI, 2014 Global Pellet Outlook, 2014.
4 http://www.allaboutwoodpellets.com/pellet_buying_101.php

5 http://www.pelletheat.org/what-are-pellets-

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Holson Forest Products Ltd.: The Challenge of International Markets

North America, and there are no labelling restrictions for the pellet industry.1 Different pellet
grades are generally produced for different target markets and have different price points: Premium
grade pellets sell for a higher price and are typically bagged for use by residential and small
business customers; industrial grade pellets are shipped in bulk containers and primarily used by
coal plants converting to a renewable energy source. Depending on their location, manufacturers
find the most economical and efficient transport method. Bagged pellets are usually distributed to
and sold through retail stores, while bulk pellets are distributed (by boat, train, or truck as
necessary) and delivered to industrial customers by truck, much the way oil is delivered. (See
Exhibit 1 for information on the wood pellet value chain.)

Wood pellet manufacturers compete on quality, quantity, availability, reliability, and contract terms
such as delivery times and contract length. Pricing is based on standard industry rates and a number
of supply and demand factors. Industrial market demand can be affected by government policies
related to reducing carbon emissions and promoting the use of renewable energy sources.
Residential market demand can be affected by outside temperatures and the cost of heating fuels
such as propane and oil.2

Holson’s founder

Ted Lewis was born and raised in Conche, a small community, population 250, on the Northern
Peninsula of Newfoundland and Labrador. After Lewis graduated from high school in 1974, he
moved to Newfoundland and Labrador’s capital, St. John’s, to work in construction. After
completing the two-year forestry and fishery program at the College of Trades and Technology, he
took a summer job at the federal Department of Forestry and Agrifoods. He later worked as a
biology research technologist with Fisheries and Oceans Canada (DFO). After four years with
DFO, Lewis moved back home with his wife, Linda, to start a family. He began working as a
commercial fisherman, while Linda worked as a teacher. In 1991, Lewis realized that the fishery
was in steady decline. He had dreamed of owning and operating a logging and sawmill business
near his hometown, so when a sawmill in Roddickton, Norchip, advertised for an operations
manager, he applied. Lewis worked with Norchip for six years before leaving in 1997 to open his
own logging company, Lewis Logging. Since returning home, Lewis had participated in several
organizations involved in local economic development such as the Northern Peninsula Business
Development Association and Newfoundland and Labrador’s Rural Secretariat. Although he was
nearing retirement, he still felt a strong sense of responsibility to ensure a sustainable future for his
employees and local communities.

Founding of Holson

Holson was established in 2004 when Lewis decided to expand Lewis Logging by purchasing the
land and equipment of his former employer, Norchip, which had closed in 2002. With the addition

1 Various private standards associations currently offer certification. The Pellet Fuels Institute, for example, identifies three grades
of wood pellet – Premium, Standard, and Utility. To earn certification, manufacturers are subject to third-party inspection and
testing. (http://www.pelletheat.org/about-the-standards-program)

2 Wood Pellet Association of Canada, https://www.pellet.org/wpac-news/global-pellet-market-outlook-in-2017.

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Holson Forest Products Ltd.: The Challenge of International Markets

of Norchip’s land, Holson held the timber and mill rights to most of the allowable timber cutting
in the area and employed fifty people. The logging industry began showing signs of decline in
2007. In 2008, Holson’s largest customer, Corner Brook Pulp and Paper Ltd. (CBPPL), decided to
stop buying lumber from the Northern Peninsula due to increased shipping costs. Lewis realized
that, if his business was to survive and the communities around the mill were to prosper, he would
need to diversify. He decided to steer Holson toward the wood pellet market, a step he felt would
help the firm and provide employment opportunities to local contractors, small service firms, and
transportation companies. By the time construction of the wood pellet plant was completed in 2011,
Canada’s forest industry had started to emerge from a multi-year cyclical decline, and the sector
had begun to focus on innovation and market development.1

Operations

Holson’s mission statement reflects Lewis’s belief that the first and foremost goal in business is
customer satisfaction (See Exhibit 2). His company, which aimed to create sustainable
communities, sold top-grade lumber across Canada and the United States and ensured that bundles
of lumber never left the yard unless they were up to Holson’s standards. Lewis’s philosophy of
producing quality products was reflected in the company’s operations. Over the years, the company
has invested in process and product technologies to improve its sawmill operations.2 CBPPL’s
2008 announcement created a crisis on the Northern Peninsula since many communities in this
region depend on the forest industry. The NL government was thus receptive to Lewis’s proposal
to establish a pellet plant with a production capacity of 6,000 metric tons per month (72,000 MT
per year). Holson could access up to 50,000 metric tons per year using the feedstock from his
licensed Crown lands. If necessary, raw materials could readily be purchased from nearby logging
contractors. Lewis estimated he could employ 322 locals throughout the forest sector as part of his
wood pellet value chain.

Under the original 2008 business plan, Holson would ship pellets throughout NL by land and to
international markets by sea out of St. Anthony, the nearest port; unfortunately, St. Anthony was
125 km northwest of Roddickton. Depending on the weather, travel to and from the port could be
problematic during the winter months, and sea ice would likely block shipping for a few weeks
each spring. Shipping finished products from Roddickton to international markets would not only
create logistical problems but also entail additional packaging, storage, and transportation
expenses. Still, based on Lewis’s calculations and estimated revenues, this model was feasible. The
port in St. Anthony would have to be upgraded to a deep-water port to accommodate vessels that
could transport pellets overseas.3 Lewis had been assured that upgrades to the port facility would
be financed by the provincial government; however, by 2016, no work had been completed on a

1 NRCan, Industry Overview, Canadian Forest Service, Natural Resources, Canada, Government of Canada.
http://www.nrcan.gc.ca/forests/industry/overview/13311. Accessed October 12, 2013.

2 Kyle White and Heather Hall, “Holson Forest Products Ltd.: Innovative Adaptations in the Forestry, Canadian Regional
Development: A Critical Review of Theory, Practice, and Potential”, September 2013, accessed July 11, 2016.

3 To minimize shipping costs, ports needed to handle 500,000 tonnes of wood pellets. Gordon Murray, “Development of an efficient
wood pellet supply chain from Eastern Canada to Europe”, 12th Pellets Industry Forum, Berlin, October 9–12, 2012.

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Holson Forest Products Ltd.: The Challenge of International Markets

deep-water port in St. Anthony.1 In addition to the lack of shipping facilities, Holson faced
problems with European markets since many European countries required that wood pellets be
sourced from certified sustainable forests,2 but the forested lands owned by Holson were not
certified. Although the NL government began considering the option of certifying Crown land in
2001, little progress had been made by 2016.3

The Holson team

As president and CEO, Lewis made all major decisions and personally managed all wood
harvesting and cutting operations. The flat organizational structure meant that everyone at Holson
had at least some involvement in all departments. Don Wells – manager, special projects – oversaw
the installation of buildings and equipment and ensured that they ran efficiently. Wells also worked
with the entire team to see that projects were completed on time and on budget. Trevor Blanchard
had been with Holson since its beginnings in 2004. As the mill superintendent, he had a close
working relationship with lower-level employees and handled the day-to-day operations of the
sawmill, as well as equipment maintenance. Blanchard was also in charge of the mill expansion.
During normal production, he was responsible for the thirty-five employees and the mill’s
operations. Todd May was hired in 2008 as part of the pellet plant initiative. He oversaw the general
design and development of the pellet plant and became the operations manager. Paula Snook-
Randell had a degree in business administration and handled day-to-day office tasks including
taking orders, financial statements, and accounts payable and receivable. Margaret Caines, who
had been with Lewis since the mid-1990s, was responsible for the paper work connected to logging
operations. After thirty years as a teacher, Ted’s wife Linda joined the office team in 2008 as
receptionist. Her responsibilities included following up on local sales, lumber and log inventory
management, and keeping employee records.

Holson was known for its high-quality products and excellent customer service. Neither Ted nor
his employees had formal training in marketing or human resources. He had no sales staff – just
“order takers,” which was anyone who happened to answer emails or the phone on a particular day.
Customers generally found the firm either in the phone book or online. Pricing was based on costs
and the going rate for the product. Holson delivered to customers using its own trucks or logistics
firms depending on their location. Local customers would often come to Holson to pick up their
order.

1 In 2014, Roddickton’s mayor, Sheila Fitzgerald, called on the NL government to build a wharf in Roddickton that would make
the Holson operations more sustainable. Diane Crocker, “Mayor calls on government to help get pellet plant running”, The
Western Star, April 28, accessed July 11, 2016. This wharf was never built.

2 Scott Berg and Ron Lovaglio, “Forest certification: Opportunity and challenge for the wood pellet industry”, Biomass Magazine,
April 5, 2012, accessed February 14, 2015. The government of NL has not been exempted from growing global pressures to
introduce a certification standard for its Crown forests. CBPPL has managed to attain various forest certifications for its operations
over the past decade (Forest Products Association of Canada, 2012). As of 2015, only the forested lands owned by CBPPL (29%
of all forested lands on the island of Newfoundland) have been certified.
http://www.sfmcanada.org/images/Publications/EN/NL_info_Provinces_and_territories_EN

3 The Forestry Services Branch of the NL government became registered to the ISO 14001:2004 standard on December 17,
2015. This certification allowed the government to “explore the feasibility of forest management certification for Crown lands
from which wood products companies obtain their timber.” The Western Star, January 21, 2016.

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Holson Forest Products Ltd.: The Challenge of International Markets

Human resources

Many of Holson’s employees had worked in the forest industry their entire life, and Holson had
little trouble filling positions. Most employees had no formal education or technical training,
although Holson worked with both Academy Canada (a private trade school) and College of the
North Atlantic (the province’s public college) to develop an on-the-job training program to help
locals learn the job skills needed to work at the firm. Holson did not have a human resources
department; each manager handled hiring in their own department, with Lewis having the final say.
From the beginning, Lewis fostered an informal organizational structure. Managers often worked
together to solve problems, with no silo mentality. They treated Lewis like a peer, rather than a
boss, facilitating communication. The staff was loyal and turnover was low. Salary levels were
based on the employee’s experience and the difficulty of the work to be performed. Most
employees fell under the supervision of the mill supervisor, Trevor Blanchard, or the pellet plant
manager, Todd May.

Finances

Holson was the largest sawmill on the Northern Peninsula. The company generated revenues from
its logging and sawmill operations of about $7.18 million in 2013, $17.21 million in 2014, and
$18.13 million in 2015 (Exhibit 3). The company’s 2015 balance sheet showed assets of about
$4.0 million (Exhibit 4). Holson’s financial position was healthy, with low to moderate gearing
ratios (See below, Table 1: Key Financial Ratios). The debt-to-equity ratio had fallen from
approximately 43% in 2013 to 18% in 2015, meaning that the company was financed by roughly
70% equity capital. Similarly, a steadily increasing quick ratio of about 200% (2015) indicated that
Holson was well able to service its short-term payment obligations. While financial security had
come at a cost of reduced profitability (return on equity had declined steadily since 2013), it left
the business with ample financial resources to invest in market development. Self-financing (high
levels of cash and equity) provided a buffer in the somewhat volatile industry (fluctuating ROCE
ratios). The decreasing gross profit margin indicated that direct costs had increased proportionally
to Holson’s revenues. Furthermore, the company had increased its cash conversion efficiency,
shrinking its cash conversion cycle from 71 days in 2013 to 27 days in 2015.

Table 1: Key Financial Ratios
2013

2014 2015

Debt-to-Equity Ratio 0.4 (42.6%) 0.3 (29.5) 0.2 (18.4)
Quick Ratio 0.7 (72.9%) 1.5 (154.6%) 2.0 (199.3%)
Return on Equity 76.2% 16.2% 15.4%
ROCE (Return on Capital
Employed)

29.6% 55.1% 43.4%

Gross Profit Margin 28.3% 12.7% 11.9
Cash Conversion Cycle (days) 71 29 27

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Holson Forest Products Ltd.: The Challenge of International Markets

Potential wood pellet markets

Newfoundland and Labrador wood pellet market

In 2016, the province was home to two other pellet manufacturers: Cottles Island Lumber (in
Summerford) and Exploits Pelletizing (in Bishop’s Falls). (See Exhibit 5 for their locations relative
to Holson.) In 2009, Cottles Island Lumber started operations with a capacity of 10,000 to 15,000
tonnes of wood pellets per year. It targeted the residential market, marketing its products through
retailers in Atlantic Canada and New England. Exploits Pelletizing Inc. was the second pellet
producer to start operations in NL, with a production capacity of 1,500 tonnes per year. This
company targeted only local markets. While both sold premium wood pellets comparable to
Holson’s, neither Cottles Island Lumber nor Exploits Pelletizing had the capacity to become a
province-wide pellet supplier. Holson thus had the potential to become the largest supplier in the
NL market.

Lewis was familiar with the NL market and knew there were opportunities for Holson in both the
residential and institutional markets. In 2008, the NL government had announced a strategy to
promote the wood pellet industry by encouraging homeowners to switch to wood pellet stoves,
appliances, and furnaces.1 A government program offered a 25% rebate to anyone purchasing new
pellet-burning appliances, but this program was cancelled in February 2009. NL’s pellet market
was still limited, likely because traditional wood stoves were still a major source of heating in the
province. Holson would have to invest time and money in educating consumers and promoting the
benefits of wood pellets to the residential market.

Another possibility was for Lewis to partner with a pellet furnace/stove producer to offer package
deals for residential customers including a pellet furnace or stove, pellets, and maintenance. A
pellet stove worked much like a fireplace and typically did not heat an entire house, while a furnace
was meant to heat an entire house. A pellet stove would cost $9,100 to buy and install, while a
furnace would cost $25,000. These costs would include a supply of wood pellets for a specific
period of time, after which customers would buy pellets as needed. The pellets would be delivered
to customers in a tank truck and stored in their home in a tank that fed the furnace. Customers could
also buy bagged pellets at most large chain stores such as Wal-Mart. Retailers generally sold 40 lb.
bags, adding a 100% mark-up to wholesale prices.

Institutional users such as hospitals and municipalities could buy wood pellets in bulk. Lewis had
submitted a proposal to the NL government to convert government-owned buildings to pellet
heating. A market study commissioned by Holson and the NL government had determined that
institutional customers on the Northern Peninsula would require 10,000 tonnes of pellets per
month. However, Lewis felt that, as with the residential market, if Holson were to focus on
penetrating the institutional market, he would need to invest significant resources in marketing and
government lobbying to persuade businesses to install pellet heating systems. As of 2016, the
annual wood pellet consumption of the residential and small business market was just 7,900 tonnes
in Newfoundland and Labrador.2

1 News Release NL, “Residential wood pellet rebate details announced”, Natural Resources, Government of Newfoundland and
Labrador, November 5, 2008, accessed October 23, 2013.

2 John Arsenault, “Wood pellets: Reducing fossil fuel demand in Canada”, BioCleanTech Forum, Ottawa, November 3, 2016.

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Holson Forest Products Ltd.: The Challenge of International Markets

The Canadian wood pellet market

Including Holson, there were ten wood pellet producers in the Atlantic Provinces, accounting for
less than 20% of Canadian production.1 Five were located in New Brunswick, two in Nova Scotia,
and three in Newfoundland and Labrador. The largest facility, Shaw Resources, was located in
New Brunswick and produced about 100,000 metric tons per year.2 Ontario and Quebec were home
to an additional five wood pellet plants, with total capacity of 1 million metric tons per year, or
about 25% of Canadian production. Ontario’s Rentech Inc. had the largest capacity of any plant in
Canada, with annual capacity of 450,000 metric tons. British Columbia had the largest
concentration of pellet manufacturers in Canada, with a total of fifteen plants. Ten of the fifteen
plants in British Columbia had an annual capacity of more than 100,000 metric tons. British
Columbia accounted for 58% of Canada’s wood pellet capacity. Canada’s total wood pellet
capacity was 4.3 million metric tons per year.3 Of the forty-two plants in Canada, sixteen were
considered large producers (more than 100,000 metric tons per year), fourteen produced between
50,000 and 90,000 metric tons, and twelve produced less than 50,000 metric tons.

Compared to international markets, demand for wood pellets is relatively low in Canada, where
the annual consumption of wood pellets for residential heating was just 200,000 metric tons in
2016.4 Premium pellets are used mostly in the residential heating sector, supplied by smaller
producers that use low-cost sawmill residue from their own operations to supply regional markets.
Consumption by the commercial sector is negligible. Although the demand for wood pellets has
been stagnant in Canada, this could change. Because of forecasted oil prices and anticipated
changes to the federal government’s policy on climate change, the Canadian pellet outlook is
positive in the heating sector, but not expected to show significant growth in commercial markets
until 2024. (See 2017 through 2025 demand for wood pellets in Canada in Exhibit 6.)

As a result of the slow growth of the Canadian wood pellet market, Canadian manufacturing has
been driven by international markets. British Columbia’s pellet producers were among the first to
identify a nascent wood pellet market among European power plants and took advantage of their
first-mover advantage to develop distribution channels and domestic partnerships.5 This meant
travelling three times the distance of Atlantic Canada’s producers to reach European markets. (See
Exhibit 7 for a map of Canadian pellet shipping routes.) British Columbia shipments each
contained up to 50,000 metric tons of pellets. In eastern Canada, a handful of ports are deep enough
to handle bulk shipments (on a much smaller scale than B.C.) – Belledune, New Brunswick;
Halifax, Nova Scotia; Quebec City, Quebec; Trois-Rivières, Quebec; and Montreal, Quebec.6
Ninety-five percent of Canadian forests are certified as managed to international standards.

1 www.biomassmagazine.com/plants/listplants/pellet/Canada/
2 Ibid.
3 Ibid.
4 Arsenault, op. cit.
5 Spelter and Toth, op. cit.
6 https://www.pellet.org/images/2012-10-10_G_Murray_12th_Pellet_Ind_Forum ; The Halifax port can handle 6 million metric

tons of cargo per year; Quebec City handles 26.5 million metric tons per year; and Belledune, NB, handles 2 million metric tons
annually.

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Holson Forest Products Ltd.: The Challenge of International Markets

The United States wood pellet market

In 2000, Canadian pellet manufacturers accounted for about 50% of North American production,
but this share fell to 28% in 2009, as new U.S. plants were built at exponential rates.1 In 2016, the
United States was home to 148 pellet plants, with total capacity of 13.2 million metric tons, more
than three times that of Canada.2 Of these 148 plants, 33 produced more than 100,000 metric tons
per year. Another 33 plants produced between 50,000 and 99,000 metric tons per year, and
74 plants produced less than 50,000 metric tons per year. Capacity data was unavailable for 8 of
the plants.

As in Canada, U.S. domestic demand for wood pellets has not surpassed supply and has remained
relatively low compared to that of overseas markets. U.S. industrial market demand will remain
low unless a national energy plan such as the Clean Power Plan is implemented.3 The demand from
U.S. residential and small business heating customers is expected to increase from 2,935,000 metric
tons in 2017 to an estimated 5,118,000 metric tons in 2024.4 For these reasons, both U.S. and
Canadian producers have set their sights on European markets.

The European wood pellet market

The EU is the world’s largest wood pellet market.5 (See Exhibit 8 for wood pellet supply and
demand in member states.) European demand has grown as a result of the European Union’s target
of supplying 20% of its energy needs from renewable sources by 2020 and the introduction of new
policies and subsidies aimed at promoting the use of wood fuels.6 The UK is the largest consumer
of wood pellets in the EU, with 2016 consumption totalling 7.2 metric tons, more than double that
of Italy, the next closest country.7 In the UK, the Netherlands, and Belgium, pellets are used
primarily for power generation.8 As these countries lack sufficient domestic production, they rely
heavily on imported pellets.9 The UK government, for example, requires an increasing percentage
of electricity to be generated from renewable sources. Industrial demand is expected to increase
significantly, as the conversion of large electricity generators capable of using wood pellets instead
of coal is expected to be completed in 2017.10

In Europe, the shortage of raw materials for pellet production means that high-quality pellets are
often traded between neighbouring countries via national or regional supply chains. This picture

1 Spelter and Toth, op. cit.
2 http://www.biomassmagazine.com/plants/listplants/pellet/US/
3 William Strauss, “Industrial wood pellet fuel in pulverized coal power plants: A rational, pragmatic, easy to implement, and lowest

cost solution for transitioning toward a zero future”, BioCleanTech Forum, Ottawa, November 1–3, 2016. The Clean Power Plan
was a policy under the Obama administration. Given the change of government in the United States, it is uncertain whether this
policy will ever become law.

4 https://www.pellet.org/wpac-news/global-pellet-market-outlook-in-2017
5 EU Biofuels Annual 2016, p. 32
6 Spelter and Toth, op. cit.
7 EU Biofuels Annual 2016, p. 34
8 http://epc.aebiom.org/about-pellets/pellets-statistics/1168-2/
9 EU Biofuels Annual 2016, p. 35
10 Ibid.

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Holson Forest Products Ltd.: The Challenge of International Markets

might change in the future, and long-distance trade with high quality pellets (e.g., from Canada or
Russia to Europe) might become necessary.1 In 2010, North American pellet producers shipped
approximately 1.5 million metric tons of wood pellets to European countries, double the volume
shipped in 2008.2 About one half of all North American shipments were to the Netherlands and
one third to the UK. Demand for wood pellets has continued to outstrip production in the
Netherlands, Denmark, Sweden, Belgium, and Italy.3 In 2016, Europe’s total pellet market was
about 20 million tonnes, and this was expected to grow by between 4% and 5% annually. European
demand for industrial wood pellets is expected to increase to 19 million metric tons by 2019 and
plateau at 20 million metric tons by 2024.4 In 2015, EU-28 wood pellet consumption for heating
was roughly 13 million tonnes.5 European plants produced some 14 million tonnes of pellets in
2016, leaving a shortfall of 6 million tonnes.6 In 2016, about 90% of Canada’s pellet production of
about 2 million tonnes was exported to Europe.7 U.S. exports were more than double those of
Canada.8

Compared to North American production plants, EU plants are mainly small or medium-sized.9
The EU’s main pellet-producing countries have sizeable domestic residential markets. Overall, EU
wood pellet production is not expected to keep pace with the demand from either the residential or
the commercial markets.10

The Asian wood pellet market

The Asian market represents slightly more than 10% of the global market.11 South Korea and Japan
are two of the Asian countries that have implemented policies to increase their use of renewable
energy sources. In 2011, the South Korean government aimed to reduce greenhouse gases by 30%
by 2020 while simultaneously increasing its use of wood pellets by five million tonnes over the
next ten years12. Meanwhile, in light of the Fukushima nuclear power plant incident in March 2011,
Japan was also considering alternatives to nuclear energy such as woody biomass.13 Projected
demand for wood pellets in South Korea and Japan through 2025 is shown in Exhibit 8. In 2014,

1 Wolfgang Hiegl and Rainer Janssen, “Development and promotion of a transparent European pellets market: Creation of a
European real-time Pellets Atlas – Pellet market overview report EUROPE”, WIP Renewable energies, December 2009.

2 Hakan Ekstrom, “North American wood pellet capacity set to increase”, Biomass Magazine, August 4, 2011, accessed
September 27, 2011.

3 Wood Resources International (2011). Wood pellet exports from the U.S. and Canada to Europe totalled 1.6 million tonnes in
2010, a doubling of shipments in just two years. May 16. http://news.cision.com/wood-resources-international-llc-
company/r/wood-pellet-exports-from-the-us-and-canada-to-europe-reached-1-6-million-tons-in-2010–a-doubling-of-shipments-
in-just-two-years,c9122985. Accessed Sep. 27, 2011.

4 Strauss, 2014, op. cit.
5 http://epc.aebiom.org/about-pellets/pellets-statistics/1168-2/
6 Ibid.
7 G. Murray, Status Update: Canadian Wood Pellet Industry, Presentation at PPWC Forestry Seminar, November 17, 2016,

Vancouver, B.C.
8 EU Biofuels Annual 2016, p. 36
9 Ibid., p. 33
10Ibid.
11 Murray, NRC 2016
12 Ekstrom, op. cit.
13 Ibid.

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Holson Forest Products Ltd.: The Challenge of International Markets

the largest demand was in South Korea, at 1.8 million metric tons, and demand is expected to grow
to 8.2 million metric tons by 20241. As of 2016, Canada exports only a small amount (20,000
metric tons) of pellets to South Korea.2

Strategic alternatives

As a local business leader, Lewis felt that his community depended on him, and the sustainability
of his sawmill business was at stake. After waiting five years to start production of wood pellets,
he felt he was no further ahead. Should he spend time and money trying to develop the residential
market in NL and perhaps Atlantic Canada? Should he concentrate on developing a viable strategy
for the UK, the world’s largest market in the foreseeable future? Should he look for partners or
strategic alliances? U.S.-based Rentech Inc., the largest wood pellet producer in eastern Canada,
was rumoured to be interested in pellet production in NL. In 2013, Rentech had purchased two
mothballed plants in Ontario and converted them to pellet facilities. Rentech was reported to have
finalized logistical agreements with CN Rail and the Port of Quebec to export pellets and to have
secured contracts for the sale of more than four million tonnes of wood pellets over ten years.3 Or,
of course, there was always the option of cutting his losses and walking away from pellet
production.

2017-10-05

1 Strauss, op. cit.
2 Murray, NRC 2016
3 https://www.canadianbiomassmagazine.ca/news/rentech-is-new-pellet-player-4146

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Holson Forest Products Ltd.: The Challenge of International Markets

Exhibit 1
Wood Pellet Value Chain

Source: Qian, Y and McDow, W. “The Wood Pellet Value Chain: An Economic Analysis of the Wood Pellet Supply Chain from Southeast United
States to European Consumers”, U.S. Endowment for Forestry and Communities, March 2013.

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Holson Forest Products Ltd.: The Challenge of International Markets

Exhibit 2
Holson Forest Products Ltd. Website Landing Page (archived)

We are a family-owned-and-operated company. Customer satisfaction is our primary goal. We
work with our industry stakeholders to create sustainable communities. Our commitment to the
environment is to fully utilize all that we take from the forest, never taking more than we need, and
to ensure the forest is ready for rejuvenation when we leave. Holson produces kiln-dried lumber at
its 10 million board feet sawmill. We specialize in random lengths and hard-to-find dimensions.
Our expert staff delivers the right order on time, every time. We have long-term commitments to
access the timber resource in the region we operate; this gives us the ability to fill any timber need
– lumber, logs, small diameter wood, wood chips, and bark. Holson also produces 50,000 tonnes
of white wood, or industrial grade, pellets annually. In our new state-of-the-art pellet mill we can
produce 6,000 tonnes per month.

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Holson Forest Products Ltd.: The Challenge of International Markets

Exhibit 3
Holson’s Income Statement

Holson Forest Products Ltd.

Income Statement in Canadian Dollars
Year End December 31

2013 2014 2015

Revenue

Sawmill 7,178,142 17,211,228 18,130,012

Direct Costs

Raw materials 3,836,298 11,366,810 11,821,482

Labour 518,805 2,116,800 2,469,600

Utilities 170,100 604,800 680,400

Fuels & Lubricants 113,400 302,400 403,200

Supplies & Maintenance 170,100 504,000 604,800

4,808,703

14,894,810

15,979,482

Decrease (increase) in lumber inventory 336,489 138,465

5,145,192 15,033,275 15,979,482

Gross Margin 2,032,950 2,177,953 2,150,530

Expenses

Amortization 329,164 1,314,388 1,069,296

Insurance 48,000 50,400 50,400

Interest on long-term debt 77,498 64,764 51,462

Repairs and maintenance 18,000 54,000 54,000

Travel and lodging 32,800 41,000 57,400

Interest and bank charges 18,000 24,000 20,400

Heat and light 4,300 5,650 5,650

Professional and consulting fees 27,500 42,000 36,000

Municipal tax 14,000 14,000 14,000

office communications 7,200 8,640 9,600

Business development 30,000 90,000 90,000

Miscellaneous 48,000 48,000 48,000

Total Expenses 654,462 1,756,842 1,506,208

Net Income 1,378,489 421,111 644,322

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Holson Forest Products Ltd.: The Challenge of International Markets

Exhibit 4
Holson’s Balance Sheet

Holson Forest Products Ltd.

Balance Sheet in Canadian Dollars
As at December 31

2013 2014 2015

Current

Cash 9,965 423,000 476,184

Accounts receivable 132,300 218,900 355,000

Inventory, estimated 922,764 1,076,179 981,000

Prepaid expenses 78,342 175,000 373,540

1,143,371 1,893,079 2,185,724

Property, Plant, and Equipment 1,602,820 1,870,144 1,870,144

Investment Tax Credit Recoverable 28,339 28,339 28,339

Total Assets 2,774,530 3,791,562 4,084,207

Liabilities

Working capital loan 125,102 325,067 307,015

Accounts payable and accrued liabilities 70,000 90,000 110,000

Due to Lewis Logging Ltd: non-interest

bearing, no specific terms of repayment 706,932 706,932 706,932

Deferred Revenue 63,060 63,060 63,060

Shareholders’ Equity

Share Capital 100,007 100,007 100,007

Retained Earnings 1,709,429 2,506,496 2,797,193

Total Liabilities and Shareholders’ Equity 2,774,530 3,791,562 4,084,207

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Holson Forest Products Ltd.: The Challenge of International Markets

Exhibit 5
Map of the Island Portion of Newfoundland

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Holson Forest Products Ltd.: The Challenge of International Markets

Exhibit 6
Canadian Wood Pellet Demand (thousands of metric tons) 2017–2025

Year Heating Industrial

2017 284
2018 314
2019 379
2020 495
2021 612
2022 740
2023 937
2024 1,153 2,000
2025 N/A 2,800

Source: Wood Pellet Association of Canada – https://www.pellet.org/wpac-news/global-pellet-market-outlook-in-2017

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Holson Forest Products Ltd.: The Challenge of International Markets

Exhibit 7
Map of North American Pellet Shipping Routes

from Wood Pellet Association of Canada

Source: Wood Pellet Association of Canada – https://www.pellet.org/images/2012-10-10_G_Murray_12th_Pellet_Ind_Forum

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Holson Forest Products Ltd.: The Challenge of International Markets

Exhibit 8
Statistics on the EU and World Market

EU Production, Supply and Demand Table – Wood Pellets (1,000 MT)
Calendar Year 2009 2010 2011 2012 2013 2014 2015 2016
Production 7,940 9,186 9,470 10,652 12,200 13,000 13,500 14,000
Imports 1,698 2,515 3,115 4,367 6,096 6,547 7,172 7,500
Exports 64 72 68 90 132 105 138 180
Consumption 9,500 11,400 12,500 15,000 18,300 18,800 20,500 21,500

Production Capacity
Capacity Used (%) 58% 62% 63% 67% 72% 70% 71% 72%

Source: Flach, B; Rondon, M; Williams, B, and Wilson, C. (2016) EU Biofuels Annual 2016 – EU-28, USDA Foreign Agricultural Service, Global
Agricultural Information Network

EU Main Pellet Producers (1,000 MT)
Calendar Year 2010 2011 2012 2013 2014 2015 2016
Germany 1,750 1,880 2,200 2,250 2,100 2,000 2,200
Sweden 1,650 1,340 1,340 1,310 1,490 1,550 1,500
Latvia 615 713 979 1,200 1,300 1,350 1,350
France 465 550 680 750 870 1,000 1,130
Austria 850 940 893 962 945 960 980
Portugal 627 675 700 900 900 900 900
Poland 510 600 600 600 600 600 600
Spain 185 240 250 300 350 475 500
Total 9,186 9,470 10,652 12,200 13,000 13,500 14,000

Source: Flach, B; Rondon, M; Williams, B, and Wilson, C. (2016) EU Biofuels Annual 2016 – EU-28, USDA Foreign Agricultural Service, Global
Agricultural Information Network

EU Main Pellet Consumers (1,000 MT)
Calendar Year 2010 2011 2012 2013 2014 2015 2016
UK 180 1,000 1,400 3,700 4,900 6,700 7,200
Italy 1,650 1,950 2,200 2,500 2,900 3,300 3,500
Denmark 1,600 1,600 2,100 2,400 2,100 2,100 2,150
Germany 1,200 1,400 1,700 2,000 1,800 1,850 2,025
Sweden 2,280 1,880 1,700 1,860 1,650 1,650 1,650
Belgium 920 1,200 1,700 1,500 900 1,250 1,250
France 400 400 550 690 880 950 1,080
Austria 660 720 790 880 950 1,000 1,000
Spain 175 200 250 380 700 700 700
Netherlands 910 1,000 1,250 1,200 500 300 600
Total 11,400 12,500 15,000 18,300 18,800 20,500 21,500

Source: Flach, B; Rondon, M; Williams, B, and Wilson, C. (2016) EU Biofuels Annual 2016 – EU-28, USDA Foreign Agricultural Service, Global
Agricultural Information Network

Industrial Wood Pellet Demand Forecast for EU Countries, Korea and Japan (thousands of metric tons)
Year UK Netherlands Belgium Denmark Korea Japan

2017 7,500 1,400 2,700 2,500 1,500
2018 9,000 1,200 3,200 2,800 2,900 2,000
2019 10,500 2,000 3,500 2,900 3,600 3,000
2020 10,500 2,500 3,500 3,000 4,400 3,800
2021 10,500 3,000 3,500 3,000 5,500 4,800
2022 10,500 3,400 3,500 3,100 6,300 5,500
2023 10,500 3,400 3,500 3,200 7,300 6,800
2024 10,500 3,400 3,500 3,300 8,200 8,000
2025 10,500 3,400 3,500 3,300 8,200 9,000

Source: Wood Pellet Association of Canada. https://www.pellet.org/wpac-news/global-pellet-market-outlook-in-2017

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Holson Forest Products Ltd.: The Challenge of International Markets

Heating Wood Pellet Demand Forecast for EU Countries
Year Italy Germany France Sweden Other EU Countries/UK

2017 3,020 2,142 1,094 1,466 1,623
2018 3,248 2,340 1,228 1,563 1,818
2019 3,449 2,524 1,632 1,669 1,978
2020 3,693 2,708 1,506 1,800 2,206
2021 3,943 2,861 1,643 1,913 2,395
2022 4,158 3,009 1,757 1,979 2,544
2023 4,350 3,189 1,880 2,081 2,710
2024 4,519 3,346 2,007 2,178 2,891

Source: Wood Pellet Association of Canada. https://www.pellet.org/wpac-news/global-pellet-market-outlook-in-2017

Main Suppliers of Wood Pellets to EU (1,000 MT)
2010 2011 2012 2013 2014 2015
U.S. 763 1,001 1,764 2,776 3,890 4,287
Canada 983 1,1160 1,346 1,963 1,259 1,475
Russia 396 1,160 1,346 1,963 1,259 1,475
Belarus 90 101 112 116 122 158
Ukraine 57 150 217 165 136 149
Other 226 226 283 374 314 317
Total 2,515 3,115 4,367 6,096 6,547 7,172

Source: Flach, B; Rondon, M; Williams, B, and Wilson, C. (2016) EU Biofuels Annual 2016 – EU-28, USDA Foreign Agricultural Service, Global
Agricultural Information Network

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