Lol calm yourself kittokitty, I think kiln dried bedding is a lot less dangerous than untreated pine. The drying process is supposed to remove a lot of the natural oils which is what makes it dangerous.
Not that I use it myself normally, but I used it when I first got both my hams since that's what they were used to. I used about a third of a cage worth and then switched after the first change. It doesn't smell strongly of anything, certainly not like untreated pine shavings do.
It's certainly not the greatest substrate though Riscat, there a lot of paper based ones on the market that a lot of people prefer like carefresh, Fitch, megazorb, aubiose or kaytee clean and cosy.
Pouching bedding isn't an issue, they'll pouch almost anything and you're right, he is probably just moving it around to make his nest. Do you have anything softer for him to nest in? Like tissue paper or paper based flakes? Pine shavings aren't the most comfortable and my hams like to line their nests with tissue.
And it shouldn't be wet, it's probably just compacted. Hams little pouches are designed to keep things dry, it's a cool little feature