80 ideas of Russian Wood & Timber 2014

For the third time already, WhatWood analytic agency has held twitter broadcast from Russian Wood & Timber forum. Traditionally, we have collected the most interesting thoughts expressed at the conference in a summing-up material.

Boris Tarasyuk, Investlesprom, Head of the Department of wood supply:

“As contractor market is not developed in our country, Scandinavian logging model (when the forest owner sells wood at stump, and contractors perform logging and removal) will not work in Russia. Now, there are two rational solutions to the problem of resources provision: to develop own procurement near your own enterprises and to go for outsourcing using the Austrian model: a one-year contract with guaranteed prices and volumes and insurance risks. It is also possible to establish synergy with consumers of adjacent raw wood materials: for example, we supplied spruce to Kondopoga pulp and paper mill, while its loggers supplied pine to our Segezha PPM. Thanks to all these measures Investlesprom reduced the price of wood raw materials for its enterprises by 3% for sawlogs, by 6% for pulpwood.”

“In 2013, prices for sawlogs in Russia grew by 15%, within two years (2012 and 2013) – by 28%, the cost of plylogs grew by 10% and 20% respectively, the pulpwood by 8% and 17%. The price of sawlog now reaches 3000 RUB/m3 with delivery, VAT exclusive.”

“The raw wood matter is critical in attracting investments into Russian forest industry. It seems ridiculous to me that everyone builds sawmills, 3-4 enterprises appear each year, but no one cares about logging. If you have a mill, you’ll have to deal with own logging, with its share up to 100% of the mill requirements, because no one is immune from the warm winter, axle load limits and so on. Our share of own logging may vary from 30% to 70% depending on the market, in case of oversupply we sell logs to Finland and Germany.”

“One of the important components in raw wood security was the creation of winter warehouses, where the raw material was stored under the one-metre layer cake from sawdust and snow. In March-April, when the abundance of wood made prices fell by 15-20% relative to the average annual values, we bought sawlogs and kept it until the autumn impassability of roads. In the fall, when prices soared sometimes by 30%, the winter warehouse was opened and the company made use of its raw materials, without participating in price rally.”

“Weight control and new standards of axle load led to growth of timber removal costs – we have to load trucks only partially.”

Pavel Starkov, MM-Efimovsky, Sales Director:

“In the European market, sawmilling companies are counting on high-quality, expensive timber grades and at least stable market. We’re not counting on growth in Europe. However, the Baltic countries are one notable exception: there’s upbeat situation there, Russian board replaces local and Scandinavian products. The reasons for this are partly in logistics, as Russia is closer than Scandinavia, partly in the strength of boreal lumber, which is higher than that of the Baltic board. In addition, European companies are moving production to the Baltic states: there are several projects in Lithuania; Swedish and Finnish capital invests actively in Estonia.”

“If you are able to control the price of sawlogs, to reduce factory costs, cut logistics costs on a large-scale production, and monitor the market price (the Japanese market is still the most expensive); if you have established a sales network, agency agreements, then this business will be profitable. No matter what market you’re in, controlling these items, you can maintain a profitable business in any region.”

“There are signs of emerging industrial distribution of panels and lumber on regional level – in Moscow and St. Petersburg. The market of the Moscow region by its volume is equal to the market of a small European country, there are such large distributors, as Kashirsky Dvor, stores as Castorama, OBI, Leroy Merlin have civilized networks and invest themselves into sales expansion.”

“Russian market is quite narrow, informal construction standard in Moscow & St. Petersburg is 50×200 laminated lumber.”

“Standards of the Russian market are quite demanding. In Europe, bluestain is acceptable for industrial-quality products, while in Russia it isn’t.”

“I estimate share of further processing in the Russian internal lumber market at 15-20%, and profit margin is oftentimes higher than for the exports. It is a question of establishing sales: I had the experience when the distribution network has ordered planed products from North-West to supply to Krasnoyarsk.”

“South Korea traditionally acquires significant volumes of side-cuts and pallets. India shows good dynamics too, even taking into account its specific certification rules. Harsh growth in Japan is due to coming soon rise of consumption tax rate.”

“East Asian market is price-competitive; freight rates to Japanese ports or Shanghai are identical to delivery rates to the Baltic ports.”

Alexander Mariev, Roslesinforg, Deputy general director:

“There are no direct regulations to process wood on the territory of Russia in the Federal law 415. But the compulsory single-piece marking of valuable species (oak, beech, ash) will affect, among others, the Chinese market.”

Ivan Valentik, Ministry of environment, Director of the Department for state policy and regulation in the field of forest resources:

“Even top priority investment projects system with forest auctions can’t fulfil all raw wood requirements of companies. Therefore, we’ve prepared a draft law which will allow further processing enterprises to request additional wood resources. The depth of further processing will be determined by the special commission.”

“Another draft law deals with legalization of lease contracts prolongation. In the framework of prolongation on the basis of preferential right, we will try to push a provision on the right to extend the maximum lease term for another 49 years.”

“Since July 01, 2014, forest declarations are compulsory for Russian loggers. To fight bribery, refusal to accept forest declarations is allowed only once.”

“Provision on protection of competition (prohibition of amending the contract after holding the auction) is now regarded as a ban on any changes to the lease agreement, we try to fight this practice and already have support of the Anti-monopoly Service.”

“We’ll try to make definition of fair forest user as flexible, reasonable and verifiable as we can, we realize that crisis situations happen sometimes – like it was under market crash in 2008, when an insolvency crisis spread.”

“We have interesting discussion now with the Agricultural ministry, soon companies owning forests on abandoned agricultural lands will have a de facto right for transferring it into private property, it’s time to start formalizing this form of ownership.”

“Out of 18 million m3 harvested by private persons for construction and repairs (this is 10% of the market) only marginal volumes were really used for this purpose, the rest went to the ‘grey’ market. Logging ban for private persons, according to the new law, will allow to limit such practice.”

“Logging ban in protective forests in current edition will lead to collapse in Karelia, we’re trying to push changes currently.”

“According to the new federal law, forestry works cost will be compensated to small businesses.”

Kai Merivuori, Finnish Sawmills association, Managing Director:

“Middle Eastern companies have to pay much for lumber, because the world market grew, and the offer is not as high, the volumes are being sold to other regions. Russian lumber stocks in Egypt are very low.”

“Such countries as Sudan, Yemen are the markets of the future, now they are small, but there is very fast growth of population”.

“Last year, the European construction market fell by 3%. The growth was observed only in three countries – Denmark, Hungary and Norway. UK is one of few bright spots in Europe now, generally demand is really stagnating.”

“If a company produces planed products, it requires a very homogeneous raw material, and that’s a problem. So I think it’s not very good to invest into further processing simultaneously with sawmilling.”

“Sulphur directive in Finland will affect the market at the end of this year, freight rates may rise. There is a question of how to replace old vessels which often offered the cheapest rates.”

“Germany and southern Sweden will now start delivering lumber to the growing market of the US, so Russia will likely have more chances to sell sawn timber in Europe.”

“There is a prejudice about the fire risk of wooden houses, but usually only interior finishing burns. A wooden house by itself is safer than concrete.”

“Finland was not a pioneer in CLT – a large congress centre near Helsinki is made of Austrian spruce.”

“I think that the biofuel market in Europe will not exist without state support and subsidies.”

“In Saudi Arabia, the construction market fell markedly due to toughened immigration policy.”

“Japan fosters domestic production, but due to lobby this includes Douglas fir and Austrian pine for some reason.”

“Weakening rouble still has not affected the market, but forward agents say this may affect freight rates.”

“Russia and Finland need development companies that would project wooden elements for construction firms.”

“Egypt was Finland’s second largest lumber market in 2013, exports from Sweden grew considerably too. Despite political struggles, Middle East & North Africa is a perspective market in the long run.”

Russell Taylor, International Wood Markets, President:

“We expect two-year period of high prices for lumber in the US”.

“China has such low costs that the further processing companies from abroad almost do not have chances, except for maybe in timber frame construction.”

“Rising domestic costs make many Siberian sawmills to go bankrupt, even those that went through modernization. Integration of own logging and sawmilling can be survival strategy for Siberian mills.”

“Lumber logistic cost from Siberia to Shanghai by rail through Manzhouli is $125/m3, by sea – $100, this is much higher than from Pacific Canada and US ($55-60).”

“There are numerous small wholesalers in China, it’s difficult to find large distributors.”

“An important question is, where China will source logs? New Zealand works at its logistic limits, but may divert some part of deliveries from other directions.”

“Chinese housing is booming due to government programmes of affordable housing and due to people investing into realty.”

“Although some markets are limelight compared to China, they’re profitable and growing: Australia, South Africa, Philippines.”

“China needs logs badly and is already paying world’s highest prices for logs. Chinese market will grow, especially softwood one. In case of 5% GDP growth, forest products demand is growing by the same 5%.”

Alexey Beschastnov, Poyry, Consultant:

“The share of wooden housing in the world is rising, it is a growth point for the wood-based panels, and demand is largely determined by repairs activity (not the new construction).”

“OSB is mostly North American product, chipboard is European, while MDF is Asian (2/3 of it Chinese).”

“Now we may say that if OSB develops well on the Chinese market, global trade flows may change considerably.”

“Turkey is a major player in the market of wood panels. The four largest companies are Kastamonu, Yildiz Entegre, Yildiz Sunta and Starwood. One of these companies makes 1.4 million m3 of particleboard per year, which is a quarter of the total Russian production, and the total size of the Turkish market is more than half of Russian.”

“The MDF market in Russia is blocked by three projects: one each in Volga, South and Central federal districts. OSB projects are present mostly in Volga and Central federal district.”

“Novovyatsky ski mill actually produces OPB, not OSB, and under poor market conditions the press is able to switch to chipboard making. Its production capacity is now 100 thousand m3. Hillman, located in Vladimir region, produces 30 thousand m3 of OSB from birch on Chinese equipment. Kalevala is now able to produce another 250 thousand m3 per year. In the near future, the Russian market expects about 1.5 million m3 of OSB capacity coming into production. If all these projects are put into work, the prices will fall, and then the Russian domestic market will grow to 1.5 million m3. In the pessimistic scenario, the price will drop by €150 per m3, in the moderate scenario – by €70.”

“One should not wait a miracle in the panel market, but the pellets will probably surprise us, both in demand and supply. From the viewpoint of cost structure, Russia’s pellet industry looks quite good on the global market.”

“Japan builds a lot of biofuel CHPs, but the market for pellets is not yet formed there.”

“There is excessive chipboard production in North-West and Central Russia, while in Volga, partially also Ural and Siberia districts there’s deficit.”

Franz Wiesbeck, Arkaim, Commercial Director:

“Pellet demand in Korea and Japan is more from the state, it’s not market demand.”

“Pellet production in Eastern regions of Russia is more profitable than panel one.”

Eduard Akim, St. Petersburg Technological University of Plant Polymers, Professor and head of department; FAO UN Advisory Committee on Paper and Wood Products, Member:

“In the beginning of this century, leap of plywood production from poplar almost doubled plywood output in China.”

“Finland burns mostly chips (because it has more profitable subsidy policy), while pellets are exported.”

“Forecasts for pellet production in China by 2020 range from 1 to 50 million tonnes. Global pellet turnover by 2020 is estimated at $9 billion.”

“Today, 95% of pellets are exported from Russia, meanwhile, 30-40% of fuel briquettes are sold on the home market. Russia may become growth driver for its pellet industry, if appropriate conditions are created.”

“Pellets are an ideal product from waste, and the combination of the production of panels and pellets is a great project in the forest sector, I don’t agree with opposing them in terms of raw material.”

“International Paper and Mondi, having come to the mills in Svetogorsk and Syktyvkar, raised the production there several times, and the same was made by Ilim Group. So I think that before building new pulpmills, we need to fully utilize our existing capacities.”

“Russia plans to create 100,000 hectares of forest plantations, it is a drop in the bucket compared to the Chinese volume. Forest plantations in China provide the world’s biggest pulp and paper industry.”

“Trade deficit in paper and board in Russia is $2 billion, we import all science-intensive grades except for office paper.”

“Pellet capacity in Russia is estimated at 2-3 million tonnes. But sales network is very poor. It’s easy to buy 10,000 t, but it’s much harder to get 100 t.”

“I-joist market is also totally underdeveloped in Russia, while this product is widely used in global housing construction.”

Alexander Totsky, UPM, Sales Director, Russia & CIS:

“The leading markets in terms of plywood consumption globally, in descending order, are China, North America, Japan and Europe. Of the 3 million m3 of Russian production, 1.6-1.8 million m3 remains in the country.”

“In terms of plywood market maturity, we’re far behind Europe. Poplar and softwoods are regarded as bad and cheap, but it’s incorrect, it’s just that appropriately qualified personnel is needed to launch such production. Benelux countries and Sweden work with softwood plywood only, it’s incorrect to regard it as low-grade.”

“We have a narrow market – only three standard grades of plywood: birch square 1525 mm, birch large-format and softwood.”

“Our problem is dependence on exports. Meanwhile, there is a number of niche markets for plywood: it was used in the construction of Sapsan trains; near St. Petersburg, there is a company that makes children playgrounds using plywood and ranks fourth in the world market.”

“The plywood market in Russia has high price elasticity: sometimes the entire amount goes to exports and prices are falling, sometimes the crisis happens, plywood remains in the country and triggers price wars. This led to the fact that the margin for distributors declined dramatically. In hard months, distributors may earn RUR 100 per one cubic metre of plywood. Then plywood distributors survive only by diversifying sales to other construction materials.”

Comment from the audience:

“It is extremely difficult to break the stereotype that a wooden house is a traditional Russian izba with all facilities on the street. Neither the elite glued beam not an izba made of logs can become massive housing construction but only timber frame construction. Today, it cannot compete with the multi-storey, because it is necessary to interiorise such a large area. House area starts from 80 m2, and while a person has one million roubles for an apartment, he does not have two millions. So even if one metre of housing costs less in the house, people do not have enough money. In addition, there is the centripetal force: better to live near the Kremlin than to make own decisions for your life in the open field. We need a body that will work daily on the topic, without heroic breakthroughs: improve the urban development plans, promote wooden house building and so forth.”

Paul Herbert, Interfor, Member of the Board; ex-CEO of Ilim Group:

“Logistic costs are the fundamental aspect of profitability. Russian log price at stump is one third of that in Germany, one half of that in Canada, harvesting costs are roughly the same, while transport costs are three times more than in Germany and four times more than in Canada. So in the end Siberian lumber happens to be not the cheapest on the Chinese market, contrary to any logic.”

“Metalworkers pay much less than sawmillers for transporting same volumes of cargoes by rail, there’s something very wrong about it.”

Pavel Trushevsky, Forest Certification LLC, General Director:

“It is necessary to establish zoning of forests by type of forest practices: intensive and extensive.”

Alexander Kulakhmetov, Forestry Agency of Irkutsk region, Director:

“One should realize that with the introduction of duties on round timber, small Chinese factories have crossed the border and started to work in Russia, producing low-grade timber. Russell Taylor said he had seen that in one area in China, from 80 small sawmills only 50 are working now, obviously, 30 simply moved to Russia. Woodworking waste at these factories lies on the ground and is not monetised anyhow, sometimes even burns.”

Nikolai Burdin, NIPIEILesprom research institute, General director:

“We estimate that real internal consumption of lumber in Russia is 17-18 million m3 annually.”

Alexander Churkin, Vologodskie Lesopromyshlenniki, Chief Executive:

“If not for the warm winter, there won’t be such a radical sawlog price growth.”

Pekka Hamalainen, MENA Wood, Managing director:

“North Africa countries such as Algeria or Tunisia purchase quality timber products at quite high prices.”