the Russian timber industry is tactically adapting to sanctions, but needs to be modernized

The Russian timber industry is recovering from the shock of sanctions and the loss of Europe as a key export market. The stabilization of logistics and the weakening of the ruble in 2023 helped the most affected segments of sawn timber and wood processing. But the problems in the pulp and paper industry were more pronounced. Limited export opportunities are forcing companies to turn to the domestic market. However, successful entry into new product niches requires modernization, the payback of which without protectionist measures is questionable.

The Russian forest industry in the first half of 2023 was not able to fully overcome the problems that arose last year due to the loss of familiar export markets. In January-June, the production of almost all types of timber products declined.

According to the Federal State Statistics Service, the output of sawn timber fell by 9.1% to 14 million cubic meters. Plywood production sank by 16.4% to 1.58 million cubic meters, fibreboard (Fibreboard) – by 15.7%, to 309 million standard square meters. m. The production of fuel pellets fell the most (by 44.6%), to 646 thousand tons. The only exception was chipboard (chipboard), whose output increased by 0.3%.

Pulp production, which managed to almost avoid falling in 2022, decreased by 3.5% in the first half of the year, to 4.3 million tons, paper and cardboard – by 4.6%, to 4.9 million tons. The output of boxes and boxes made of corrugated paper, which increased by 8.4% last year, slowed down the growth to 3.3% (to 3.9 billion square meters).

Exports bounced off the bottom

The dynamics was the result of the loss of large export markets in the EU. In 2022, all major groups of goods fell under the embargo: wood and wood products, including plywood, boards and pellets, pulp and certain types of paper and cardboard. According to Roslesinforg, unfriendly countries (mainly European) accounted for about 46% of all exports of Russian timber products in 2021.

Having lost their traditional markets, the timber industry is faced with a not so big choice: increase supplies to the domestic market or reorient exports. But the massive reversal of manufacturers inside the country (for example, Segezha Group doubled paper deliveries to Russia and tripled plywood sales in the third quarter compared to the previous one) naturally led to a rapid oversaturation of the market, a collapse in demand and prices even before the end of the year.

As for exports, after a long struggle with logistical restrictions in the Eastern range and disruptions in container traffic, especially in the North-West, supplies began to slowly recover. China remains almost the only large and solvent market for sawn timber. In addition to him, the top three included Uzbekistan and Kazakhstan (1 million cubic meters and 408 thousand cubic meters, respectively).

The main reasons for the recovery of exports compared to the second half of 2022, according to market participants, were the overall improvement of logistics, an increase in transport subsidies from the state (including as part of the February instructions of the President of the Russian Federation), and also, especially in recent months, the weakening of the ruble .

The Ministry of Industry and Trade believes that in the first half of the year a number of sub-sectors showed an increase in production by 3-4%, and this is a “good result”. “Positive trends have formed primarily due to the work done by the Ministry of Industry and Trade to support domestic producers and rebuild transport and logistics routes,” the ministry stressed. They assure that all the instructions of the president have been fulfilled or will be fulfilled within the allotted time, and the situation with the shipment of timber products is “stable”. Timber merchants complained to relevant Deputy Prime Minister Victoria Abramchenko that the support measures promised after the February meeting with the president did not work (see Kommersant of June 8).

The world’s largest plywood manufacturer Sveza noted the redirection of exports to Asia, the CIS and the Middle East, but added that “it is still premature to talk about a return to the previous production volumes.” For this, according to the company, time is needed and further support from the state, including the preservation of transport subsidies and the involvement of large cargo carriers to work on routes passing through the ports of the Northwestern Federal District and the Far East. In addition, the forestry complex needs support in concluding intergovernmental agreements, as well as infrastructural financial solutions for international settlements.

The active weakening of the ruble, which began in the spring, should also support exporters. Since mid-2022, Russian sawnwood prices have declined by 40-50% in dollar terms (see infographic), but due to the exchange rate, the impact on the export economy has been negligible.

According to Valentin Gavrilov, Timber Industry Practice Director at Strategy Partners, according to the results of 2023, logging volumes in Russia may decrease by about 15%, to 165 million cubic meters, but if the exchange rate remains above 85 rubles / $, logging volumes may fall much less – up to 175 -185 million cubic meters. In 2022, according to WhatWood, logging amounted to 195 million cubic meters. Mr. Gavrilov expects plywood production to fall by only 5% at the end of the year, as well as keeping pulp production at the level of last year.

No paper in your own country

The Ministry of Industry and Trade emphasizes that timber companies have not reduced their interest in investments, and new projects are being actively launched in Russia and old ones are being completed. Sveza also notes that the company will increase investments in the modernization of production in 2023 by 15%, up to 3 billion rubles.

However, Kommersant’s interlocutors emphasize that they are talking about the completion of projects that began even before the imposition of sanctions. This year, the Segezha Galich plywood mill, the Plitwood plywood mill – a joint venture of the Cherepovets plywood and furniture mill and the Vologda Lesopromyshlenniki group of companies, as well as the Ilima pulp and cardboard mill in Ust-Ilimsk, are being commissioned. These capacities, says one of Kommersant’s interlocutors, only throw additional volumes onto the market, which intensifies competition and lowers prices. According to a July survey by Strategy Partners, 20% of timber companies in 2023 froze their investment program, and another third reduced it by at least 30%.

The main question for most companies is where to find markets and whether to refocus on filling niches in the domestic market, which will require a change in the nature of investment. The previous strategy of the largest vertically integrated holdings was aimed primarily at export growth, but the sanctions called it into question, since there is nothing to replace the EU market in terms of supply margins.

According to the program for the development of the forest complex adopted by the government in 2021, by 2030 the volume of logging was to increase by 30%, to 286 million cubic meters. Sawnwood production was planned to increase from 44.7 million cubic meters in 2019 to 62-69.5 million cubic meters, of which only 24.7 million cubic meters was expected to be domestic demand. Market pulp output was to increase by 5.7 million tons, which corresponds to the capacity of six new large pulp and paper mills, and pellet production – from 1.9 million tons to 2.8–5.2 million tons, occupying up to 8% of the world market.

Now, Kommersant’s interlocutors say, the only market that can “digest” such volumes of pellets is China, but deliveries there are prohibited for environmental reasons and, moreover, impractical due to expensive logistics.

Gradually, the authorities come to the conclusion that the former export-oriented development strategy of the industry needs to be changed. In mid-July, Vice Speaker of the Federation Council Yuri Vorobyov said that Russia needed to focus on a scenario in which most of the products of the forest complex would be sold on the domestic market. For this, he said, it is necessary to develop wooden housing construction, as well as the construction of new and modernization of existing pulp and paper mills. Prime Minister Mikhail Mishustin spoke about this in July.

However, the reorientation to the production of import-substituting products, the need for which many experts say (see “Ask price”), is hampered by the fact that, as a rule, it is necessary to modernize production facilities. For example, the current decline in output at PPM is caused by a decrease in external demand for Russian pulp, which cannot be sold in significant volumes to China – according to some interlocutors of Kommersant, due to poor quality.

At the same time, market participants say, logging and processing of timber is a pyramid, within which the entire volume of wood received, including pulpwood and waste, which usually serve as raw materials for pulp and paper, should be used. Already, companies are complaining that they have to leave their balance sheets in the forest – this threatens with fines for increasing the fire hazard.

Some of Kommersant’s interlocutors believe that in order to create sufficient incentives for the modernization of capacities, the authorities will resort to restricting or banning the import of certain products. For example, bleached pulp can be used to make fluff pulp used in diapers, which is now mostly imported. At the end of July, the Ministry of Economy has already introduced a protective import duty of 50% for plywood.

Olga Mordyushenko