Russian Forestry and Wood Supply Operations Analysis

WOODWORKING Fig. 1: Gross domestic product in BRIC countries: (A) relative size of economies in BRIC countries in current US dollars, per cent to total; (B) history and forecast in constant prices, year-to-year percent change and (C) history and forecast in constant prices, cumulative change, 2000 = 100 per cent 100% 80% 60% Relative size of economies in BRIC countries in current US dollars, per cent to total several times in several years - all you need for this to happen is to have all the basics in place -legislation, protection of ownership rights, trust in long term stability etc. The last point requires a stretch of the imagination, doesn't it? On the other hand, resources are not really that critical a factor - as we will see in the examples of China and India below. WHERE ARE THE MARKETS? Fig. 2: Production and consumption of all wood based panels (combined) in BRIC countries and in the rest of the world, million m³/a 10 Brazil 5 Russia India China China is slowing down. The "new normal" in GDP growth in China is in a range of 5-7 per cent/a as compared to 9.7 per cent average growth in 2000-2014. Is this bad news? - not necessarily. 0 Brazil Fig. 3: Production and consumption of wood based panels in Russia, 1000 M³/a 3000 MDF/FB 2000 -Production -Consumption 1000 1992 1992 | 1993 1993 1994 1995 1996 India 1994 1995 1996 1997 1997 1998 1998 1999 1999 2000 2000 2001 2001 2002 2002 2003 | 2007 2004 2004 2005 2005 2006 2006 2007 2007 2008 2009 2010 2011 2012 2013 Production -Consumption 2008 2009 2010 2011 2012 2013 40% 20% 0% BRIC economies in 2014, BRIC economies in 2014, no PPP* adjustment PPP* adjusted A * PPP = purchasing power parity Per cent, year-to-year changes 15,0 10,0 ■Brazil 5,0 China India Russia 0,0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 -5,0 -10,0 600,0 500,0 400,0 300,0 200,0 100,0 Per cent, cumulative changes, 2000 = 100% B Brazil China India Russia 0,0 C 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Source: IMF World Economic Outlook, April 2015 China is no longer "growing from a low level" and even 5-7 per cent is a very (very!) remarkable volume, (see Fig. 1). While China is slowing down in percentage points, India is picking up. There is a strong possibility that India might become "a new China" in global economic growth in the next two decades. Naturally, it would require some legislative changes in favor of investors (see Table 1) while many other factors look promising. Russia and Brazil are struggling to "double GDP in seven years" (to quote Russia's President Vladimir Putin from 2003). It looks like Mr. Putin's self- appointed task would require some 20 years instead of just seven - and that is true for both Russia and Brazil. In the short run, some 3-4 per cent growth looks like extremely optimistic scenario for Brazil and Russia while the same numbers would be a very pessimistic scenario for China and India. How does this affect the wood based panel markets in those countries? Production and consumption of different wood based panels (particleboard, fiberboard/MDF, plywood, OSB) differ in shares from country to country while the overall volume (all panels combined) is comparable for Brazil, India and Russia both in production and in consumption. In 2013, production was at a level of nearly 10 million m³/a in Brazil and slightly over 10 million m³/a in Russia and India. Consumption in Russia and Brazil is lower than production mainly due to plywood export in both cases. Consumption in India in recent years has developed faster than production due to positive net-import in all large-volume wood based panel types: MDF, particleboard, plywood. The development of production and consumption of wood based panels in China looks similar to the GDP skyrocket pattern from the fig. 1C. Wood based panel production in China is over ten times larger today than in Russia, Brazil or India while the starting point for China - some 20 years ago on the graphs below - was slightly above Brazil, slightly below India, and about twice as low as in Russia. Production in China is larger than consumption, which is additional proof that production of wood based panels does not necessarily need abundant wood resources in the country. It is worth noting that by 2011, the production of wood based panels in China had already 10 5 0 150 50 50 0 5 0 200 150 100 50 0 34 #6 (2015) RUSSIAN FORESTRY 1992 1993 1994 1995 1996 1992 China (note the scale) 100 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 10 Russia 1993 1994 1995 1996 1997 8661 1999 2000 2001 2002 Other countries (note the scale) 1997 1998 | 2007 Production 8000 -Consumption Production -Consumption. 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2013 6000 4000 2000 0 0 500 1000 0 WOODWORKING 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014e OSB Consumption -Production 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014e Particleboard 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014e 4000 Plywood 3000 Consumption -Production 2000 1000 Production - Consumption 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2013 Source: Pöyry Management Consulting 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014e Source: Pöyry Management Consulting RUSSIAN #6 (2015) FORESTRY 35 -Consumption Production ⚫Consumption -Production

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