Russian Forestry and Wood Supply Operations Analysis

A COMPLEX VIEW A COMPLEX VIEW Fig. 11: Pulp exports (left) and imports (right) from/to Russia, commodity tariff numbers 4701-4705, million t/a 14 key distributors are lower than European mills can offer even on an EXW basis. On the other hand, export opportunities to Europe for the Russian mills are also limited by a planned increase of Eastern European capacity (with a new mill under construction in Poland: Kronospan), by modernized mills in the UK/Ireland (Norbord, Smartply), and by additional volumes freed from deliveries to Russia mostly from Latvia, Romania, Poland and Czech Republic. In 2014, the export volume was at the level of 10,000 m³/a, and most of the boards were sold to Kazakhstan and Kyrgyzstan. Particleboard (PB) production increased in Russia by 2.7 per cent in 2014 compared to production in 2013 according to preliminary numbers by the Russian statistics committee. Particleboard remains both the most produced and the most consumed type of wood based panel in Russia. Short-term prospects for the industry are not particularly bright as most of the boards are targeted at domestic furniture production - which might be under pressure from lowering demand. Industry players predict a decrease in production for 2015 of some 5-10 per cent. On the bright side, nearly one-third of total particleboard production capacity in Russia is more than 30 years old, with an average age in this group of 45 years (!). New, cost-efficient players might achieve healthy capacity utilization by pushing some of the older mills from the market. This process has already started - but not yet on a large scale, as most of the outdated PB capacity is integrated with plywood production and thus it is used as a wood residues utilization option. In 2014, several high capacity mills started PB production in Russia and in Belarus, including Rechitsadrev (part of Bellesbumprom, capacity 215,000 m³/a, Belarus) and Uvadrev (capacity 315,000 m³/a, Udmurtia, Russia). Construction is on the way at a Kronospan Bashkortostan project in Ufa, Russia, with a capacity of some 500,000 m³/a. Earlier, PB production started at a Kronospan site in Elektrogorsk, with a capacity of 250,000 m³/a. The largest Russian plywood producer, Sveza, is developing particleboard project in Verkhnyaya Sinyachikha. According to the general director of the mill Ilya Radchenko, the project is on hold until at least mid-summer 2015 due to the unstable economic situation, however, the first payment to the machinery supplier was already made, and the planned capacity of the line is 500,000 m³/a. Plywood production in Russia grew by some 6.3 per cent in 2014, reaching 3.54 million m³/a, according to preliminary numbers from the Russian statistics committee. Plywood remains a heavily exported product, with some 1.97 million m³ exported in 2014. This represented volume growth of 11 per cent compared to 2013, and an 18 per cent increase in dollar terms (1.17 billion USD in 2014). The Russian plywood market has grown from half-a- million m³/a in 2000 to nearly 1.4 million m³/a in pre-crisis 2007. In 2009, consumption dropped to 0.8 million m³/a, but quickly recovered to exceed pre-crisis levels. In 2011-2014, consumption of plywood in Russia was rather stable at a level of just above 1.5 million m³/a, of which some 90 per cent was birch plywood. In the mid-term, further growth in the domestic market is likely to be restricted by the growing supply of OSB, stagnating furniture production and the overall weak economic situation. On the bright side, the position of Russian producers in key export markets (the EU, the CIS #6 (2015) RUSSIAN FORESTRY and the US) became stronger with the devaluation of the ruble in addition to the quite unique abundance of birch in Russia which confers a natural advantage from the raw material point of view. There are only two high-capacity softwood plywood mills in Russia - EFK (currently idle) and the ITI Bratsk mill. Some softwood plywood is produced by LVL-Ugra mill as well. All other mills produce almost exclusively birch plywood. The largest player is Sveza, with a plywood production capacity of nearly 1 million m³/a - several times more than the next largest players. The most modern high-capacity plywood mills produce large-size birch plywood, including phenolic film-faced products. And, after the ruble devaluation, almost all Russian mills are rushing to the European market: prices at the beginning of 2015 plummeted by some 5-6 per cent. In case of smaller players, prices fell even lower than that. Globally, birch plywood is produced mostly in Western Russia, Finland and Baltic countries. Of the three regions, investment activity in 2014 was seen in the Baltics (Latvijas Finieris has plans in Kurzeme, Latvia) and in Scandinavia (Latvijas Finieris has restarted the former Visuvesi mill in Sastamala, Finland). Large investments in Russia are possible even in the current economic situation, due to the fact that plywood remains a high-margin export oriented product. In the Russian Far East there are two high-capacity veneer producers - Terneyles (Sumitomo) and the RFP Group. Apart from plywood, there was some remarkable activity in the production of LVL in Europe (Steico SE in Poland, Pollmeier in Germany, and Stora Enso in Finland) and in the US (Georgia-Pacific). Some possible capacity increase was announced for Taleon Terra LVL mill in Russia as well. With all that, the European LVL capacity is likely to overcome the demand in the short term. PULP AND PAPER: some developments While plans for a new pulp mill in the Vologda region by Sveza are slowly shaping up, some brownfield investments in the pulp-and-paper sector already took place in 2013-2014: the production of pulp at the new line in Bratsk by Ilim Group exceeded 50 per cent capacity utilization in 2014 (the "Big Bratsk" project, with a capacity of 720,000 t/a); coated wood-free paper production was started in Russia for the first time by Ilim Group in Kotlas (some 20,000 t/a out of a 70,000 t/a capacity); and LWC paper production started by the Kama mill (formerly Investlesprom) in 2013, the only such production in Russia, with a capacity of 86,000 t/a. There was also some M&A activity: Investlesprom's holding was sold by the Bank of Moscow (which is controlled by VTB Bank), with most of it ending up in the hands of Vladimir Yevtushenkov's AFK Sistema in mid-2014. Earlier in 2013, the Kama mill was sold by the Bank of Moscow to a group of investors including the management of the mill. Smaller scale M&A activity included acquisition of Selenginsky CKK by the owner of the Baikal Wood Company, Yevgeny Pruidze, in late 2013. Millions 2,5 0,16 2 Millions 0,14 0,12 4705 1,5 0,1 ■4704 0,08 4703 1 ■4702 0,06 ■4701 0,04 0,02 0 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 0,5 Pulp production in Russia was up by 4 per cent in 2014 after a decline of some 5.8 per cent in 2013. The 2014 level of 7.5 million t/a of pulp production is approximately the same as the average production volume in Russia in the period 2000-2014, and it is the same as the volume of production in the Soviet Union in 1990. So, roughly speaking, export opportunities and growing segments have balanced the negative factors over the last decade. Exports are more or less stable at some 1.9-2.0 million t/a, and the trend is toward its increase. Imports are increasing but the level is much smaller. In 2014, export grew by 4.2 per cent in volume and some 7.1 per cent in dollar terms (fig. 11). Paper production in Russia was at some 4.9 million t/a in 2014, and average growth since 2010 was some 1.3 per cent while newsprint paper production declined by average 4.2 per cent/a (1.6 million t in 2014, 3.1 per cent growth in 2014 after 12.6 per cent decline in 2013). Paperboard production reached 3.1 million t in 2014, 1.6 per cent growth compared to the previous year. BIOENERGY: burning hot for pellets In recent years, the pellet business became a large-volume game mostly between Europe and the US. Both the US and Europe are by far the largest Fig. 12: Top-12 largest net-importers of pellets and briquettes in 2013 globally, commodity tariff numbers 440131 and 440139, million t/a Greece Japan Finland Austria Germany Rep. of Korea Netherlands Sweden Belgium Denmark Italy United Kingdom Source: UN Comtrade 4705 4704 4703 ■4702 4701 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: UN Comtrade global producing regions while in the US production is much more concentrated than in Europe and the share of industrial pellets in total production is overwhelmingly greater. The US players are currently the largest in terms of cumulative exports as well as investment plans. On the other hand, Europe remains not only important producing region but by far the Number One consuming region globally (fig. 12). Globally, the pellet business is undoubtedly one of the fastest growing segments in the forest industry. All "basic issues" such as whether we should fight global warming, whether burning wood is a good way to fight global warming and whether subsidies are a good way to promote wood as an energy source to fight global warming have already been addressed, at least in the key global market, in Europe. The risks for investors are now mostly in the details: what kind of subsidies and in which volume/time are going to be in place in the long run, how the wood is going to look among other renewable sources, are there going to be any geographic or technological limitations, etc. The countries which have set the clearest long-term "rules of the game" are expected to grow the fastest. Among those: the UK, Belgium, the Netherlands and Denmark. So the main basic risk for the business so far is the risk that it is fairly limited by geography (with Europe as by far the most important key consumer) and RUSSIAN #6 (2015) 15 FORESTRY