Russian Forestry and Wood Supply Operations Analysis

12 A COMPLEX VIEW Fig. 7: Global production of sawn timber and wood based panels, 1961-2011 Million m³ 500 450 Wood based panels Sawn softwood Other sawn timber 400 350 300 250 200 150 100 50 0 1961 1971 1981 1991 2001 2011 Source: Pöyry Management Consulting Fig. 9: Regions with sawn timber import exceeding 750,000 m³/a in 2013 Europe MENA Americas 1000 m³ UK 1000 m³ 4 581 Egypt 1000 m³ US 2 989 Germany 3 800 Saudi Arabia 2 120 Italy 3 630 France 2 200 Algeria Morocco Canada Mexico 1 367 1 029 2 074 1 312 Netherlands 2 025 Turkey 865 Austria 1 697 UAE 848 Belgium 1 320 Denmark 1 034 Norway 990 Slovenia 905 Estonia 750 A COMPLEX VIEW Asia 17 367 1000 m³ China Japan 16 797 7 245 Uzbekistan 2411 South Korea 1 502 Iran 935 SAWN TIMBER: go for export! Global sawn timber production can be seen as having been nearly stagnant in the last half a century: since the 1970s global production and consumption volumes are relatively stable at some 400-450 million m³/a (fig. 7). At the same time, the production of wood based panels grew several fold - from lower than 70 million m³/a in 1970 to over 280 million m³/a in 2011. Today, global production of wood based panels roughly equals the global production of sawn softwood. In Russia, the official statistics cover only relatively small number of sawmills, and this part is dominated by large export oriented mills. Mid-sized and small sawmills (serving almost exclusively the local market) are nearly completely left out of the statistics. It leads to underestimations in official production and thus - since 2013, negative (!) apparent consumption in the country: the volume of official export is larger than official domestic production while the volume of import is practically non-existent. Real sawn timber consumption in Russia is estimated at somewhere between 15 and 25 million m³/a which means that something like a third to a half of total production is not covered by the official statistics (fig. 8). However, the largest players are well known and visible - big mills, big volumes, big exports, big plans. In 2014, we saw some new capacity come on stream. The largest starts were Kraslesinvest (in the Boguchansky district; test production in 2014), TSLK (Ust-Kut) and Lesosibirsky LDK-1 (Lesosibirsk) - all these mills are high-capacity mills located in Russian Siberia. Together the three mills add over 1.5 million m³/a capacity to output in Siberia - which means significant pressure to traditional export markets for all Siberian mills. Large-scale plans include the Sibles mill in the Krasnoyarsk Krai, the Asia Les sawn timber and pellet mill in the Khabarovsk Krai. Apart from that, the devaluation of the ruble has led to an increase in deliveries of sawlogs to markets such as China - which led to growing ruble prices for domestic mills. However, it should be noted that the price increase was significantly lower than the magnitude of the ruble devaluation. The largest beneficiaries of the ruble devaluation were traditional sawn timber exporters to high-price markets (such as Europe and Japan). Among these, an even better position is seen among the mills with integrated wood supply. On the other hand, high-price markets experience ever fiercer competition as they became much more attractive buyers. Europe remains #6 (2015) RUSSIAN FORESTRY a place with significant overcapacity at least in the short term. In 2014, there were no large-scale start-ups (an example of a mid-scale start was the commissioning of a 200,000 m³/a mill by Ikea Industry in Poland) but no significant closures either - apart from closure of the 800,000 m³/a Stora Enso mill in Austria's Sollenau municipality. In addition, there was no major M&A activity in Europe, and only one clearly noticeable insolvency - that of machinery supplier Jartek Oy in Finland. In lower-price-lower-quality markets such as China and Egypt, the situation for sellers is not easy due to lower than expected growth in demand, as well as some increase in competition. Markets where Russian suppliers Fig. 8: Official apparent consumption of sawn timber in Russia: ...negative Million m³/a 20 15 10 5 0 -5 -10 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014' -15 Export (official) -20 Consumption (official) Production (official) -25 Source: Russian Statistics Committee were traditionally strong, due to either logistics or long-developed ties, experienced much less tension. This group includes such countries as Uzbekistan, Azerbaijan and even Iran (however, these markets lost part of their attractiveness as many of the deals are traditionally concluded in rubles). In general, important markets for Russian producers are the same as the key importers globally, with the US as one possible exception (fig. 9). Another highlight of the year (apart from the falling ruble and new capacities) were ownership changes. Most notable were the divestment of Rusforest mills in Archangel and Boguchany (North-West Russia and Siberia respectively) as well as a change in ownership of the Arkaim mill (Russian Far East). WOOD BASED PANELS: go for export and push imports away! For wood based panels the situation is much more diverse - both in terms of products and geography. In 2014, new capacity came on stream in the production of MDF: Kastamonu (Tatarstan, 480,000 m³/a capacity, plans to increase MDF production capacity up to some 850,000 m³/a and add particleboard production with capacity of some 750,000 m³/a) and PDK Apsheronsk (Krasnodar Krai, 300,000 m³/a capacity). Kastamonu has integrated production of laminate flooring with capacity of 20 million m²/a, while PDK Apsheronsk plans to have laminate flooring production with capacity of some 10 million m²/a. Two more MDF lines might come on stream in 2015-2016: the Russian Laminate line in the Smolensk region (400,000 m³/a capacity) and Roskitinvest mill in the Tomsk region (200,000 m³/a capacity). In 2014, two mills started in Belarus: Gomeldrev (part of Bellesbumprom, 215,000 m³/a capacity, 3-40 mm thick MDF) and Mozyrsky DOK (350,000 m³/a capacity, 20-240 mm thick insulation fiberboards). The 2 million m³/a MDF market is dominated by domestic producers. The share of imports in this market is already low, additional capacity of 0.8 million m³/a started this year and planned starts equating about the same volume in 2015-2016 would put a lot of pressure on the market. More positively, the market is diverse: MDF/HDF is used in the production of doors, mouldings and wall panels, in furniture production and in laminate flooring production. Laminate flooring production is experiencing a full-scale boom now - after the devaluation of the ruble there is a need to substitute some 35 million m²/a (which means: over 300,000 m³/a of HDF) of European and Chinese laminate flooring on the Russian market (fig. 10). OSB production began in Russia in 2012. Since then the number of investment projects in construction and installation phase has grown. Current installed Source: UN Comtrade, Pöyry Management Consulting capacity in OSB production in Russia is more than 1 million m³/a (at the following enterprises: DOK Kalevala, Hillman, Novovyatsky Ski Combine, and Kronospan Egoryevsk), and the relevant machinery that already resides in Russia accounts for 500,000 m³/a (at Oris, although there is some uncertainty about its realization). Apart from Oris, there are several other high-capacity projects which might start OSB production in the country soon. These include Kastamonu in Tatarstan, Kronospan near Ufa, Swiss Krono in the Perm Krai, Ugra-plit in the Khanty-Mansiysk region and Taleon Terra in Tver region. Even with some delays and cancellation of yet-to-be-built mills, Russia is facing some 2.5-3 million m³/a of installed capacity by 2020 as a possible scenario, which significantly exceeds projected demand. Short-term prospects are good for all manufacturers as already installed capacity will enable local manufacturers to substitute imported OSB (and some low grade plywood) on the domestic market and have healthy capacity utilization. However, in the mid-term, capacity utilization might be significantly lowered by ongoing projects as well as by deliveries from the new Kronospan mill in Belarus, which came on stream in 2014 with capacity of some 600,000 m³/a. The position of European OSB producers on the Russian market is not good due to the sharp devaluation of the ruble: currently delivered prices in Russia from the Russian/Belarussian mills for Fig. 10: Wood based panel production in Russia million m3 14 OSB 12 MDF ■Plywood 10 PB 8 4 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014e Source: Pöyry Management Consulting RUSSIAN #6 (2015) 13 FORESTRY