Russian Forestry and Wood Supply Operations Analysis
WOODWORKING
WOODWORKING
36
Fig. 4: Top-5 producers of wood based panels
in Russia by capacity, 2015, million m³/a
Kronospan Group
Sveza
Swiss Krono Group
Egger
Syktyvkar Plywood
0
1
grown so much that total production in BRIC
countries surpassed that of non-BRIC ones. By
2013, combined production of wood based panels
in BRIC countries overcame the rest of the world
by some 15 million m³/a (about 5 per cent of total
global production volume). Consumption in BRIC
countries was by about 15 million m³/a lower in
BRIC countries than in the rest of the world. In a
nutshell, trends in the wood based panel business
in BRIC countries might be regarded as trends in
the global wood based panel business (see Fig. 2)
WHERE IN RUSSIA?
If you are willing to invest in Russia, which
products and which regions look promising? In
terms of products, the picture differs significantly:
particleboard is moderate risk high volume
product; plywood and MDF are medium volume
products with low and moderate risks respectively;
OSB is the fastest growing product with low
starting volume and moderate risks; fiberboard
(hardboard) is a small/decreasing volume product
(Fig. 3).
Panel types used mostly for construction (OSB
and plywood) are likely to experience growth in
production in the mid-term in Russia, with quite
different drivers: plywood production might grow
in volumes (and in share of higher value products)
to increase exports; OSB production will grow
to push away imports, i.e. to decrease - and
maybe - reverse the net-import flow:
OSB production began in Russia in 2012. Current
installed capacity in OSB production in Russia
is over 1 million m³/a (DOK Kalevala, Hillman,
Novovyatsky Ski Combine, Kronospan Egoryevsk).
Hot large-capacity plans include Kastamonu in
Tatarstan, Kronospan near Ufa, Swiss Krono in
the Perm Krai, Ugra-plit in the Khanty-Mansiysk
region and Taleon Terra in the Tver region. Even
with some delays and cancellations of the planned
mills, Russia is facing some 2.5-3 million m³/a
#6 (2015) RUSSIAN t
FORESTRY
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Particleboard
Plywood/LVL
MDF/FB
OSB
Announced plans
3
Source: Orifjon & Associates Estimates Based on Various Sources
of installed capacity by 2020, which significantly
exceeds projected demand. In the mid-term the
capacity utilization might be damaged 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.
Plywood remains heavily an exported product -
some 1.97 million m3 out of some 3.54 million m3
produced was exported in 2014. Exports grew by
11 per cent as compared to 2013. Consumption
of plywood in Russia decreased slightly due to
growing competition with domestically produced
OSB as well as due to larger incentives to sell
plywood on the export market when domestic
prices tumbled together with the falling ruble.
Panel types used mostly for furniture and interiors
(particleboard and MDF) are likely to be in more
difficult position as the volume of consumption
largely depends on furniture production inside the
country. Here we are likely to see growing supply,
stagnant demand and thus rapidly increasing
competition:
Particleboard production grew in Russia by 2.7 per
cent in 2014 as compared to 2013. Particleboard
remains both the most produced and the most
consumed type of wood based panel in the
country. Nearly one-third of the total particleboard
production capacity in Russia is over 30 years
old, with an average age in this group of 45
years. In 2014, two high-capacity mills started
particleboard production in Russia and in Belarus:
Rechitsadrev (part of Bellesbumprom, capacity
215,000 m³/a, Belarus); Uvadrev (capacity 315,000
m³/a, Udmurtia, Russia). Construction is on the
way at Kronospan Bashkortostan project in Ufa
(Russia), capacity 500,000 m³/a. A bit earlier,
particleboard production started at the Kronospan
site (former Elektrogorskmebel) in Elektrogorsk,
capacity 250,000 m³/a. The largest plan is for a
750,000 m³/a line for Kastamonu in Tatarstan.
If installed, the line will be the second largest
in Russia and one of the Top 10 in the world.
In 2014, new capacity came on stream in the
production of MDF: Kastamonu (Tatarstan,
capacity 480,000 m³/a), is currently increasing MDF
capacity up to some 850,000 m³/a by installing
ex-Pfleiderer line initially targeted by Pfleiderer
in Novgorod, and PDK Apsheronsk (Krasnodar Krai,
capacity 300,000 m³/a). One more high capacity
MDF line might come on stream in 2016: the
project has been developed by Russian Laminate
holding in the Smolensk region with a capacity
of 400,000 m³/a. In 2014, two mills started in
Belarus: Gomeldrev (part of Bellesbumprom,
capacity 215,000 m³/a, MDF 3-40 mm thick) and
Mozyrsky DOK (capacity 350,000 m³/a, insulation
fiberboards 20-240 mm thick).
―
While furniture production is almost an exclusive
end-use segment for particleboard in Russia, MDF
end-use segmentation is diverse: MDF/HDF is
used in production of doors, mouldings and wall
panels, in furniture production and in laminate
flooring production. Laminate flooring production
is going through a full-scale production boom now
after the devaluation of the ruble there is the
need to substitute some 35 million m²/a (which
means: over 300,000 m³/a of HDF) of European
and Chinese laminate flooring in the Russian
market. New capacity of 20 million m²/a was
started in 2014 by by Kastamonu in Tatarstan.
PDK Apsheronsk is planning to start laminate
flooring production with capacity of some 10
million m²/a in 2015. Egger has plans to have
some Russian-based production as well.
With forest resources spread widely from the
North-West to the Far East of the country, the
demand for wood based products in Russia is
heavily concentrated in Western Russia, mostly
in the Central, Volga and South regions. But
even within the Western part of the country,
the transportation distances are huge by European
standards. On the positive side, transportation is
relatively cheap - often within a range of some
1.5-2 euro per m³ per 100 km. That being said,
transportation distances often exceed 500 km,
a fact which in Europe would in many cases kill
competitiveness. It means that competition in
Russia is not regional: large players operate in
all main consuming Federal Regions.
Of course, there are some exceptions for lower
price products, e.g. for particleboard: producers
in the North-West tend to sell to the North-West
market and to Central Russia, producers in Central
Russia sell in their home region and around - to
the Volga and the South. Current oversupply of
particleboard in the North-West (some 1 million
m³/a) creates a wave from the North-West to the
Center, where the wave is strengthened by further
oversupply of some additional 0.5 million m³/a
from the producers in Central Russia. And the
wave, finally, is consumed by the Volga and the
South regions. Undersupply in the Volga region
is (a partial) explanation behind the location of
all recent large-scale projects in particleboard
production: Sveza, Uvadrev, Kastamonu, Kronospan
Ufa.
But again, as a rule, competition is not regional: it
is nationwide for domestically produced/consumed
products and it (naturally) transcends any borders
for internationally traded goods. Who are the
main game setters? (see Fig. 4)
Concentration in the industry is at a medium
level - the Top-5 players control just a bit over 30
per cent and the Top-10 players control nearly
a half of total wood based panel production
capacity in Russia. Among the Top-10 producers
there are large international players including
Kronospan Group, Swiss Krono Group, Egger, IKEA,
and Kastamonu. These producers are among the
largest investors as well - with plans and projects
in production of panels, furniture, and laminate
flooring.
One more interesting thing to notice in Fig. 4
is that while the top leader is well defined, the
position of all other players is subject to change:
Kastamonu might become the second-largest
player in couple of years, with an MDF capacity of
some 850,000 m³/a (two lines) and a particleboard
capacity of some 720,000 m³/a. The Number 5
position in the list might be taken by any one-
site-one-line producer with a high capacity line
of 600,000 m³/a or so. For example, the Taleon
Terra 600,000 m³/a OSB line that is planned for
installation in Torzhok would move the mill right
into the Top-5 list, and for that we would not even
need to include the 150,000 m³/a LVL capacity
of the mill. Any player with over 600,000 m³/a
which starts in 2015-2018 would almost certain
to have a place among the Top-10 producers of
wood based panels in Russia. The number of high
capacity mills in Russia in any panel type is still
low, and there is a place for new (cost efficient)
entrants in particleboard and plywood, while
the current size of MDF and OSB market would
be a limiting factor for entrants in production
of these panels.
Looking at individual panels, the Top-5 producers
control from 45 to 55 per cent of total capacity
in the production of MDF, particleboard, and
plywood separately. Foreign players dominate
MDF and particleboard production: Kronospan,
Kastamonu, Swiss Krono, Egger, and IKEA. In
plywood production the undeniable leader is
Sveza, controlling about a fifth of total plywood
production capacity in the country. In OSB
production, the Top-4 players are the only
players so far, and the concentration here is
high.
Considering possible new entrants, only the
competitive situation in particleboard and
plywood might be called favourable: with a
long tail of old low-capacity high-cost mills
which can be pushed out of the business by new
high-capacity low-cost entrants. But competition
and the pressure on prices even in particleboard
and plywood production are likely to increase
to levels not seen in the last 15 years. And
here we run into one more growing difficulty
for wood based panel producers in Russia: if
the market stops growing for several years
in a row, cost efficiency would jump right
to the top of the agenda of almost any mill
manager not just because "we need even
better profits" but because "that's a matter of
the survival of the business".
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With that said, there is a lack of specialists which
are experienced in working in an extremely
low-margin environment. The last 15 years of
development of the wood based panel market
in Russia was always a "capture the growing
market" game, with a short break in 2009. There
was no time and no "good" conditions to develop
the best management practices for a survival-
of-the-fittest kind of environment. The current
slowdown might be much longer than the "it was
scary but short" slowdown of 2009. So, how to
cope with potentially lowering margins?
HOW TO COPE WITH LOWERING
MARGINS?
Many mills in Russia, facing lowering margins,
have decided to enter value-added production.
On the face of it, the strategy is appealing: "we
do not make money on the base boards, let's
go
further downstream, to where the money is made!"
However, this strategy has at least two significant
pitfalls:
• If the strategic move is successful from a
market perspective (competition in the value-
added products sector, logistics, product
range), than any of the existing competitors
can copy the move - reducing the question
of margins back to the competitiveness of
the basic boards. If the strategic move is
unsuccessful, already low profitability is
damaged even further.
• Even when the decision of going downstream
to manufacturing of value-added products
looks absolutely right from the market
perspective, there is a good chance that
the existing "wholesale" mindset of the
Fig. 5: Pöyry Management Consulting: over 150 performance improvement projects for forest
industry enterprises worldwide, typical duration of a project - 12 months, typical ROI 5:1
RUSSIAN #6 (2015) 37
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