Russian Forestry and Wood Supply Operations Analysis

56 PULP AND PAPER INDUSTRY PULP AND PAPER INDUSTRY What Does the Future Hold for Russian Paper and Board Markets? The Russian economy, along with Russian pulp and paper industry, has undergone probably its most turbulent period since the 2009 worldwide economic crisis. This article provides an overview of the state of Russian paper and board industry in 2007, prior to the 2008/2009 crisis and subsequent years ending in 2014, discusses the drivers of two major growth areas (tissue and corrugated consumption) and attempts to provide a near-term outlook for the whole industry. In 2009, the Russian economy contracted sharply, leading to a subsequent drop in its paper and board consumption and production. In 2014, the Russian economy's structural issues were exacerbated by economic sanctions imposed by the international community, which reduced its economic growth further from 1.3 per cent in 2013 to 0.6 per cent in 2014. Between 2007 and 2013, it appears that growth in the country's total paper and board consumption and production was highly correlated with its real GDP growth (Figure 1). However, in 2014 paper consumption contracted sharply to the tune of 6 per cent, while the country's paper production posted healthy growth of 3.2 per cent. Such divergence had not been seen since 2008, although the magnitude of divergence was higher in 2014. Indeed, the Russian pulp and paper industry has not been affected directly by the sanctions, which means that there is no restriction on exports of its products to world markets. However, Russian companies are restricted in terms of access to banking credits to support its export activities. Below are three major factors that in our view help explain better than expected Russian higher domestic production in 2014: ⚫ The depreciation of the Russian ruble, especially during the fourth quarter of 2014 which supported higher exports. • Most of overseas markets for Russian paper and board continued to grow last year, a situation which is quite different from that during the previous crisis in 2009. • Increased capacity from new paper and board machines. Despite contracting, our preliminary estimates put Russian paper and board consumption at 6.8 million tonnes in 2014, still 3.3 per cent higher than 2007 levels. Growth in consumer spending, real GDP and industrial production - although at lower than during the pre-crisis period - helped Russian paper and board consumption to grow by 5.5 per cent annually between 2010 and 2013. Figure 1: Growth in Russian Real GDP, Paper and Board Consumption and Production 15% 10% 5% 20 0% -5% -10% -15% 07 08 09 10 11 GDP Paper and Board Consumption 12 13 14 Paper and Board Production Source: Orifjon & Associates estimates based on various sources Figure 2 provides the breakdown of Russian consumption of all paper and board into various grades such as containerboard, cartonboard, wrapping papers, printing and writing paper, newsprint and other unclassified grades in 2007 and 2014. Note that we define consumption as domestic production minus exports plus imports. The lion's share of growth in consumption of all paper and board in Russia from 2007 to 2014 was in containerboard, the share of which increased from 30 per cent in 2007 to 39 per cent in 2014. The next largest paper market is printing and writing paper with 25 per cent of all consumption in 2014. After reaching more than 100,000 tonnes greater than 2007 levels in 2013, the consumption of printing and writing paper in Russia contracted by up to 10 per cent in 2014. The third most important paper market in Russia is cartonboard, with a share in paper and board consumption dropping by 1 per cent to 10 per cent to 700,000 tonnes. This segment is exposed to import competition of printed materials, which are exempted from import duties while imported base board is subject to import duties of 15 per cent. Market reports suggest that close to third of cartonboard needs in Russian market are imported in the form of printed folding cartons, which puts the Russian printing and converting industry at a competitive disadvantage. Newsprint consumption, which has been affected by the rise in electronic media, represented just 7 per cent of total paper consumption in 2014. Its share in total paper consumption declined by 5 per cent from 2007 and its volume posted a drop of 41 per cent to 460,000 tonnes in 2014. Newsprint and wrapping papers have been suffering due to competitive pressure from electronic devices and plastic packaging, respectively. The country's apparent consumption of wrapping papers dropped by 17 per cent from 2007 levels of 260,000 tonnes, leading its share in overall paper and board consumption to decline to just 3 per cent by the end of 2014. Tissue has been one of the best growing sectors in Russia through 2012, with market size reaching Figure 2: Breakdown of Russian Paper and Board Apparent Consumption* in 2007 and 2014, thousand tonnes Figure 3: Russian Paper and Board Production by Grade in 2007 and 2014, thousand tonnes 9 000 8 000 8 000 625 7 000 7 000 525 355 500 230 280 505 665 770 6 000 6 000 350 430 310 220 260 695 5 000 5 000 725 3 330 2 540 4 000 4 000 1975 2650 3 000 3 000 1 355 1 505 2000 1745 1000 2 000 1660 1 000 1980 1 635 0 785 2007 Other** ■Wrapping Papers * Apparent Consumption = Production + Imports - Exports 0 460 2014 Containerboard ■Newsprint ** Other are paper and board grades that are not included in any of the other categories. 490,000 tonnes in 2012 thanks to average annual growth of 11.1 per cent between 2007 and 2012. However, tissue consumption contracted by 6 per cent in 2013 and 2014 per year due to the uncertain economic situation. Nevertheless, with 430,000 tonnes of consumption in 2014, the share of tissue in the country's total paper consumption was 6 per cent, which is still higher by 1 per cent than in 2007. Finally, consumption of "Other Paper and Board," which consists of such grades as specialty paper and board not included in any of the packaging and graphic paper categories (e.g., roofing board, coreboard, technical papers, labels, wallpaper, gypsum liner), posted a drop of 1.8 per cent annually over the last seven years, with levels of just 665,000 tonnes in 2014, or 10 per cent of total consumption. As for domestic paper supply in Russia, total production reached about 8.1 million tonnes in 2014, up by 545,000 tonnes from 2007, with average annual growth of 1.2 per cent. The difference between production and domestic consumption indicates that Russia remained a net exporter of paper and board and its surplus position has increased over the last seven years. Substantial capacity increase in printing and writing paper, and containerboard, contributed to most of the increase in the country's net export position during this period. A sharp increase in recycled containerboard capacity for the last two years (SFT Kamenskaya Cardboard and Paper Mill, Mayak Mill in Penza, 000 Dekart in Moscow region etc) pushed Russian domestic virgin containerboard producers to increase their exports with the aim of offsetting the share loss in their domestic markets. At the same time, in the printing and writing paper areas, Russia saw a drop in its trade deficit position thanks to new paper capacity (Kotlas Branch of Ilim Group). In the cartonboard segment, given 2007 Tissue a relatively complicated production technology, the Russian market remained a large net importer of cartonboard. In the case of tissue, it was challenging for domestic supply to keep up with growing domestic demand and this caused a small, but sustained trade deficit in the segment. Three segments in Russia saw increased production during the last seven years: containerboard, printing and writing paper, and tissue. Tissue production posted the largest increase of all grades (55 per cent) over its 2007 levels to reach 355,000 tonnes in 2014. Containerboard production posted the largest increase in absolute terms over the last seven years with a 31 per cent increase over 2007 levels by the end of last year. The share of containerboard production increased Cartonboard 2014 Printing & Writing Source: Orifjon & Associates estimates based on various sources by 7 per cent to 41 per cent of total paper and board production in 2014. Although there are a lot of grades within that category, the country's domestic production of printing and writing paper increased annually by 1.1 per cent between 2007 and 2014. The trade deficit position in that segment had been increasing to reach historical highs in 2013, before new uncoated and coated domestic paper production caused it to decline sharply in 2014. All other sectors contracted as a result of declining domestic demand during the last seven years. Newsprint's share in overall production dropped by 6 per cent to 20 per cent in 2014, while the share held by wrapping paper fell a couple of percentage points to 6 per cent relative to Figure 4: Consumer Market for Corrugated and Tissue Consumption in Russia 15,0% 10,0% 5,0% 0,0% -5,0% -10,0% -15,0% Annual Average: 07-12 ■GDP Real Disposable Income 2013 Household Consumption 2014 ■Fixed Asset Investment Retail Sales Tissue consumption Source: Orifjon & Associates Estimates Based on Various Sources #6 (2015) RUSSIAN FORESTRY RUSSIAN #6 (2015) 57 FORESTRY