Russia emerging as a global timber threat
The Global Softwood Log and Lumber Conference held in Vancouver in early May was designed to have an expanded focus on industry developments in Russia and China. A report from the International WOOD MARKETS Group conference looks more closely at the Russian forestry industry and anticipated growth in wood processing competitiveness in global markets.
The devaluation of the ruble has had a huge impact on the competitiveness of Russian softwood exports, a trend expected to persist for the short- to mid-term future. However, longer-term competitiveness issues remain, e.g., logistical access to softwood forests and limitations on the economic range of new timber supplies (due to poor the forest management practices of the past). For example, while stumpage fees are very low in comparison to other global regions, the practice of harvesting the most accessible forest areas first has resulted in progressively longer hauling distances to more marginal forests and, consequently, higher overall delivered log costs.
Speakers Jukka Halonen, of StepChange Consulting
, and Ken Munson, formerly of International Paper
, agreed that Russia's outdated forestry practices have contributed to the stagnation of its forestry sector. In comparison to countries with more intensive silviculture practices (such as neighbouring Finland), Russian forests have a relatively low growth rate. Further, due to the logistical and economic issues mentioned above, the Russian industry harvests a smaller percentage of its annual allowable cut (AAC): only ~30%.
Perhaps even more alarming, current and past reforestation practices (or lack thereof) have resulted in a steady conversion of logged areas from coniferous (softwood) forests to uneconomic deciduous (hardwood) forests. Indeed, Mr. Munson indicated that, at the current negative conversion rate (some -0.3% per year) in Russia's Leningrad region, the percentage of coniferous forests will decline from 51% in 2015 to only 20% by 2115.
Fortunately, the opportunity exists to improve Russian forestry practices. In 2013, Russia's first-ever National Forest Policy was introduced. As of 2016, regional regulations are being developed to address forest management practices, including forest inventory, harvest planning, road building, reforestation and thinning. While forest management activities are expected to have an upfront cost, they will also have several benefits: a reversal of the decline in coniferous forest cover, an increase in log size and quality, a reduction in logistics costs, and a 20%-30% increase in the AAC. Implementation of the policies is expected in 2017 and 2018, with improvements in the Russian timber harvest visible soon after.
In addition to the opportunities available through better forest management, Mr. Halonen suggested that forestry firms can reduce delivered log costs by increasing their operating efficiency. For example, companies can optimize their use of forest leases by planning and coordinating harvesting, transportation and log storage activities around stand structure, road conditions and season. In addition, firms can adopt best practices in harvesting, e.g., by utilizing more efficient harvesting equipment, holding on-site spare parts in case of breakdowns, and improving waste management.
Andrey Bessonov of Ilim Group
confirmed that his company is currently working on improving the efficiency/productivity of its logging operations, optimizing logistics, and adopting intensive silviculture practices, with several net objectives targeted by 2030:
- Dramatically increase the company's timber harvest by 20%-30% through intensive forestry management;
- Increase logging productivity growth by 30%;
- Reduce log delivery costs by 10% (in real terms); and
- Increase the sawlog versus pulp log share by at least 25% by 2030.
Mr. Bessonov went on to explain how the devaluation of the Russian ruble has significantly reduced logistics cost for log shipments from Russia to China. For example, comparing 2013 (before the devaluation) to 2015 (with the ruble devalued by about 50%), the following changes in transportation costs occurred:
- Siberia to Manzhouli (mainland crossing in Northern China): US$40/m3 to US$20/m3;
- Russian Far East to Manzhouli: US$56/m3 to US$30/m3; and
- Western Russia to Manzhouli: US$95/m3 to US$50/m3.
With logging costs also reduced by about half due to the ruble's devaluation, and given much lower logistics costs,Russians now occupy the low-cost position in terms of delivered log and lumber costs to China
; this will solidify its market position in China for some time to come. With such close and low-cost proximity to the world's second-largest economy, increases in Russia's export-oriented production are expected to be a key initiative for its log and wood products sector.
Building on this, with its new global competitiveness, major players in the Russian lumber market are undertaking new capacity investments: five of the leading companies have plans for US$500 million in processing investments. The catch: to produce an additional 2 million m3 of softwood lumber, an additional softwood timber harvest of some 5 million m3 is required. This is where the potential for expansions in the pulp and paper sector enter: there are plans for an increase of ~1.3-2.0 million tonnes of new softwood pulp and 0.3 million tonnes of tissue and paperboard capacity.
The increased wood supply to these pulp and paper investments would generate the extra sawlogs required by the new sawmill projects. However, it is important to note that the last greenfield pulp mill in Russia was built many decades ago; aside from one or two large expansions at existing sites, pulp-mill investments in Russia have been rare. Nonetheless, perhaps the new competitiveness of Russia's industry will allow new pulp-mill projects to commence and, given more intensive forestry management, many of the new sawmill projects could also proceed.It seems the Russians are definitely coming, and planning to export more pulp, logs and wood products
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