Rapidly increasing input costs, such as costs of wood raw material, are threating Russian P&P producers to lose competitive advantage on the global market. Russian Pulp&Paper sector is export oriented and Russian producers compete with other long-fibre pulp and paper products producers on the global markets. Due to recent depreciation of the local currency (Ruble), Russian producers have a temporary reprieve as one of the lowest cost producers in the world and are enjoying high margins. However, the situation will change as the Ruble strengthens and fiber prices increase. Therefore, appropriate wood fibre cost is crucial for retaining competitiveness of Russian P&P products on the global market.
Russian pulp mill log yard
Russian P&P sector has expanded in the last 10 years and its importance for Russian economy has been growing. In 2006-2015, the growth has been significant for production of market pulp (15%) and especially packaging materials, where production volumes more than doubled. Also, export sales account for a considerable share. For instance, export amounts to 30% for wood pulp, 70% for Printing&Writing paper and 25% for packaging materials. Increasing export revenues due to weak local currency, made Russian producers probably most profitable in the world in the last 2 years.
Figure 1. Russian Production and exports of Pulp (left), Printing and Writing Paper (middle) and Packaging materials (right), 2006-2015. Source: FAO
Pulp and paper raw material base in Russia is heavily depending on wood and amount of recycled fiber is low. Share of virgin fibre has been traditionally very high and currently amounts to 80%. As demonstrated in Figure 2, Russia currently enjoys the lowest pulpwood costs among the main supplier regions, totaling to lower than USD 20 per m3. For example, pulpwood for Russian mills currently costs one third than for their competitors in Scandinavia. Differences to North American producers are also significant. However, this is partly due to strong depreciation of ruble in 2014-2016.
Figure 2. Delivered pulpwood costs in Quarter 2, 2016. Source: various, Indufor
In 2010-2015, the raw material prices in Russia have risen sharply in local currency, but the favorable exchange rate has halted the growth of euro-based prices. Due to limited infrastructure and depletion of nearby resources, pulpwood usually must be hauled long distance, sometimes longer than 1 000 km. Increasing oil price and accompanying revaluation of RUB may be lurking behind the corner. Therefore, competitive advantage in wood costs can be temporary if no actions of improving wood supply operations are taken now.
Figure 3. Wood fibre price development in EUR (left) and local currency (right), 2010 vs. 2015. Source: Indufor
Recent exchange rate development has given Russian P&P industry strong competitive advantage. Russian P&P producers have wood fibre cost advantage relative to all competitors. Also, low labor cost and increasing labor productivity improves Russia’s competitiveness. Due to extraordinary positioning with high profitability and low, but increasing productivity the competitive situation can be improved with new investments. This kind of investment plans are arising in the future mainly in Siberia and Russian Far East in order to serve Asian demand. Along with modernization, they are needed to defend Russia’s P&P industry's competitiveness when Russian ruble gets stronger again.
Harvesting operations in Russian forest