The Russian sawmilling industry is characterized by fragmentation, a division between large export-oriented companies and smaller companies relying on the domestic market, labour intensity, and advantages in stumpage and labour costs. However, the industry is facing serious pressure brought on by inflation and other factors driving up the prices of delivered logs, and the necessity to invest into infrastructure and new equipment to maintain competitiveness.
The Russian Sawmilling Industry at a Glance
Russian sawnwood production has nearly doubled since 2000.
The overall production level and industry development is heavily driven by exports. However, both production and domestic demand for sawn softwood is expected to be at a somewhat higher level than the official statistics indicate.
The sawmilling industry in Russia is still very fragmented and is characterized by relatively small sawmills with an annual capacity of less than 100 000 cubic meters. A significant share of these mills is expected to be missing from the official (production) statistics resulting in misleading supply-demand balance in the country.
Most of the small and medium sized mills focus their sales to domestic market with local clients. However, there are naturally also some companies with pure export focus in these size categories. On the other hand, the largest Russian sawmills sell practically all their output to the export markets.
The importance of China as the main export destination has skyrocketed, its share of all exports rising from a humble 3% in 2000 to over 60% in the last couple of years. The role of Central Asia has increased as well, though at a much more modest pace. Together with the Middle East the share of these core export markets accounts for over 80% of total export volume. Lower quality requirements in these markets have enabled Russian sawmills to meet their demand with the current level of production technology.
Development of sawnwood exports from Russia
Competitiveness of the Russian Producers
Costs and productivity form a cornerstone of competitiveness within any industry, which in turn drives investments. In the sawmilling business, costs consist of:
- raw material
- capital and
- other costs
Differences in product mix, raw material base, input prices, machinery, and logistics result in distinct cost structures between industry players.
Raw material holds a dominant stance in the cost structure of sawmilling anywhere in the world. Russia has a distinct advantage in the cost of raw materials, with the cost of delivered logs being among the lowest in comparison to main competing suppliers. Within the country, there are naturally regional differences in the price development of domestic logs, with prices in the North-West and Far-East increasing sharply recently. The volatility of prices has however also been highest in these two regions. In other regions the price development has been relatively stable, following a moderate increasing trend. Due to the weakening of the Rouble, Euro-based prices have however even decreased.
In many cases, Russian sawmill industry continues to lag behind in product sales values relative to its competitors in several markets. The log quality is good and sometimes even higher in comparison to many competitors. This disadvantaged position been due to perceived product quality issues resulting mainly from outdated technology and differences in service levels (timeliness, ease of payments, claim handling). These service issues are partly resulting from the lack of local presence – Russian companies have fewer sales offices or terminals/landed stock in the key export markets. In addition, there is improvement potential in experience and skills in export sales, especially among the smaller companies. Latest capacity investments and expansion outside Russia are however changing the old unfavourable situation and reputation.
In Russia, the labour price is clearly the lowest compared to the main competing countries, and the cost level has even decreased in euro terms but has increased annually in the local currency. Favourable exchange rate development has enabled this development.
Despite the favourable development versus the main competing countries Russian sawmilling industry is still heavily labour intensive.
Although the labour productivity has increased somewhat faster than in the competing countries, it has not been able to compensate the price increase and therefore the unit costs have increased. At most mills, significant labour productivity improvement opportunities exist.
Current Investment Trends
Currently there are over 10 planned investment projects in the pipeline in the Russian sawmilling industry for the upcoming years. The total planned new capacity amounts up to over nearly 2.5 million m3 p.a., which represents an over 5% increase compared to the current level of production. These investment plans are located mainly in Siberia and Russian Far East. An important issue impacting the investment attractiveness relates to the sales opportunities of processing residues and unwanted wood assortments (i.e. pulpwood) which has an impact on the financial feasibility of the investment project. There are several greenfield pulp mill projects in both of these regions.
Business Outlook and Opportunities
Russian raw material competitiveness will face serious challenges in the next several years. Unlike in many competing areas, stumpage value in Russia is low, and log cost consists mainly of harvesting and transport costs. Thus, market driven impacts that decline the stumpage price level are smaller than in competing countries. Furthermore, inflation will increase input costs in harvesting and logistics. Road infrastructure will also continue to pose a challenge and capital investments in forest infrastructure are needed.
Indicative log cost breakdown
The ultimate mill gate price depends on companies’ ability to utilize their annual allowable cut (AAC) efficiently. Success on high AAC utilization rate should be pursued especially in areas that require major infrastructure investments.
Other costs, such as sawmill labour are increasing rapidly with inflation, which also deteriorates the cost advantage that Russian sawmills have been enjoying.
For the industry to maintain and even improve competitiveness, it must aim towards improving the productivity of labour, invest in infrastructure, try to increase the value of its products and utilise by-products more and more efficiently. These all call for substantial investments into the industry.
Future mills will require
- more automated systems (e.g. grading, moisture control)
- more independence by employees – flexibility to change tasks, learn new skills
- more high skilled labour – e.g. electronics specialists
- attractive salaries to retain skilled people to remote locations
However, since the log transport costs are considerable and infrastructure limited, the correct mill size has to be considered carefully. Log cost per m3 increases with mill size and other cost savings become marginal once a certain size has been passed. As the raw material quality is high it allows the production of higher value specialties such as planed, MSR and modified/treated products. Investments in grading optimization technology can also increase sales value, especially in North-West Russia.
The demand for wood products in high-rise construction is emerging globally. The Russian building code also experienced alterations in the beginning of this year opening the market for wider-scale use of sawnwood based construction products in the country. Segheza Group and ThermoHoltz have announced plans to build CLT manufacturing capacity within Russia, but it is likely for others to follow suit in the near future. Hasslacher Group announced new glulam capacity to its facility in the Novgorod oblast and Segheza is planning a new glulam plant in Sakhalin.
CLT wall elements in wooden construction
Despite several greenfield pulp mill plans in Russia, major expansion of pulp capacity is not expected to occur in the foreseeable future and thus other options to increase by-product value should be found. Sawmills in the Nordic countries and North America are heavily exploring new higher value processing options for by-products, such as
- bio crude / pyrolysis oil
- activated carbon
- bioplastic composites
- wood-plastic composites
- bioethanol / biobutanol.
Through investments in product and market research, sales and marketing the sawmilling companies could maximize the value potential of their technology investments.
This article has been also published in the Russian Forestry Review #8 in May 2019.
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