Export of sawn timber from Russia: two rounds are behind, what's in the third?

The situation with the export of lumber from Russia is similar to a boxing match. In the first round, one of the athletes received a severe knockdown, but was able to continue the fight. At the same time, in the second round, he looked more dignified, deftly dodging his counterpart, conducting good counterattacks and confidently gaining the first, such important points…

Casting a retrospective glance at 2022, it is clearly visible that in the first round of the battle for survival, Russian exporters of wood products first lost their established supply chains (by May-June 2022, the largest ocean lines simply stopped entering Russian ports), and then, after the fifth package of EU sanctions came into force by 01.07.22, we were unable to supply lumber from Russia to Europe. The knockdown was really serious. Sales markets have shrunk (the number of importers of Russian lumber decreased from 80-85 in the 1st half of 2022 to 25-28 in the 2nd half), and world lumber prices fell in July-September 2022 to a two-year low (and remain so to this day). Such a harsh situation did not allow the timber industry of Russia to take a breath for a moment.

World prices for lumber

Source: https://tradingeconomics.com/commodity/lumber (December 13th, 11:55 MSK)

The second round of the battle for the survival of the Russian timber industry began with the reversal of export cargo flows of lumber from the western part of the country to the Far East. According to the Federal Customs Service, China's share in container exports of lumber from the Russian Federation increased from 84.4% to 91.1% in the first half of 2023 compared to the same period in 2022. According to Russian Railways, by the end of 11 months of 2023, this share increased even more – to 92.6%.

At the same time, the containerization of lumber exports was proceeding at the fastest pace. Thus, according to the Federal Customs Service, the level of containerization during the transportation of lumber for export was 36.6% in 2021, 45.1% in 2022, and in the period from January to July 2023 it increased to almost 50%, amounting to 49.5%. One of the two most important reasons for this was the lower cost of shipping goods in containers through land border crossings due to subsidies from the PRC. The second reason was that the absence of two transshipment points at the ports of departure and destination and the maritime component significantly reduce the time of delivery of products to the end consumer in China. All together, this led to the fact that the share of shipments through border crossings in the Far East amounted to 54.7% of the total container exports of lumber of the Russian Federation in 11 months of 2023.

At the same time, in late 2022 - early 2023, the process of replacing the sea lines of global carriers that stopped entering the ports of the Russian Federation began on lines organized by the leaders of the Russian transport business (Delo Group, FESCO, Modul), as well as regional shipping companies from countries friendly to Russia (China, India, Turkey, UAE). The best example is the Great Port of Saint Petersburg, which has been most affected by the rupture of established supply chains. The changes in the shares of lines in the port transshipment of goods for the 1st half of the year are shown in the following table.

In order to unload the railway network of the Eastern Polygon (territories behind the Ural Mountains), the Government of the Russian Federation adopted a resolution on granting subsidies for the transportation of wood products for export through the ports of the Northwestern Federal District. In this case, according to the Decree, timber industry exporters in 2023-2024 will be able to compensate up to 80% of the costs (up to 50% of the volume of supplies) for the transportation of their products. The Decree applies to transportation from July 01, 2023 to September 30, 2024.

It is necessary to mentionthat the action taken had an effect. If in the 1st half of 2023 container exports of lumber through the Great Port of St. Petersburg ranged from 1,200 to 3,800 TEU, then from July 01 this index was at least 4,000 TEU, reaching 5,500 TEU in some months. As you can guess, China was again the main export destination here (94.4%).

Naturally, almost monopsony significantly increases the risks in the fight for survival. It's too much like boxing with one hand.

In addition, things have not been going as well for this consumer for a long time as we would like. The slowdown in economic growth led to the fact that in early December, the international rating agency Moody's Investors Service downgraded the outlook on China's credit rating from stable to negative. The rating agency notes the strengthening of fiscal policy in China and an increase in government debt. In addition, according to the results of the 3rd quarter of 2023, the country recorded the first outflow of foreign direct investment since 1998. The authorities are also seriously concerned about the overheating of the real estate market. The country's largest construction company, Evergrande Group, which is part of the so-called "big four" developers (the entire "four" is in the TOP 30 largest companies in China), is on the verge of bankruptcy. Sales of another representative of the "big four" – Country Garden Holdings – fell by 81% in September compared with a year earlier. According to Bloomberg, China's real estate investment growth changed from +38.5% in February 2021 to -9.1% in September 2023 (month-on-month of the previous year). This indicator has been in the "red" zone since April of this year.

This situation is beginning to affect Russian exports to China. So, if the container export of lumber for 7 months of 2023 decreased by only 0.09% compared to the same period last year (from 2.994 thousand tons to 2.991 thousand tons), then, in reality, the total export of lumber from Russia to China during this period decreased by 14.8% (from 5,005 thousand tons to 4,621 thousand tons – data of the Federal Customs Service).

Russian metallurgists and iron ore suppliers are also beginning to notice a decrease in exports to China.

Thus, the Chinese real estate market began to slow down rather than lead to the growth of the national economy. Not looking for alternative markets for Russian timber producers in such a situation is comparable to boxing with one hand in the third, decisive round.

It will definitely not be easy in this round, because China is not the only one with problems with the construction sector right now. The number of building permits issued in the European Union is at a two-year low. It's all the fault of the high interest rates of central banks, which pushed up mortgage rates. And not only in Europe. Thus, mortgage rates reached levels of 4.9% in Korea (data for September), 5.9% in Australia (June), 7.0% in Canada and 7.4% in the USA (both in November), 7.7% in New Zealand (October). 

It is clear that the road for Russian lumber to these countries is closed, but the global trend towards a decrease in construction rates will push timber producers in other countries to search for new opportunities to sell their products in other countries. The intensification of competition is inevitable.

But, unlike lumber manufacturers, Russian logistics companies are fighting their duel "with both hands", having built up muscles and general training after solving the most difficult tasks in 2022-23. to turn cargo flows, organize new shipping lines and debug new supply chains. They will definitely be able to lend a shoulder to their timber industry colleagues in the third round.