According to Rosstat data, after a prolonged period of negative production dynamics observed from mid-2022 to July 2023, a positive trend in monthly sawn timber production volumes in Russia has emerged. Although these changes are close to zero or even fall into negative zone, as in 2024, the obvious decrease in volatility allows us to cautiously conclude that adaptation to the new conditions has taken place and sawmill companies have adjusted their production programs to the sales geography that is available today.
Official statistics show that since the third quarter of 2024, the value of lumber shipments and the revenue of sawmill companies have been growing steadily. This positive trend is primarily due to the weak national currency. If we look at the correlation between the RUB exchange rate, revenue, and production volumes, it is clear that neither the price of products nor the volume of shipments in volume terms have such a strong impact on revenue growth as shown by official statistics. The correlation shows the RUB reflection of revenue from export sales.
The dynamics of profits and losses from sales, which are also recorded by Rosstat, show that sawmill companies have been recording losses for five consecutive quarters up to Q3 2023. The return to profitability was very short-lived – from late 2023 to early 2024 – and by Q2-Q3 2024, companies reporting to Rosstat were again showing losses.
In terms of the profitability of sales, it correlates with sales dynamics. Profitability began to decline in 2021, which can be explained by a correction in prices from the historic highs recorded in 2021 to the average normal values observed before the period of high volatility caused by the pandemic. The increase in production costs, coupled with relatively stable and even weak prices on export markets, does not allow Russian sawmill companies to demonstrate the same positive profitability that has been evident over the past seven years. Rosstat also records an increase in the accounts payable of sawmill companies over two years. Since 2022, the increase has been almost twofold.
At the end of 2024, Rosstat estimated the volume of sawn timber production in Russia at 28 million cubic meters. As is well known, Rosstat's data is incomplete, and in September 2024, Rosstat revised its data for 2023. The WHATWOOD agency makes its own annual estimate of sawn timber production volumes. Realizing that official sources do not take into account small businesses, or even some medium-sized businesses, the agency estimated sawn timber production in the Russian Federation at 39.6 million cubic meters, which is, on average, 2% more than in 2023. 90-95% of the total production volume is sawn timber from coniferous wood species, with deciduous species accounting for about 3-4 million cubic meters per year, mainly birch. The growth in sawn timber production in 2024 compared to 2023 stimulated a twofold increase in individual housing construction in the first half of 2024.
There are three macro-regions for lumber production: the European part of Russia, Siberia, and the Far East. The sanctions environment in 2023-2024 affected all constituent entities of the Russian Federation. Siberia and the Far East have been reducing production volumes over the past two years, while the European part has maintained and even increased them. If we exclude the years of high volatility (2021-2022) from the comparison with 2023-2034, we see that sawn timber production volumes in the European part of the Russian Federation have not only remained stable or unchanged, but have even increased.
It is worth noting that in 2022, a decline in production volumes was recorded in all regions, while a return to positive growth in 2023 is also recorded in all these regions. However, in 2024, only the North-West will maintain positive growth rates in sawn timber production volumes, according to Rosstat. It should be noted that the negative deviations in the Central Federal District and the Volga Region are minimal, in the range of 65,000 to 100,000 cubic meters, which is comparable to the statistical error. The North-West District has continued to record growth in sawn timber production for two years (2023-2024). At the same time, the Arkhangelsk Region and the Republic of Komi have reduced their production volumes, while the Vologda Region, the Republic of Karelia, the Novgorod Region, and the Leningrad Region have increased their production volumes and are showing stable positive dynamics.
Why is the European part of the Russian Federation, led by the Northwestern Federal District, able to maintain and improve its production indicators in sawmilling? Sawn timber producers in the European part of the Russian Federation have a number of objective advantages, including geographical proximity to centers of consumption of sawn timber in the domestic market, location in the center of active and solvent demand in the wooden house construction segment, and in the repair and DIY segment, which partially compensates for the loss of export markets. However, the remoteness of Siberian and Far Eastern producers from centers of consumption in the domestic market allows them to develop only local domestic markets and export to Southeast Asia. This does not mean that products from Siberia cannot be found on the markets of Krasnodar, Moscow, St. Petersburg, or the Caucasus republics, but the distance of 5,000 km to consumption centers has a significant impact on competitive advantages. Therefore, these regions tend to offer products made from species that do not grow in the Central Federal District and the Northwest, such as Siberian larch, cedar, and other niche items. As a result, despite the closure of European export markets, the European part of the Russian Federation still enjoys a slight competitive advantage thanks to the domestic market.
According to estimates by the WHATWOOD agency, sales of sawn timber on the domestic market are not just gaining momentum, but by the end of 2024 will have overtaken supplies to China. The reason for this development of the domestic market is necessity – the domestic market has always been underestimated in terms of its potential. Sales of sawn timber to the domestic market in the first half of 2024 showed a twofold increase. These are volumes that are sent for defense needs, for the restoration of destroyed territories, and for the elimination of natural disasters. Surveys of small businesses in northwestern Russia and the Volga region in 2024 confirmed very high consumer demand for raw lumber until late autumn. It is worth noting that small businesses appear to be quite flexible in the seasonal construction and renovation market, meeting all the demand for natural moisture lumber in the local markets of small towns, where medium and large companies simply cannot reach, as our large and medium-sized companies are located far away and do not work with small batches. It is worth noting that small businesses meet the needs of households in small batches, including those households that are located at a certain distance from DIY centers of regional and federal significance.
The assumption that large businesses attempting to enter the domestic market are somehow driving out small businesses is not yet very convincing, and there is little evidence to support it. Large Russian factories continue to build their work with the domestic market on a residual basis. Everything that can be sold for export is sold for export, while the domestic market is offered some non-common cross-sections and specifications, or targeted sawing, with orders from construction companies or DIY chains that are not very large for large companies. Small sawmills are currently winning the price competition for natural moisture lumber in these segments. Small players form the basis of the Russian sawmill industry. The sawn timber market is highly fragmented. The top 15 sawn timber producers accounted for only 20% of production in 2024. The top 15 producers represent 45 sawmills, which is only about 8 million cubic meters, meaning that small and micro businesses form the basis of the sawn timber market.
Prices for Russian sawn timber in almost all key export markets have returned to their average normal values, which were in place before 2021 and the subsequent recovery. Currently, we are seeing the usual values for the Egyptian market and the usual values for the Japanese market for planed products. The Chinese market also operated at its normal level throughout 2024.
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