According to the results of last year, the export of Russian timber decreased by 70%, to 3.8 million m3. Such a sharp drop is due to the decree of the Government of the Russian Federation No. 396 dated 03/18/2021 on restrictions on the export of softwood and hardwood timber from January 1, 2022. At the same time, lumber exports decreased by only 20.8% and amounted to 23.3 million m3 in 2022. This decrease was influenced by the EU embargo on the import of almost all products of the Russian timber industry, which came into force in July 2022.
How is the Russian timber industry doing a year after the introduction of large-scale sanctions and has it managed to reorient export and boost domestic demand?
Decline in exports
Currently, the number of countries to which Russian lumber is exported has decreased to 28, while over the past decade the number of such countries has remained at the level of 105-110. Lumber supplies for export in the first quarter of 2023 amounted to 4.6 million m3, which is 23% lower than the level of the first quarter of 2022.
According to the results of the first quarter of 2023 , the indicators of lumber exports from Russia:
● 3.3 million m3 were exported to China in the first quarter of 2023, showing an increase of 1% YoY;
● 525 thousand m3 to Uzbekistan, which is 15% more than the level of the first quarter of 2022;
● Shipments to Tajikistan increased by 129% to 143 thousand tons. m3;
● Israel: +68% to 57 thousand. m3;
● Other directions mainly showed negative dynamics, and the European direction completely left the list of lumber supplies from Russia.
However, there are trends in the market that can be perceived as very positive. Lumber exports from Russia to China have been increasing for the fourth month in a row, logistics corridors are gradually expanding, and carriers offer fairly affordable tariffs for container transportation from the European part of Russia.
Lumber production in Russia in the spring of 2023 showed relatively good results, and the early opening of the construction season sets high expectations for the Russian domestic market.
A good help for Russian exporters was the weakening of the national currency. During April, the exchange rate was above 80 RUB/USD (January–February ~70 RUB/USD). The average exchange rate of the national currency of China in April was 11.74 RUB/RMB compared to 10.42 RUB/RMB in January–February. The analysis shows that in the first quarter of 2023, about 75% of the total export of lumber accounted for settlements in RUB and RMB.
The timber industry itself has great potential. According to expert data, the estimated cutting area — the permissible annual volume of timber harvesting — in Russia is about 730 million m3 per year and is used by approximately 30%. At the same time, the Russian timber industry is one of the most profitable business sectors. Return on investment in the sawmill industry is on average 5-7 years, in the wood-based panel industry — 6-8 years. The industry occupies the top lines in terms of compared with other sectors of the economy — 10-25% in terms of profitability.
Despite the difficult times, the Russian timber industry remains an attractive investment sector: investment projects are implemented within the country with the participation of business associations, and the industry itself is open to foreign investment. The mechanism of priority investment projects has been operating in Russia since 2007. According to it, the authorities determine important areas for investment and attract large-scale companies in exchange for tax benefits and other preferences.
The Russian Forest Association has been involved in the preparation and implementation of priority investment projects for almost 10 years and is the most experienced partner in this area.
Main problems: logistics
The timber industry is one of the most affected by recent events. According to the Institute of Problems of Natural Monopolies, the passage of wood products at the border points of the Northwest in the first quarter of 2023 decreased by 81.5% compared to last year, and in the South — by 70%. Shipment in the Far East decreased less significantly — by 12.8%, however, the limitation for the transportation of timber here is the limited capacity of transport routes in the eastern part of Russia. There are currently problems with logistics in the Siberian regions, which forces some companies to reduce or temporarily suspend their production.
In the period from January to April, 9.4 million tons of wood products were loaded on the Russian Railways railway network, which is 22.1% less than the same result last year.
In addition, Russian exporters of lumber faced problems with the approval of applications GU-12 (application form for cargo transportation). This particularly affects small and medium—sized enterprises, since applications are primarily approved by large companies of the timber industry that have a full production cycle - from harvesting to processing of wood.
The Russian timber industry now associates the main expectations for the recovery of exports with access to new markets and an increase in demand for timber products from the main importer — China. However, the delivery of wood products to foreign markets largely depends on the potential of rail transport.
Recall that in February 2023, the President of the Russian Federation approved a list of instructions to support the timber industry. In particular, the Government and JSC "Russian Railways" should consider the issue of priority transportation of wood products. Currently, an interdepartmental group has been established to address issues with priority transportation, which should prepare a regulatory document for the approval of new forms of GU-12. However, this is a complex process that can take considerable time.
Growth of domestic consumption
Timber harvesting, according to Rosstat, decreased by 7% in the first quarter of 2023. A decrease in demand from timber processing plants also leads to a decrease in logging in the country. According to WhatWood analytic agency preliminary estimate, lumber production in Russia in the first quarter of 2023 decreased by 11% YoY and amounted to about 9 million m3. However, already in March 2023, production increased by 23% compared to the previous month. And in April 2023, the volume of production reached the level of April 2022, when all export sales markets were still open.
As mentioned above, the supply of lumber for export in the first quarter showed a decrease of 23% compared to the first quarter of 2022. Thus, about 4.4 million m3 remains on the domestic market, which corresponds to 48% of lumber production for Q1 2023. The domestic market for the consumption of lumber and forest products in general is becoming more and more significant for Russian producers.
State support of the industry
The state and business associations jointly develop support measures for the industry, including: the order of priority of cargo transportation by rail has been adjusted. Under certain conditions, timber products can now receive priority in loading.
Forecasts for 2023
Expectations for 2023 are based, first of all, on the expansion of bottlenecks for the export of Russian timber products — an increase in supply channels both by sea and by land, as well as a reduction in rates for payment for transportation.
In the first quarter of 2023, in general, a fairly low level of business activity was observed in most of the world lumber consumption markets, which led to a high level of inventory, which is approaching historical highs. Construction activity in many countries is also at a low level.
The preservation of the results of 2022 can be considered a success for the Russian timber industry in 2023. But, most likely, there will be a decrease in the main product groups. Here are the export expectations of the industry in 2023:
● lumber — 21-22 million m3, which is 5-10% compared to the indicators of 2022;
● plywood — 1.7 million m3, which is -10-15% compared to the indicators of 2022;
● OSB — -20% to 300 thousand. m3;
● pellets — -50% to 0.8-0.9 million tons.
A smooth recovery in demand for basic products is not expected until 2024.