Russia is one of the world's three largest producers of softwood and hardwood lumber, behind China and the United States. The volume of sawn timber production in Russia in 2022 is expected to decrease.
According to WhatWood, the decline by the end of 2022 was 11%. Production volumes began to slide into negative values starting in March 2022. By the end of 2022, the rate of decline has already reached double digits: 18-20% in annual comparison.
According to WhatWood's preliminary estimates, the volume of softwood and hardwood lumber production in 2022 amounted to 38-39 million m3 of lumber (2021: 42 million m3). The largest decrease was recorded in the North-Western Federal District of the Russian Federation: -19% YoY.
Chart1: Russia: production and export of lumber in 2010-2022 (million m3)
In 2022, Russia lost most of its export markets for lumber sales. The export of lumber is the most important item of income of the Russian timber industry. Every two US dollars out of five earned during exports are accounted for by sales of lumber. The number of countries that bought Russian lumber in the last decade has been stable at the level of 105-110. In December 2022, their number collapsed to 30 (excluding re-exports from these countries).
In 2022, the export of lumber from Russia decreased by 22% YoY to 23.5 million m3. This is the lowest level since 2014-2015.
Chart 2: Russia: export of sawn timber in 2010-2022 (million m3)
From the second half of 2022, lumber is not exported from Russia to Europe (due to the effect of the 5th package of EU sanctions). The share of export sales of lumber in Russia accounted for 61% of total production (on average, this share has reached 70-78% in recent years). This decrease is explained by the closure of the market of European countries with annual consumption of lumber from Russia (volume of about 5 million m3 per year) from the second half of 2022.
Of the TOP 20 countries receiving lumber from Russia, almost all countries showed negative dynamics, except Iraq, Turkey, Lebanon and other countries. Due to the closure of European markets, Russian manufacturers increased supplies in the Asian direction. Most export destinations of Russian lumber showed a decrease. Growth was observed in several countries: Iran (+25% to 375 thousand m3), Iraq (+12% to 268 thousand m3), Turkey (+48% to 122 thousand m3), Lebanon (+19% to 91 thousand m3 m3), etc. These areas are not the main sales markets for Russian sawmills and will not be able to replace the European markets that have fallen out either in price, volume, or marginality of sales.
The hopes pinned on the development of new sales markets to India and other Southeast Asian countries also did not materialize. The high cost of logistics at a relatively low price for lumber in these markets reduces the prospects for cooperation. This is confirmed by the data on the results of exports in 2022. If in 2021 about 40 thousand m3 were delivered to India, then by the end of 2022 only 13 thousand m3. Since July 2022, Russian companies have stopped trying to develop this direction.
A serious problem for exporters of lumber was the limitation of the number of checkpoints through which the export of forest products by transport is allowed. In November 2022 The Government amended Government Resolution No. 521 of July 15, 2010. This change allowed the export of lumber from Russia only to the Republic of Belarus through the Russian-Belarusian border, the Republic of Kazakhstan through the Russian-Kazakh border and the Kyrgyz Republic through the Kazakh-Kyrgyz border.
At the same time, Resolution No. 521 (taking into account the amendments) did not allow the export of lumber to third countries across the border with the Republic of Kazakhstan. JSC "Russian Railways" unambiguously interpreted the provisions of Resolution No. 521 as a ban on the transit of lumber through the Republic of Kazakhstan to third countries. This fact has significantly affected the export of lumber, in particular to China and Uzbekistan. The problem was solved by Decree of the Government of the Russian Federation No. 2552 dated December 30, 2022 and amendments to Resolution No. 521: to Russian exporters from January 31, 2023. It is allowed to transport timber to the EAEU countries, except Armenia, by trucks.
Chart 3: Russia: geography of lumber exports in 2022
China― the main hope of Russian exporters, reduced imports of softwood lumber in 2022 from all countries of the world, including from Russia by 13-15% YoY (-2-2.3 million m3 to 17 million m3). In 2020-2021, China's share in the export of lumber from Russia decreased. In 2022, China reduced the import of lumber from all countries by 7% YoY to 26.7 million m3. Russia's share in the Chinese market of imported lumber was 53%.
Chart 4: China: import of softwood and hardwood lumber
Estimated retrospective statistics show a steady monthly decline in lumber exports from Russia for three consecutive years. From the peak of lumber exports in Q3 2019 at 2.8-3.0 million m3, by Q4 2022 volumes decreased to an average of 1.9-2.0 million m3 per month.
Chart 5: Russia: export of lumber for the last 12 years, monthly (million m3)
Decrease in demand for lumber with a falling price trend
A downward price trend was observed in all Russian lumber sales markets in 2022. WhatWood notes that in 2021, prices in all export markets reached historic highs, and business activity was at the peak of the economic cycle. After such ups, prices tend to bounce back. The main reason for the price decline in all sales markets is the price cooling after the peak values of 2021, the negative impact of anti-covid measures on demand in the Chinese market, high global economic uncertainty, excess supply of lumber from Russia over demand in all export markets, as well as pressure from buyers due to increasing supply from Russia. A buyer's market period has formed in the global lumber market.
The price reduction zone began to enter, starting from Q2 2022 In the main market of Russian lumber – China - the price reduction in 2022 amounted to 20% relative to the historically record 2021. In October 2022, Chinese buyers discussed contracts with Russian companies at the level of $200-230/m3 for softwood lumber. The level of $200 /m3 is not passable for all Russian plants at the rate of 60-65 rubles / USD. The average price of softwood lumber in 2022 in the Chinese market was higher than in 2018 (+5%), 2019. (+24%), 2020 (+20%). The weakening of the ruble against the US dollar in December 2022 and January 2023 gave hope to Russian exporters. February prices in the ports of China also began to revive (+$20-25/m3).
Lumber prices on the Russian domestic market in 2022 decreased by 17% relative to 2021 to an average annual level of 15,600 rubles (excluding VAT), but remained significantly higher than previous periods: +36% by 2018, +29% by 2019, +23% by 2020. Despite the growing demand for lumber in the domestic market, increased after the closure of European markets, the volume of supply of softwood and hardwood lumber puts pressure on prices.
Chart 6: Russian lumber price index by sales markets
Focus on the domestic market
In Russia, on 01.12.2022, about 85 investment projects were announced, providing for the development of lumber production with varying degrees of probability of implementation. In modern economic conditions, many investors have revised their plans regarding intentions to create and expand production facilities.
The deadlines for the implementation of investment projects that are being implemented within the framework of priority investment projects in the field of forest development, as well as projects that are being implemented by major players have been postponed or projects have been put on pause. For example, the ULK Group refused to implement a project to create a Pinezhsky LPK with a capacity of 1 million m3 of lumber and 600 thousand tons of wood pellets. Kraslesinvest has put the project on pause until the spring of 2023, after which it will make a final decision on the possibilities of implementing the project.
Such actions of the players are caused by high uncertainty in the sales markets, narrowing of sales channels and insufficient capacity of the domestic market to use the installed production capacities.
It is noteworthy that in 2022, the rate of decline in lumber exports significantly exceeded the rate of production reduction. In the domestic market of Russia, there is an increase in the consumption of lumber. The main driver was the development of wooden housing construction. According to WhatWood estimates, the growth of lumber consumption in the domestic market relative to 2021 amounted to 5% to 15.3 million m3.
For most of 2022, the domestic lumber consumption market was supported by fairly good results in the commissioning of housing construction. In January-September 2022, 79.1 million m2 of housing were commissioned in Russia. This is 26.5% or 16.6 million m2 more than in the same period of 2021. The individual residential construction, which is a major consumer of lumber, accounted for 62% of all built housing.
In construction, despite external unfavorable trends, the completion of previously started projects supported the volume of work. All this ensured stabilization and even some growth in economic activity in the summer. However, in early autumn, the decline in economic activity resumed amid growing uncertainty. Consumer activity began to weaken. The reduction in the number of workers has created risks for the continuity of the work of individual industries. The aggravation of the situation with a shortage of personnel in the labor market in the medium term will restrain productivity growth.
Chart 7: Russia: commissioning of residential housing, million m2
The demand for lumber in the domestic market of Russia began to decline more noticeably since September. According to preliminary estimates based on a survey of participants in the wooden house construction market, the volume of orders in the premium segment fell by at least half as of September. The average price segment ― a drop of up to 50%; "economy" and "economy plus" ― a decrease of up to 20%.
Recently, federal and regional authorities have been increasingly talking about the need to stimulate demand for forest products on the domestic market. The Ministry of Industry and Trade and the Ministry of Construction of Russia continue to develop a roadmap for the formation of the domestic market for the production and consumption of standardized glued wooden materials. Changes are being made to State standards, codes of rules so that it is possible to start the construction of wooden buildings using modern technologies.
The Ministry of Construction and "Dom.RF" held a competition of standard projects of wooden houses about a competition of standard projects for wooden houses. Choosing a house according to a standard project helps in passing state expertise, which gives confidence to customers, banks and insurance companies in the quality of projects and the technologies and materials used.
Granting preferential loans (including mortgages) for the independent construction of a wooden house can also stimulate demand in the domestic market.
The authorities are popularizing the idea that lesprom is ready to provide wooden house kits for high-rise buildings, schools, kindergartens, paramedic stations, post offices, as well as for resettlement programs for citizens from emergency housing. The authorities of some regions report that they will launch pilot projects for the use of wooden structures.
For example, an illustrative example could be the construction of apartment buildings from CLT panels in Sokol, Vologda region by Segezha Group, completed in January 2023. The cost per square meter is 70 thousand rubles.
For example, the capacity of Sokol Realty is 50 thousand m3, which is approximately 200 thousand m2 of housing per year. The targets of the federal project "Ensuring sustainable reduction of the housing stock unsuitable for habitation" of the national project "Housing and Urban Environment" in terms of the area of emergency housing subject to resettlement amount to 9.03 million m2 for 2019-2024. If 100% of the new housing built was built on the basis of wooden materials (including CLT), then the demand for lumber would amount to 13 million m3 (for 5 years). In 2021 the total area of the resettled emergency housing stock in all regions of Russia amounted to 3 million m2.
Investors and authorities at various levels have a lot to do to stimulate domestic demand, but the vector, apparently, has been set. It remains up to the practical implementation.
