Despite the significant narrowing of sales channels for Russian timber products over the past year, Russia remains part of the global wood product market, and, accordingly, is subject to trends in the global economy.

Although the world's leading institutions such as the IMF, the world Bank, and the EBRD note in their reports that the global economy is recovering from the effects of COVID-19, but this recovery is slower than expected. The organizations' reports predict that global economic growth will decline from 3.5% in 2022 to 3.0% in both 2023 and 2024.

In 2023, a high level of uncertainty remained on world markets, which affected the continued slowdown in global demand for forest products. The tightening of monetary policy measures by many world governments aimed at reducing the growth of inflation, rising interest rates on loans, mortgages lead to weakness in global demand, a decrease in consumer activity, and stagnation of the global construction industry.

The main indices characterizing the performance of the timber industry of Russia began to revive in Q1 2023 and moved to growth in Q2 2023. For three consecutive quarters (3-4 q. 2022 and 1 q. 2023), revenue remained at the level of 545-549 billion rubles. In Q2 2023, revenue increased to 589 billion rubles. In the 1st half of 2023, total revenue decreased by 17% to 1.1 trillion rubles in compare with the 1st half of 2022.

Source: WhatWood data

The largest revenue growth in Q2 2023 compared to Q1 2023 was recorded in the segments of woodworking. Thus, revenue from sales of lumber increased by 14% QoQ to 53 billion rubles, plywood: +22% QoQ to 35 billion rubles, chipboard/OSB: 9.5% QoQ to 37 billion rubles, MDF/HDF/fiberboard: +24% QoQ to 14 billion rub .

The negative dynamics in revenue in Q2 2023 compared to Q1 2023 was recorded in logging: -9% to RUB 19 billion. The negative dynamics in the logging sector has been maintained for five consecutive quarters.

Net profit in total for all sectors of the timber industry in the 1st half of 2023 decreased by 55% to 106 billion rubles. An improvement in the 1-2 quarter of 2023 is noted in the sawmill industry. After a loss of 17 billion rubles in 3-4 quarter 2022, the sawmill industry was able to reduce the loss to 4.2 billion rubles. Unprofitable industries in Q2 2023 remained: the veneer production (-604 million rubles) and logging (-1.1 billion rubles).

Investments in fixed assets of timber industry companies in the 1st half of 2023 decreased by 25% YoY to 48 billion rubles. Investments in logging for 6 months of 2023 decreased by 46% YoY to 3.75 billion rubles, in woodworking: -58% YoY to 11 billion rubles, in pulp and paper industry there was an increase in investment: +5% YoY to 33.4 billion rubles. A third of all investments in timber industry were in Irkutsk region (investment projects of the Ilim Group).

The index of industrial production in 2023 is in an upward trend after significant falls in 2022. The indicators of the furniture industry significantly exceed the segments of chemical and mechanical woodworking.

The volume of timber logging in Russia in the largest forest regions continues to decline. According to Rosstat, for 9 months of 2023, the decrease was 6% compared to the same period last year.

Source: WhatWood data

The logging of hardwoods subsides more than softwood ones. And if, in general, the decrease in the Russian Federation relative to the same period last year seems to be quite moderate, then the analysis of the decrease in the volume of hardwood logging by regions shows a slightly different image. The most significant regions for the timber industry are: Tomsk -21%, Karelia -32%, Krasnoyarsk Territory -38%, Nizhny Novgorod Region -23%, Kirov region -14%, Leningrad Region -27%, Tver Region -19%. The main reason for such declines is the acute problem of sales of birch logs for veneer. There are not enough processing capacities inside the country, and the export of birch logs to the West is closed. Loggers avoid hardwood plots whenever possible.  This tactic also affects the volume of logging (reduction) of timber for sawmills.

WhatWood maintains its forecast for 2023 without significant changes. It is expected that the volume of logging by the end of 2023 will amount to about 186-190 million m3. At the peak of 2018, volumes reached 239 million m3.

The birch hardwood for veneer is confidently forming the price agenda in the round timber market this year. The first price movement for birch logs was noted in May after 7 months of price lull. And since May, prices have been steadily rising: from 3,000 to 4,700 rubles / m3 without VAT, the station of shipment in November.

In the sawlogs segment, a multidirectional price trend began to form in June, also after a months-long lull. The divergence consisted in the fact that small sawmilling companies, during a high period of demand, offered sawmill suppliers higher prices. Medium and large sawmills of the Northwestern Federal District and the Central Federal District did not increase the volume of purchases and kept prices for softwood logs at the level of the previous months of 3000-3300 rubles/m3 without VAT, station of shipment. Small and medium-sized sawmills in the Volga Federal District and the Central Federal District confirmed their purchase prices for softwood at the level of 4000-5200 rubles/m3 without VAT and shipping costs. The first signals about the upward movement of prices for sawlogs were received in September. The price increase continues. In November, the average price for spruce sawlogs at staion of shipment in Vologda region was 5000 rubles/m3 without VAT. The price level for veneer logs and sawlogs, today, motivates loggers to maintain the volume of roundwood logging.

If we turn to data on the volume of production of timber products, then according to the results of 9 months 2023, the most stable results are demonstrated by the segment of wood-based panels.

The growth in production of wood-based panels for the furniture industry is explained by the confident indicators that the furniture industry is demonstrating this year. According to the Russian Association of Furniture and Woodworking Industry Enterprises, the positive trend in the industry will continue at least until the end of 2023. It is expected that the output of furniture may increase by 30.2% in volume and by 18% in value terms to 423 billion rubles compared to 2022.

Production of timber products in 2023

Source: WhatWood data

In the segment of wood-based panels, we see multidirectional dynamics and this is primarily due to the high dependence of niche birch plywood on export markets.

The key events in the lumber market in 2023, starting from the second quarter, were changes in the logistics services market. The imbalance in the container equipment market, when containers arriving with imported goods accumulate in the European part of the Russian Federation, waiting for the opportunity to return loaded to the East, led to the fact that rates began to decrease significantly. In June, for example, timber producers from the Vologda region received a rate of $ 30/m3 (container train). In August-September, exporters received near-zero rates or even an additional payment for providing cargo for transportation. These conditions mostly affected the sawmills of the North-West, not Siberia. For the sawmill industry, the turn to lower shipping costs, coupled with a weakening ruble, was the main factor in improving sales profitability.

According to the results of 9 months. according to WhatWood estimates, the volume of sawn softwood and hardwood is approaching 30 million m3, which is 4% less than in the same period last year and 12% less than in the same period in 2020 and 2021. WhatWood predicts that by the end of the year about 39 million m3 will be produced in the Russian Federation against 40 million m3 last year.

According to the results of 9 months. according to WhatWood estimates, the volume of sawn softwood and hardwood is approaching 30 million m3, which is 4% less than in the same period last year and 12% less than in the same period in 2020 and 2021. WhatWood predicts that by the end of the year about 39 million m3 will be produced in the Russian Federation against 40 million m3 last year.

The volume of lumber production is decreasing, but the volume of consumption in the domestic market is growing for the third year in a row. The sawmill industry does not depend on imported lumber supplies. However, starting in 2022, after the narrowing of the geographical perimeter of sales for Belarusian sawmills, Belarusian-made lumber began to enter the Russian market. Thus, taking into account supplies from Belarus, the apparent consumption of lumber in 2023 may approach 17 million m3 or 43% of total production.

The basis of Russian lumber exports is the Chinese market, whose share may grow by 7 percentage points by the end of the year compared to last year. Supply volumes are likely to remain at the level of 14 million m3, which is explained by relatively sluggish demand during the period of covid restrictions and unjustified expectations for a rapid recovery in demand after their cancellation. WhatWood notes the stability of supplies to China: starting from March 2023, on average, the volume of supplies is estimated at 1.3 million m3 per month.

The downward trend in lumber prices is observed in all world markets. It should be noted that this situation has been observed since the middle of 2021 after an abnormal price increase. In February 2023, there was a episodic increase in lumber prices, but since March 2023, lumber prices have continued to fall.

In June-July 2023, prices dropped to historically low values. In China, the price was on the verge, and for many companies below the level of profitability (190 $/m3, CFR Chinese port, spruce, KD, grade 1-4). However, the significant weakening of the ruble against the US dollar and the Chinese RMB in recent months has helped Russian exporters. The price recovery became noticeable in August, when Russian exporters were able to receive a price increase of $ 25 to the price of June-July. In September and October, timber exporters contracted with an increase in prices and by November they came with a price level of $ 245 for spruce lumber and $ 260 for pine.

On the contrary, prices in the domestic market showed an increase in Q2 2023. This is due to the height of the construction season – the time of active consumption of lumber. In August, demand began to cool noticeably, and the price fell to 16-17 thousand rubles /m3. Of course, the price level varies among manufacturers. For example, large export-oriented sawmills in the Arkhangelsk region offer softwood lumber (KD, grades 1-4 at the factory gates without VAT) for 20,000 rubles. It is expected that by the end of the year, with the end of the construction season, the price of lumber will fall to the level of 1 sq.m. 2023

The wood pellet segment found itself in the most difficult situation in terms of losing markets. The expert opinions of industry analysts and the expectations of manufacturers to replace were identical: Southeast Asia will not close the volumes that previously went to Europe. We see this result in 2023.

According to WhatWood estimates, 1.3 million tons of wood pellets were produced in Russia in January-September 2023. By the end of the year, according to WhatWood forecasts, the volume will approach 1.8 million tons, which is 35% less than last year and 42% less than in 2020.

Starting from the 2nd half of 2022, a change in the structure of pellet production became increasingly obvious. Proximity to the main sales market – South Korea became the main reason for the leadership of the Irkutsk Region, Khabarovsk Krai and Krasnoyarsk Krai, which, following the results of 9 months 2023, became the largest regions for the production of pellets. The positions of the North-West, on the contrary, have weakened significantly.

According to WhatWood estimates, in 2023, the consumption of pellets in the domestic market will approach 0.8 million tons, which is all 100 thousand tons more than a year earlier. The Russian government has launched a program to develop the domestic pellet market. Thus, the Republic of Karelia, Komi and Arkhangelsk regions will receive funds from the federal budget for the transfer of existing biofuels and the opening of new boiler houses in the regions on pellets.

The Komi Republic received 1.8 billion rubles from the federal budget for the modernization of boiler houses. At the expense of a special treasury loan, measures will be financed to upgrade existing and build new boilers using biofuels. 1.1 billion rubles will be allocated for the construction of new pellet block-modular boiler houses to replace 18 solid-fuel coal-fired boilers. The implementation of measures to convert boiler houses of the Komi Republic to biofuels is planned during 2023-2024. Arkhangelsk region will receive 2 billion rubles. for the conversion of boilers to biofuels, for the modernization of existing boilers running on coal and fuel oil, when they are converted to biofuels (including pellets), as well as for the design and construction of new boilers. 20 boiler houses will be modernized and built with the allocated funds.

Of course, the announced measures contribute to the development of pellet consumption within the country, but they definitely will not be able to compensate for the losses of pellet producers from sanctions restrictions. Expectations for 2024-2025 are still very moderate: it is possible that the volume of production will be fixed at the level of 1.8-1.9 million tons. A positive impulse for the industry could be China's decision not to classify wood pellets as waste prohibited for import into the country. But there is still a lot of uncertainty about this issue.

For 9 months of 2023, South Korea remained the undisputed leader in the supply of Russian pellets, to which more than 93% of the total volume (665 thousand tons of pellets) was exported, which is more than 1.87 times higher than the same indicator in 2022 (355 thousand tons of pellets). The price on the basis of CFR (Busan, Kunsan, Gwangyang, Incheon) in August was $124 per ton against $131 in July 2023. But in September, the price rolled back by $ 7, in October by another $ 2 to 115. The current price of pellet producers for the domestic market is 5000-5500 rubles /ton.