Lumber production is the segment of the timber industry that forms a significant part of the export revenue of the industry in Russia. Unfortunately, Rosstat works in such a way that it does not provide data on small and medium-sized enterprises, so the assessment is based on NLARI agency data.

These data show that with the outbreak of the military conflict in Ukraine and the imposition of Western sanctions, lumber production has decreased. Since 2022, there has been a collapse of some companies, even large ones, due to disruption of product sales chains in the western direction. After the withdrawal of Western companies from the Russian market, and the redistribution of their shares to new owners in Russia, there is no guarantee that these plants will be put into operation.

Such a strategy, in which a company is acquired but not launched, has the right to exist, since there is no sales market for these companies. In this regard, even some local factories, especially those located in the North-West, have tried to find buyers for their business. At the same time, those who managed to change ownership may also not start their production.

The current situation is primarily related to the long-term deterioration of the situation in the sawmill industry. The export of pellets has significantly decreased and, in the long term, it is unlikely to recover. The South Korean market, which is popular for exporting pellets, will not save anyone. The export of wood chips has also decreased. In general, the sawmill industry has shifted to low-margin markets, in addition, transportation costs have increased significantly.

Now Russian companies are strongly tied to the Chinese market. It should be noted that the Chinese market has done a lot for the Russian industry, as they give Russian manufacturers access to the Chinese market and good prices. Even against the background of the prospects for a reduction in construction in China, Russian manufacturers continue to supply a lot to the Chinese market. Despite this, we can predict a decline in lumber production in Russia, especially in the North-western and Central regions, where the situation will be most acute.

Another negative factor is that Russia is not widely represented in other markets such as MENA or South-East Asian markets. This puts Russia in a vulnerable position. All attempts to quickly break into these markets have not led to any significant results.

The market most affected by the crisis in Russia is the plywood market, and there is no positive dynamics here. The market decline is significant. In the USA, plywood comes with a 50% duty. It is highly likely that Turkey will withdraw from the EU supply chain due to European investigations. Russian companies are trying to sell veneer, not finished products, and all searches for alternative markets for plywood have so far failed. There are no alternative solvent markets capable of consuming high-tech products yet.

Therefore, both the decline in revenue of plywood factories and the further strengthening of competition in the domestic market are obvious. Moreover, plywood manufacturers compete both with each other and with OSB manufacturers. And so far there are no constructive solutions to the problem. There is an attempt to export to low-margin markets such as Egypt, but this is not a solution to the problems of the industry in the long term.

The fiberboard market is the only one that has positive dynamics. The first positive factor of this segment of the timber industry is that all foreign major players have remained in Russia and they continue their activities and even develop investment activity. There is a recovery in production volumes to pre-crisis levels and even an increase in prices. But we must not forget that high inflation and rising prices in Russia now do not indicate an increase in demand. Rather, the price increase is associated with an increase in cost. At the same time, there is a demand for fiberboard from furniture manufacturers and manufacturers of finishing materials.

It is often possible to read in the media that the growth of furniture production is associated with a factor in the growth of demand for real estate due to the preferential mortgage program. One can argue with this thesis. The growth in demand for real estate can be attributed to people's desire to save their savings, and real estate is one of the few remaining ways for people to invest money. Externally, the demand for real estate looks positive, but there are great fears of a negative development of this market.

If we look at the fiberboard market from the point of view of average per capita consumption, then the Russian market has the potential for development when compared with average per capita consumption in developed countries.

The chipboard and OSB markets are also recovering, despite the collapse of some major manufacturers. The growth factors in these markets are similar to fiberboard. The main question is what will happen after the furniture boom and what plateau domestic demand will fall to.

In general, the situation in the timber industry is described in such a way that export-oriented segments have been seriously affected, and those segments that are focused on the domestic market are on a relatively stable trend.

The main consequence of sanctions for the industry is its simplification due to limited access to technologies. This, in general, coincides with the requirements in most of the markets currently available to Russian manufacturers in the Arab world, where product quality requirements are lower than in the European market. Factories with complex technological processes and complex products found themselves in the most losing position. Marginal markets capable of purchasing complex technological products such as CLT, LVL, and specialized plywood are currently unavailable to the Russian manufacturers. Factories with a simpler technological cycle can win the competition from more technologically advanced companies. It seems that this situation will remain in the Russian market for a long time. This is a factor that must be taken into account in business planning.

Also, one of the consequences of sanctions is to increase the relevance of the domestic market. Many large companies are seeking to expand their presence in the domestic market, including working in the b2c segment. Here, large companies will have a long process of adapting to the domestic market. If they were previously shipped for export by wagons, then in the domestic market, they will have to work with both small batches and the b2c segment. This is a rather difficult job that requires certain specialists, a certain sales system. Small companies that have already been focused on the domestic market are in a more advantageous position.

Another consequence of the sanctions is increased competition in the domestic market. We see competition not only between companies, but also between products.

Due to the decline in the efficiency of the timber industry, an important factor that can support the industry may be the devaluation of the national currency. Any strengthening of the ruble will worsen the situation in foreign markets, which will further exacerbate competition in the domestic market. Russia is actively testing new markets for timber industry products. So far, it has not been very successful. The only markets where Russian products are widely represented are China and Central Asia.

Today, all promising sales markets are concentrated in the global south. South America is not taken into account here because of the long-range logistics. Plywood manufacturers may be interested in South America, but they will not have to count on significant volumes.

The MENA market is very specific. By 2040, the region is projected to grow to 1 billion people. At the same time, the population is quite poor and there is always a risk of military conflicts in this region. In fact, there are three countries in this region with which Russia can trade timber products – Egypt, Saudi Arabia and the United Arab Emirates. At the same time, the demand for timber products correlates with exports and oil prices. An increase in imports to these countries always corresponds to an increase in oil prices. The rest of the markets in the region are poorly solvent. If we talk about Morocco and Algeria, the markets of these countries are fully occupied by European manufacturers. From the point of view of business and logistics, entry into these markets is unlikely. The MENA market is interesting to Russia from the point of view of fiberboard, plywood and lumber.

Nevertheless, the region is logistically difficult to reach from Russia. Direct shipments are carried out through the Black Sea ports only to Egypt. Everything else is transported through Turkish ports. The market associates certain hopes with the North-South transport corridor, which cannot yet be fully operational. The corridor has a number of problems, in particular with cost. For example, the cost of supplies through the Caspian Sea was more expensive than the cost of supplies from St. Petersburg to Egypt. The business is waiting for the launch of the railway service, but this opportunity is not yet available.

In the MENA region, Russia is still concentrated mainly in Egypt. But it should be noted that this is a low-profit market and has problems with the trade balance. Finnish, Swedish and Chinese manufacturers also operate in this market.

Russia is interested in working with Saudi Arabia, where there is a program for the development of entire sectors of the economy, as well as a program for the construction of new cities. But so far, Russia is very poorly represented there, mainly in the form of plywood supplies. The main suppliers of lumber are Scandinavian manufacturers. The development of this market requires a long-term presence, investments in this presence and requires understanding how to work on it.

Iraq and Iran are among the promising markets. These are the markets where it is possible gradually to increase presence due to geographical proximity. It should not be expected a breakthrough on these markets. They are similar in structure to the markets of Central Asia. But against the background of other countries in the region, they look more promising for the Russian manufacturers.

The markets of Central Asia and Transcaucasia are, in fact, a continuation of the Russian market. The population in Transcaucasia will change little in the near future, but the population of Central Asia may increase by 25% by 2040. The largest markets in the region are Kazakhstan, Uzbekistan and Azerbaijan. These markets are a kind of damper for Russia, when an excess of products is formed in Russia, batches of products are sent there. At the same time, these markets are low-margin, but very familiar to Russian manufacturers. The main advantage of this region is the high GDP growth rates. Coupled with the population growth rate, in this region, we can expect an increase in effective demand.

The Hindustan market is very specific. The markets of the three countries in the region - Pakistan, India and Bangladesh – are very inert. These countries buy little timber products and sell little. Population growth is projected to be large, in particular in Pakistan by 18% by 2040, but this does not mean that demand will grow. In addition, India is following the path of plantation timber cultivation and is able to provide its domestic production with a significant amount of raw materials. The basis of timber processing is its local tropical species, Russian species are perceived more as exotic and the expediency of supplies there is a big question.

If the North-South transport corridor becomes operational, then some kind of penetration of Russian products into these markets will occur, first of all, pulp and paper products. But even this should not be expected to make a big breakthrough. Russia and India have a huge trade imbalance, which, at this stage, is almost impossible to solve. Russia supplies oil, and there is practically no return flow of goods from India to Russia. In this regard, it is not profitable for them to develop supplies of Russian timber products to their market. Therefore, the North-South transport corridor is interesting solely from the point of view of entering the markets of the Persian Gulf countries with minimal transport costs.

There were testing shipments of lumber from Russia to India. Domestic manufacturers, first of all, faced with a low price, in the region of $ 150 per cubic meter, and the requirements of non-standard cross sections. In addition, there are duties in India, there are regulatory restrictions. There is a lot of talk about the Indian market because of the large population, but it is not possible to expect much from it.

East and South-East Asia are the same, widely advertised market. But, in the long run, it is not possible to expect much from them either. On the one hand, the market is gigantic, while China, Indonesia, Vietnam and Malaysia are independently trying to develop their timber industry. They create plantations of fast-growing species and achieve tremendous success at the same time. This macroregion produces about 70 million cubic meters of plywood. Although it is of low quality, it is still not 4 million cubic meters of Russian. The region actively exports plywood, and Russian manufacturers compete fiercely with them on price, since high-quality plywood is not required in a number of applications.

In the long term, such a development of the timber industry in the region does not bode well for Russia. For example, when China introduced the plantation model of forestry, China's forest cover was 12%, now it is about 30%. Thus, the region has every chance to independently cover its needs for timber products and even develop exports, which will create new competitors for Russian producers in world markets. In addition, in the medium-term forecast, one should always keep in mind the slowdown in the Chinese economy.

Among the positive factors of the development of the timber industry in Russia, it is worth expecting a recovery in demand, as well as a reduction in the Central Bank's key rate and an increase in mortgage lending. This will lead to the expansion of the domestic market, and it is also expected to strengthen its presence in the markets of Central Asia and Transcaucasia. There are no other prospects for expanding the presence of Russian manufacturers in various markets. Supplies to the Persian Gulf countries may be developed with the introduction of the North-South transport corridor. But these are all growth points that the Russian timber industry will have until 2040. In the long term, China, which will grow trees on plantations, can create serious competition for Russia in the domestic and foreign markets.