R U S S I A THE ENIGMA

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1 RUSSIA : R U S S I A THE ENIGMA SOFTWOOD TIMBER MARKET RUSSIA THE ENIGMA EXPORT DYNAMICS PAUL HERBERT Member of the Board Sviatoslav Bychkov, ILIM TIMBER International Softwood Conference Hamburg, October 04-06, 2017 GLOBAL SOFTWOOD LOG & LUMBER CONFERENCE, VANCOUVER, MAY 07TH, 2015

2 MAJOR MACROECONOMIC FACTOR AFFECTING TIMBER TRADE Currencies relative to US Dollar, Jan Dec 2016 EGP to US Dollar, % 20% 10% 0% -10% -20% -30% -40% -50% -60% Jan Dec 2015 Jan Dec 2016 Source: Bloomberg Currency volatility at the major producing countries (EU, Canada, Russia) and major importing countries (Egypt, India, CIS) affected prices and led to volumes redistribution in timber trade Strong US dollar and stable RMB were driving demand in the USA and China. Egypt Pound crash brought down MENA market

3 RUSSIA FOREST RESOURCES AND ROUND WOOD VOLUMES 2016 NW AAC 50% utilized Siberia and Far East AAC 30% utilized ~ 83 billion m 3 growing stock ~700 million m 3 AAC ~ 210 mln. m 3 total harvesting ~ 147 million m 3 softwood harvesting

4 ROUNDWOOD PRODUCTION AND CONSUMPTION RUSSIA MLN. M production consumption Source: FAO Russia exported in 2016 about mln. m3 of softwood (mainly saw log to China) and mln. m3 of hardwood (mainly birch pulpwood to Finland) Russia produced in 2016 about 3,7 mln. m3 of plywood and about 35 mln. m3 of sawn timber

5 ROUNDWOOD AND SOFTWOOD LUMBER EXPORTS FROM RUSSIA MLN. M Industrial Roundwood Exports Softwood Lumber Exports Source: FAO Customs duties for softwood saw log exports introduced in 2008 combined with government support for investments in wood processing limited log exports Russia supplied in 2016 about 25 mln. m3 of sawn timber for exports and about 10 mln. m3 for the domestic market

6 SOFTWOOD SAW LOG PRODUCTION MLN. M % Ruble devaluation in 2014 ramp up saw log production in Russia % Positive statistics had been supported by introduction of Unified State Information System to control round wood market turnover Major growth in saw log production happened in Siberia and Far East region driven by demand from China for sawn timber Source: Russian Customs

7 SOFTWOOD SAW LOG EXPORT DYNAMICS MLN. M , % 10, , ROW CHINA China softwood saw log imports from Russia account for 85-90% of total Russian saw log exports and consists mainly from high quality Siberian pine Ø 30 cm and larger Finland, Sweden and Germany are the major European importers of saw log from Russia, mostly high quality 6 m Spruce Source: Russian Customs

8 SOFTWOOD SAW LOG AND LUMBER RWE EXPORTS FROM RUSSIA TO CHINA MLN. M Logs Lumber RWE Source: WM, China Customs Russia supplied in 2016 about 11 mln. m3 of softwood saw log to China market comparing with 25 mln. m3 in 2007 Russia became leading supplier of of sawn timber to China in 2016 with about 12,8 mln. m3

9 RUSSIA SAWMILLING MAP Ust-Ilimsk Sawmill St. Petersburg Ilim Timber Headquarters Moscow Krasnoyarsk Bratsk Plywood Mill Irkutsk Khabarovsk Top-50 Russian sawmills combined capacity ~12 mln. m3 of sawn timber Vladivostok Source: Whatwood

10 SOFTWOOD SAWN TIMBER EXPORTS VOLUME AND SPECIES MLN. M % MLN. M Pine % 24 Spruce Larch Other Source: Russian Customs

11 RUSSIAN EXPORTS OF SOFTWOOD SAWN TIMBER BY REGIONS (th. m 3 ) China % Europe MENA % CIS Asia RoW % First half of 2017 Russia increased export volumes to China market +23% and to CIS +10% while the Egypt dropped down -53% Source: Russian Customs

12 SOFTWOOD SAWN TIMBER EXPORT DYNAMICS CIS 19% Asia RoW 6% 2% Asia RoW 5% CIS 2% 14% 44% China MENA 11% 53% China MENA 16% 14% Europe Europe 14% Source: Russian Customs

13 RUSSIAN SAWN TIMBER EXPORTS TO CHINA BY SPECIES (th. m 3 ) % % Pine Spruce Larch Others Siberian spruce, Douglas fir and Siberian cedar pine became new species recently introduced to China market Spruce lumber (white wood) from North West Russia became very popular for furniture manufacturers

14 CHINA SOFTWOOD SAWN TIMBER IMPORTS ,2 mln.m ,3 mln.m ,5 mln.m3 0 Canada Russia USA Chile New Zealand Total European Others Total Imports from Russia represented major part of the growth in total softwood sawn timber imports in 2016 Source: China Customs

15 VOLUMES AND LOGISTICS FOR SOFTWOOD TIMBER EXPORTS TO CHINA 2016 Manzouli St. Petersburg Suifenhe Vladivostok Ust-Luga 7,6 6,0 Vanino 3,5 0,0 1,6 2,3 0,5 1,3 SAWLOG LUMBER SAWLOG LUMBER SAWLOG LUMBER SAWLOG LUMBER Source: Russian Customs

16 SPECIFICS OF SOFTWOOD LUMBER IMPORT FROM RUSSIA TO CHINA Chinese saw mills in Russia are targeting minimal levels of log processing to be qualified as lumber by Russian Customs and avoid log export duties The presence of Chinese saw mill operations is visible first of all in Far East area close to the boarder

17 TRENDS GOVERNMENT INCENTIVES DEVELOPMENT Ministry of Industry and Trade in 2017 is submitted a draft of the strategy for the Russian forestry (sustainability) and wood processing industry development (further processing) CONTROL Electronic system for monitoring of round wood turnover on federal level started to operate successfully July 01, 2015 (415 Federal Law) June 10, 2016, the State Duma adopted in the third (final) reading the largest set of amendments to the Forestry code of the Russian Federation since its adoption in 2006: - compulsory application of remote sensing data (including GPS survey data, aerial photography), photo and video recording, reports on the use of forests and reports on reforestation SUPPORT September 2017 new incentive was announced to allow sawmilling companies from Far East with own forest leases to export by quota Larch and Far East Spruce saw log with reduced export duty

18 CONCLUSIONS China remains the key market for Russian log and lumber with increasing share of lumber exports Redistribution of volumes from MENA and CIS markets and ramp up of saw mill capacity leads to growth of lumber export volumes from Russia to China Longer transportation distances for saw log will increase costs for Russian sawmills in Siberia and Far East Short term competitive advantage with Ruble devaluation was finished in 2H 2016 and Ruble strengthening in 2017 is bringing margins to low level

19 ILIM TIMBER CORPORATE PROFILE OPERATIONS Ilim Nordic Timber USA GERMANY RUSSIA Ust-Ilimsk branch of Ilim Timber Ilim Timber Bavaria Head Office, St. Petersburg Bratsk branch of Ilim Timber Business Units: Russia and Germany Sales organizations: EU, USA, China, Russia and NIS, MENA Annual production capacity: 2,65 million m 3 of sawn timber and m 3 of plywood Company headcount: 3000 people Species: pine, Siberian larch, spruce, Douglas fir, Sitka spruce Long-term contracts with strategic log suppliers

20 ILIM TIMBER CORPORATE PROFILE SALES AND PRODUCTION VOLUMES 2016 BU Germany BU Russia Key markets* (cbm.) USA Europe MENA Russia CIS China 6% 13% 18% 9% 54% Europe 54% China 18% MENA 13% Russia & CIS 6% RoW 9% Total production: m 3 Total sales: 600 mln. USD *incl. sales of plywood

21 THANK YOU FOR YOUR ATTENTION!