R U S S I A THE ENIGMA RUSSIA SOFTWOOD TIMBER MARKET DEVELOPMENTS. Sviatoslav Bychkov, ILIM TIMBER. PAUL HERBERT Member of the Board

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1 R U S S I A RUSSIA SOFTWOOD TIMBER THE ENIGMA MARKET DEVELOPMENTS Sviatoslav Bychkov, ILIM TIMBER PAUL HERBERT Member of the Board 66 th INTERNATIONAL SOFTWOOD CONFERENCE Riga, October 11, 2018 GLOBAL SOFTWOOD LOG & LUMBER CONFERENCE, VANCOUVER, MAY 07TH, 2015

2 MAJOR MACROECONOMIC FACTOR AFFECTING TIMBER TRADE 30% 20% 10% 0% -10% -20% -30% -40% -50% -60% Currencies relative to US Dollar, Jan Dec 2017 Jan Dec 2015 Jan Dec 2017 EGP to US Dollar, 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 FOREST BASED PRODUCTS EXPORT VALUE NW AAC 50% utilized 30% sawn timber exports Share of export value 2017 Siberia and Far East AAC 30% utilized 45% sawn timber exports 31% 40% 16% 13% Sawn timber Plywood and Boards Round wood Pulp&Paper Export value of sawn timber in 2017 totaled at 4,4 billion USD (40% of exports) ~ 83 billion m 3 growing stock ~ 700 million m 3 AAC ~ 210 mln. m 3 total harvesting ~ 147 mln. m 3 softwood harvesting

4 ROUNDWOOD AND SAWN TIMBER EXPORTS FROM RUSSIA MLN. M Industrial Roundwood Exports Softwood Lumber Exports Softwood saw log exports stabilized on the level of WTO quota about 12 mln. m3 Russia exported in 2017 about 11.5 mln. m3 of softwood saw log (mainly to China) and ~ 7 mln. m3 of hardwood (mainly birch pulpwood to Finland) ~5% less then in 2016 Russia supplied in 2017 about 27 mln. m3 of sawn timber for exports and about 9,5 mln. m3 for the domestic market Russia have produced in 2017 about 3,7 mln. m3 of plywood (mostly birch) and about 36,5 mln. m3 of softwood sawn timber Source: Russian Customs

5 SOFTWOOD SAW LOG PRODUCTION MLN. M % Ruble devaluation in 2014 ramp up saw log production in Russia in % % 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 market Source: Russian Customs

6 SOFTWOOD SAW LOG EXPORT DYNAMICS MLN. M , , CHINA 12 China softwood saw log 11 1 imports from Russia 1 account for 85-90% of total Russian saw log exports and consists mainly from high quality Siberian pine Ø 30 cm and larger Other Finland, Sweden and Germany are the major European importers of saw log from Russia, mostly high quality 6 m Spruce Source: Russian Customs

7 CUSTOMS DUTIES UPDATE FOR THE FAR EAST SPECIES (LARCH, SPRUCE) 25% 40% 60% 6,5% 6,5% 6,5% 6,5% 80% reduced duty inside quota standart duty On December 12 th, 2017 Russian Government ratified the quota for logs export in the Far East Decree #1520), and customs duty elevation in (Decree #1521) Customs duty to reach 40% in 2019 and 80% in 2021 which will make log exports without quota economically unfeasible The major export destination which will be negatively affected by duty increase is China

8 RUSSIA SAWMILLING MAP St. Petersburg Ilim Timber Headquarters Ust-Ilimsk Sawmill Bratsk Plywood Mill Round wood 1,4 Plywood and Boards 1,8 Pulp&Paper 3,5 Source: Whatwood Top-50 Russian sawmills combined annual output capacity about 12 mln. m3 of sawn timber or ~30% of total Russia production and nearly ~40% of exports

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

10 RUSSIAN EXPORTS OF SOFTWOOD SAWN TIMBER BY REGIONS TH. M3 China % Europe % MENA Asia RoW % CIS -2% Growth in exports to China have been supported mostly by introduction of the new saw mills and rump up of existing production capacities Saw mill companies were increasing drying capacities to ensure export volumes of KD products Source: Russian Customs

11 SOFTWOOD SAWN TIMBER EXPORT MARKET SHARE DYNAMICS CIS 12% Asia RoW 5% 2% CIS Asia RoW 5% 2% 14% MENA 9% 14% Europe 58% China MENA 11% 14% Europe 53% China Source: Russian Customs

12 RUSSIAN SAWN TIMBER EXPORTS TO CHINA BY SPECIES (thousand m 3 ) +16% +29% +14% Pine Spruce Larch Others Source: Russian Customs 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

13 CHINA SOFTWOOD SAWN TIMBER IMPORTS mln. m3 total softwood sawn timber import to China in 2017 showing 19% growth compare with 2016 (21 mln.m3) Russian softwood sawn timber export share grow up in % up to 14,3 mln.m Canada Russia USA Finland Sweden Total Others Imported sawn timber sales value growth rate in 2017 excided ~29% while saw log sales value grow up ~26% Source: China Customs

14 VOLUMES AND LOGISTICS FOR SOFTWOOD TIMBER EXPORTS TO CHINA 2017, MLN.M3 Manzouli +16% Suifenhe -14% St. Petersburg +33% Vladivostok Ust-Luga 8,0 3,8 +20% Vanino 5,0 1,8 0,0 3,5 0,5 2,2 SAWLOG LUMBER SAWLOG LUMBER SAWLOG LUMBER SAWLOG LUMBER Source: Russian Customs

15 TRENDS GOVERNMENT INCENTIVES DEVELOPMENT Russian Government have approved in September 2018 a Strategy for the wood processing industry development (cluster approach, further processing, pulp and paper production development) targeting 2,5 times growth of added value for 1 m3 of raw material N.B. The Strategy have been reconsidered after unexpected 44% increase of forest leas rate which made the industry much less attractive for investments CONTROL Electronic system for monitoring of round wood turnover on federal level started to operate successfully in 2015 (415 Federal Law) and on sawn timber July 01, There are 47,5 thousand authorized users in December, 2017, the State Duma adopted in the third (final) reading the option to get forest lease not only by auction but also by tender for the wood processing companies 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

16 CONCLUSIONS China remains the key market for Russian log and lumber with increasing share of lumber exports Introduction of the new capacities and redistribution of volumes from MENA and domestic market leads to growth of sawn timber export volumes from Russia to China Sustainable demand and stable prices in China are driving development of sawmilling capacities in Russia both in the North West and Siberia & Far East Short term competitive advantage with Ruble devaluation was finished in 2H 2016 and Ruble strengthening in 2017 brought margins to low level

17 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

18 ILIM TIMBER CORPORATE PROFILE SALES AND PRODUCTION VOLUMES 2017 BU Germany BU Russia Key markets* (cbm.) USA Europe Russia CIS MENA China 9% 6% 13% 18% 54% Europe 54% China 18% MENA 13% Russia & CIS 6% RoW 9% Total production: m 3 *incl. sales of plywood Total sales: 615 mln. USD

19 THANK YOU FOR YOUR ATTENTION!