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
MAJOR MACROECONOMIC FACTOR AFFECTING TIMBER TRADE 30% 20% 10% 0% -10% -20% -30% -40% -50% -60% Currencies relative to US Dollar, Jan 2014 - Dec 2017 Jan 2014 - Dec 2015 Jan 2016 - Dec 2017 EGP to US Dollar, 2016-2018 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
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
ROUNDWOOD AND SAWN TIMBER EXPORTS FROM RUSSIA MLN. M3 60 50 40 30 20 10 0 92 94 96 98 00 02 04 06 08 10 12 14 16 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
SOFTWOOD SAW LOG PRODUCTION MLN. M3 79 +4% Ruble devaluation in 2014 ramp up saw log production in Russia in 2016-2017 78 77 76 75 74 73 72 0 72 2014 +2% 73 2015 +4% 76 2016 79 2017 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
SOFTWOOD SAW LOG EXPORT DYNAMICS MLN. M3 12 10 8 6 4 2 0 11,7 2 10 2014 10,3 1 9 2015 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 11 2016 Other 10 2017 Finland, Sweden and Germany are the major European importers of saw log from Russia, mostly high quality 6 m Spruce Source: Russian Customs
CUSTOMS DUTIES UPDATE FOR THE FAR EAST SPECIES (LARCH, SPRUCE) 25% 40% 60% 6,5% 6,5% 6,5% 6,5% 80% 2018 2019 2020 2021 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 2019-2021 (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
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
SOFTWOOD SAWN TIMBER EXPORTS VOLUME AND SPECIES MLN. M3 27.0 +10% MLN. M3 26.5 26.0 Pine 15 25.5 25.0 24.5 +8% Spruce 7 24.0 23.5 23.0 22.5 +5% 24 27 Larch 3 22.0 21.5 0.0 21 2014 22 2015 2016 2017 Other 2 2017 Source: Russian Customs
RUSSIAN EXPORTS OF SOFTWOOD SAWN TIMBER BY REGIONS TH. M3 China 12 824 15 505 +21% Europe 3 461 3 574 +3% MENA 2 765 2 515 Asia 1 319 1 306 RoW 526 479 3 349 3 275-9% CIS -2% 2016 2017 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
SOFTWOOD SAWN TIMBER EXPORT MARKET SHARE DYNAMICS 2017 2016 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
RUSSIAN SAWN TIMBER EXPORTS TO CHINA BY SPECIES (thousand m 3 ) +16% +29% +14% 10 000 9 000 2 000 1 000 8 214 2 265 1 461 884 9 359 2 626 1 882 1 638 Pine Spruce Larch Others 0 2016 2017 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
CHINA SOFTWOOD SAWN TIMBER IMPORTS 16.000 14.000 12.000 10.000 8.000 6.000 4.000 25 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 2017 23% up to 14,3 mln.m3 2.000 0 Canada Russia USA Finland Sweden Total Others 2015 2016 2017 Imported sawn timber sales value growth rate in 2017 excided ~29% while saw log sales value grow up ~26% Source: China Customs
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
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, 2017. There are 47,5 thousand authorized users in 2018. 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
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
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 220 000 m 3 of plywood Company headcount: 3000 people Species: pine, Siberian larch, spruce, Douglas fir, Sitka spruce Long-term contracts with strategic log suppliers
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: 2.300.000 m 3 *incl. sales of plywood Total sales: 615 mln. USD
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