The Itera company got burned in the forest

10.05.2011 — Analysis

The NGK Itera international group of companies has failed in its attempt to diversify its business activities in the Sverdlovsk region. The gas company proved unequal to the task of producing furniture boards, and experts believe its problems were exacerbated by poor marketing. As this columnist for "RusBusinessNews" has determined, the gas company risked investing hundreds of millions of rubles in a side business, although it does not possess the necessary raw materials or any woodworking technology of its own.

Itera first expressed an interest in getting into the timber-processing industry in 2006. A year later the Viysky woodworking plant was opened with great fanfare in Nizhny Tagil, with an annual output predicted to be between 24,000 and 27,000 cubic meters of finished products. 593 million rubles were invested in the project. Vladimir Makeev, chairman of NGK Itera's management board, told journalists at the time that high-performance technology for the advanced processing of lumber would allow the company to produce high-quality furniture boards for export. The American company Universal Wood Products promised to act as sales consultants for the products.

However, the owner soon put the plant up for sale, and no one has yet expressed any interest in buying it. The business is not operating and the staff have been let go. Only a few employees remain to harvest timber, which is enough to pay the taxes and keep the company's conservation. A recent inspection by the office of the environmental prosecutor revealed that the owner has for the most part abandoned the forest-development project, which, among other things, was intended as a measure to prevent forest fires. According to Robert Slepukhin, the interregional environmental prosecutor in Nizhny Tagil, the Viysky woodworking plant lacks both sufficient technology and fire-fighting equipment.

Experts claim that Itera's problems were rooted in the company's poor understanding of their new business. Vladimir Makeev claimed at the plant's opening ceremony that the Sverdlovsk region had a good base of raw materials that would allow them to produce significantly more high-quality products. But this is not true. According to specialists from the Economics Institute of the Urals branch of the Russian Academy of Sciences, 60% of the region's forested areas consist of small-scale, low-quality wood. The Viysky woodworking plant was confronted with this very lack of high-quality raw materials.

The gas company made its second mistake by betting on the production of furniture boards. Nikolai Kireev, president of the Urals Timber Industry Union, claims that furniture boards are going out of style and that the technology to produce them is both time-consuming and labor-intensive - thus, very expensive. The very production process, which includes sawing the wood, kiln drying the timber planks, and gluing the furniture boards, is difficult to do here. The most important step is ensuring that the timber is properly dried. For example, the world's leading companies that dominate the market season their timber planks for at least a year before they are used in production. Because this approach doesn't lend itself to quick profits when producing furniture boards, this has been the ruin of many Russian enterprises.

An integrated approach to production is necessary if timber processing is to be cost-effective, meaning a closed-loop process that recycles the wood back into production. And pulp and paper mills in the Sverdlovsk region are on their last legs.

As a side note, according to the Development Strategy for the Timber Industry up to 2020 that has been approved, Russia can only count on supplying roundwood, timber, and pulp to China, Finland, and a few other countries, as well as plywood and cardboard to Europe, Turkey, and the US. But the problem is that these markets are extremely volatile and fast-growing, and Russian companies have not been able to keep pace with them. You have to have new, wood construction materials, environmentally-friendly semi-finished products, etc. in order to increase overseas sales. In the absence of any innovative new trends, Russia can only dream of making a breakthrough abroad.

The domestic market is in a pitiable state, although, given the size of the country, it would be capable of giving a serious boost to the timber industry. Most of the raw materials for the Russian market are taken from the eastern part of the country for consumption in western Russia. But there is very little rail service between the two halves of the country, thanks to the "farsighted" reforms made by Russian Railways. According to Nikolai Kireev, there is a desperate need for more freight cars to transport timber and timber products. This, along with the regular increases in the prices charged by the natural monopolies, is utterly destroying the Russian timber industry. Domestic production of wood homes and furniture has been seriously depressed for several years now, which experts blame mostly on declining income levels of the population.

The irony is that although the Viysky woodworking plant is sitting idle, it remains on the Russian government's 2007 list of high-priority investment projects for forest development. It is possible that although 593 million rubles were spent on the project due to its high-priority status, only a certain few senior managers and officials reaped the benefits.

Vladimir Terletsky