Russian Forestry Industry Is Rotting

22.10.2009 — Analysis

The government of the Khanty-Mansiysk Autonomous Okrug has not managed to sell the state owned shares in OJSC Ugra Timber Industry Holding. The auction has been postponed until November. Experts reckon that the price will have to be reduced down to nominal as the timber industry is not in the best of shapes. The RusBusinessNews observer established that the Okrug is paying for strategic mistakes made by the business and authorities in the last fifteen years.

The nominal value of the Ugra Timber Industry Holding amounts to 3.3 billion roubles. The KhMAO government estimated the value at 5.5 billion but there were no takes for the shares at this price. Authorities had to extend the deadline for the auction bids for a month. Experts, however, doubt that the situation will change in November: Business is ready to buy the shares at a price no higher than nominal. This would mean the Okrug is going to carry serious losses: Investment into the modernization of timber processing plants and the establishment of new capacities amounted to more than 5 billion roubles.

The holding has been established five years ago by the joining under the same roof wood sawing plants and a plant making glued laminated timber out of the LVL veneer. A goal has been set for the managers to reach the modern level of technology of wood sawing and to come up with new products. They have managed that, having modernized sawmills and commissioned prefab houses lines, as well as started production of MDF boards, furniture, and joinery products.

The equipment for the new timber sawing lines the holding purchased from S.A.B., drying chambers - from Vanicek. Harvesters (timber felling machines) have been bought from Volvo. The LVL timber lines have been supplied by the Finnish RAUTE. Having been modernized the Ugra TIH was able to produce more than 600 thousand cubic metres of high quality timber, about 39 thousand of glued timber and up to 80 thousand square metres on one line of the timber frame houses.

The purchasing decisions, predominantly of German equipment, seems not indisputable to the experts, in the view of Andrey Dobrachev, a Professor at the Urals Forestry University, equipment of the same quality from Italy, Turkey, or China costs twice cheaper. The bet on the most productive machines consequently put under threat the bank loan repayments.

With the worsening of the economic crisis the holding's revenues have fallen rapidly: half a year ago the Ugra TIH has been idling altogether, during the summer it worked only using a half of it capacities. Mikhail Nanivskiy, the Deputy Director General of OJSC Ugra Timber Industry Holding, claims that today the capacities are loaded up to 90% which does not guarantee easy life for the company in 2010.

The holding ships timber exclusively abroad as the domestic market, in the opinion of Mr. Nanivskiy, is not ready to consume products od such high quality. The buyers are predominantly from the countries of the North Africa and Middle Easte. Up to a third of the glued timber is shipped abroad too. The holding's managers claim that export volumes have not decreased in 2009. 

The experts, however, are very careful regarding such claims. Andrey Dobrachev reckons that all profits made on sales of products abroad are consumed by the transportation costs and this forces the professor to consider counting on exports a mistke. According to him the goods produced by the Ugra TIH could easily be used in the domestic market. The furthest destination where the timber should be sent to is Kazakhstan. Ugra, due to its geography, will lose the remote markets to the Leningrad, Arkhangelsk Oblasts, Karelia and other regions located close to sea ports. It is not by accident that these Russian regions are leading in terms of sales of timber prefab houses abroad. There are no companies from the Urals Federal District amongst exporters of these products.

Exports of timber from Ugra are not profitable not only due to large distances. The Head of the Urals Timber Housing Association Viktor Kralin claims that having about 970 cubic metres of timber the holding ships abroad no more than 200 thousand. The majority of the raw materials - mainly undersized trees and foliaged trees simply remain at the plots because transporting them for hundreds of kilometres is not profitable and there is nowhere to process these. There is no decent plywood plant in the Okrug, there are no production capacities to make cellulose, cardboard, spirit and other by-products of mass timber processing. Such enterprises have been established in the soviet times in the neighbouring Sverdlovsk Oblast but now they either stand idle (hydrolysis plants) or accumulating debt to gas suppliers (Novaya Lyalya Pulp and Paper Combine). As a result about 20% of timber is wasted standing while one has to pay for the plot as a whole.

Experts consider the purchase of Weinmann timber frame house production lines an unfortunate decision. These lines need experienced staff which is a problem for Russia, according to Mr Dobrachev. Moreover, the idea of timber frame housing is in itself mistaken: there are not enough consumers in the domestic market, this includes mentality considerations while foreign buyers prefer buying whole timber houses in Russia, rather than timber frame. Whole timber houses, the expert reckons, can be made employing a usual sawmill and a joinery workshop and then they would look be primitive or obviously mass-produced. Correspondingly the loan burden on the enterprises reduces considerably. Ugra TIH, however, had planned for large volumes and is now is in the clutches of creditors.

Logistics miscalculations have turned into problems for the LVL timber sales: shipping 18 metre long beams to Europe is not easy at all. Wooden beams in the domestic market do not enjoy an adequate demand which prevents the plant to work at the full projected capacity.

Andrey Dobrachev reckons that water routes to Kazakhstan and Europe should have been established in the nineties along the Northern Sea Route. Logging operations which had tens of tugboats should have joined their efforts and purchase large timber carriers which would have lowered the transportation costs.

Mikhail Nanivskiy reckons that water transportation option is a utopia: the project would require serious investments and efforts as the shipping process is not up and running, there are no terminals. Andrey Dobrachev agrees that there would be enough difficulties in mastering the Northern Sea Route but these have to be overcome because railway transportation is a dead end.

The situation of the Russian timber processors is rather difficult: round timber to Finland is shipped from Brazil, since export of round timber from Russia is prohibited. Timber processing has achieved the best possible levels of productivity and quality but this is not enough to pay for the imported machinery. It would only be possible to rectify the economy with further investment into logistics and the establishment a fully fledged cluster but finding money at the time of crisis far from easy. The result is that the timber industry is dreaming of USSR style production volumes while timber rots standing.

A reasonable question arises: why do the authorities, seeing the desperate situation of the sector not stimulate the demand in the domestic market? It is very hard to answer this because, regardless of a practically zero profitability Russian plants are continuing to ship timber abroad. They say that timber was shipped abroad at a loss in the soviet times too. Someone has to need this, if export which does not give profit to shareholders is flourishing. In these conditions, experts are convinced, it will be extremely difficult for the KhMAO budget get back the money invested in Ugra Timber Industry Holding.

Vladimir Terletski