Competitiveness of the Russian Sawmilling Industry€¦ · Competitiveness –Labor Cost In Russia,...

MAXConference 2017Moscow, RussiaMr Jarno Seppälä, Head of Forest Industry & Bio Solutions Consulting

Competitiveness of the Russian Sawmilling Industry

April 21, 2017

Agenda

• Indufor• Industry Overview

– Supply & Demand– Industry Structure– Export

• Competitiveness– Quantitative

• Cost structure• Raw material• Labor

– Qualitative• Conclusions

2 Copyright © 2017 Indufor Oy

Indufor


Indufor Independent international consulting company based in Finland, New Zealand, Australia and the US with over 35 years of experience in the field of forestry, forest industry and natural resourcesProvide world class advisory services to a wide range of private and public sector clientsMore than 300 clients in over 800 projects in 5 continents.


Indufor – Forest Industry & Bio Solutions – Service Offerings

Biomass sourcing and wood supply plansSite suitability for forest plantation and biomass species and varietiesPotential and realistic supply availability in biomass supply basketsDeveloping supply models and assessing associated cost structures

Business strategiesPre-feasibility/feasibility studiesBusiness plansMarket supply, demand and trade assessments – market entry solutionsEnd use segment and client identification studies

Due Diligence and M&APurchaser and vendor due diligenceValuations Mergers and acquisitions

Process ImprovementsTechnology assessmentsOperational improvement analysis

Industry benchmarkingIndustry segment productivity assessments Single plant benchmarking studies


Indufor – Russia

In Russia since late 1980sBoth strategic and operational projects Services cover all strategically important issues for the industry:

Forest management and forest inventoriesWood supply and procurementInvestment analysis - feasibilitiesManufacturing processes Sales and marketingLogistics


Industry Overview


Overview – Supply and DemandIndustry development heavily export driven but official statistics somewhat underestimate the role of the domestic market.

• Sawn softwood production has approximately doubled since 2000

• The overall production level and industry development is heavily driven by the exports

• However, both production and domestic demand for sawn softwood is at a higher level than official statistics indicate.

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e

S&D Balance of Sawn Softwood in RussiaMm3

Production

Apparent Consumption

Export


Overview – SupplyRegional shares of sawnwood production have remained almost unchanged with Siberian and North-Western FD account for over 2/3 of the total output. However, Siberian output has increased significantly whereas output in NW Russia has been stagnant.


Production of sawnwood in Russia, 2016

Siberian 40 %

North‐Western 28 %

Volga13 %

Far‐Eastern 7 %

Central 7 %

Ural 4 %

Southern 1 %

North‐Caucasian

>1%

Total – 34 million m3

0 %

10 %

20 %

30 %

40 %

50 %

60 %

70 %

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90 %

100 %

2010 2011 2012 2013 2014 2015 2016

North‐Western FD Volga FDFar‐Eastern FD Siberian FDCentral FD Ural FDSouthern FD North‐Caucasian FD

Overview – Industry StructureVery fragmented industry characterized by relatively small sawmills with an annual capacity of less than 100 000 cubic meters. A significant share of these mills is expected to be missing from the official (production) statistics resulting in misleading S&D balance in the country.

Official statistics

> 200 199‐100 99‐50 < 50

Indufor estimate

> 200 199‐100 99‐50 < 50


Overview – Industry Structure and Sales FocusSales focus is largely dependent on sawmill size. Large mills target their output to export markets.

• Most of the small and medium sized mills focus their sales to domestic market with local clients

• However, there are naturally also some companies with pure export focus in these size categories

• On the other hand, the largest Russian sawmills sell practically all of their output to the export markets

Sales Focus According to Sawmill Size

Domestic

Exports

>100K m3/a

50‐99Km3/a

<50K m3/a

TotalRussia


Production

Overview – ExportsVery significant structural changes in the export market focus during the last 15 years towards markets with lower quality requirements with China representing for over 50% of the total. This has been possibly mainly with the existing production technology level.

0 %

10 %

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30 %

40 %

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60 %

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100 %

2000 2010 2016

Japan

Other

Middle East

Europe

Central Asia

China

• The shares of exports to Japan and Europe have shrinked continuously

• The importance of China as the main export destination has skyrocketed (from 3% to 58%), the role of Central Asia has increased as well, though at a much more modest pace

• Together with the Middle East the share of these core export markets accounts for over 80% of total export volume


Competitiveness


Competitiveness – Cost StructureRaw material dominates the cost structure worldwide.

• In sawmilling, raw material has a dominating share of the total cost and of total productivity

• Changes in productivity can’t be done overnight but there improvements can be achieved through machinery investments

• The differences between cost structures of the countries are due to the differences in:

– Product mix – Raw material base– Input prices– Machinery– Logistics

Raw material

Energy

Labour

Other

Capital

General Cost Structure of the Sawmill Industry


Competitiveness – Delivered Log CostsRussia has the lowest log costs among among the main competing suppliers – in relation to different softwood fibre types (fast vs. slow growing) as well as sawnwood end use (structural vs. non-structural) types, but…

020406080

100120140160180200

USD/m3

Delivered Log Costs in 2016


Competitiveness – Log Price Development…log prices in Russia have risen rapidly in local currency, but the lower value of Ruble has significantly reduced the euro-based prices!


‐10%

‐8%

‐6%

‐4%

‐2%

0%

2%

4%

6%

8%

10%

Finland Sweden Germany Austria Canada Russia

Euro Local currency

Annual Softwood Log Price Changes in 2010‐2015

Competitiveness – Log Price DevelopmentPrices for softwood logs in Russia have increased in the North-West and Siberia, but the development have been relatively stable elsewhere.


60%

80%

100%

120%

140%

160%

180%

200%

Jan‐12

Mar‐12

May‐12

Jul‐1

2

Sep‐12

Nov

‐12

Jan‐13

Mar‐13

May‐13

Jul‐1

3

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‐13

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RUB/m3, index 2012

North‐Western FD Siberian FD Other FD

Competitiveness – Log Price DevelopmentSeveral factors put pressure on Russian log price development.

• Russian raw material competitiveness will face serious challenges in the next several years:

– Unlike in many competing areas, stumpage value in Russia is low, and log cost consists mainly from harvesting and transport costs.

– Thus, market driven impacts that decline the stumpage price level are smaller than in competing countries

– Furthermore, inflation will increase input costs in harvesting and logistics.

– Road infrastructure will continue to pose a challenge. Capital investments in forest infrastructure are needed

Indicative Log Cost Breakdown

CountryA

CountryB

CountryC

CountryD

Russia

Transport

Harvesting

Stumpage

Share of total log cost


Competitiveness – Log Price DevelopmentMill gate price depends on the companies’ ability to utilize AAC efficiently. Success on high AAC utilization rate should be pursued especially in areas that require major infrastructure investments.

Mill Gate Price per Harvesting AreaMill Gate Price Sensitivity to AAC

Utilization Rate

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200

400

600

800

1 000

1 200

1 400

1 600

Area 1 Area 2 Area 3

Lease fee andoverhead

Terminals

Road Construction &maintenance

Loading and Unloading

Transport ‐ Barge

Transport ‐ Road

Harvesting

RUB/m³

0

1 000

2 000

3 000

4 000

5 000

6 000

100% 95%

90%

85%

80%

75%

70%

65%

60%

55%

50%

45%

40%

35%

30%

25%

20%

15%

Area 1

Area 2

Area 3

RUB/m³


Competitiveness – Labor CostIn Russia, the labor price is clearly the lowest and has decreased in euro terms during 2010-2015, but has increased as much as 12% annually in the local currency. Favorable exchange rate development has kept the euro-based labor cost almost unchanged.

0

500

1 000

1 500

2 000

2 500

3 000

3 500

4 000

Canada Sweden Finland Germany Austria Russia

Social cost Wage

EUR/month


Labor Cost in 2015

‐2%

0%

2%

4%

6%

8%

10%

12%

14%

Austria Finland Germany Sweden Canada Russia

Euro Local currency

Annual Labor Cost Changes in 2010‐2016

Competitiveness – Number of EmployeesDespite the favorable development versus the main competing countries Russian sawmilling industry is still heavily labor intensive.


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Russia Canada Sweden Germany Finland

2010 2015

1000 persons

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Germany Sweden Finland Canada Russia

2010 2015

m³/a/person

Production per EmployeeNumber of Employees

Competitiveness – Number of EmployeesAlthough the labor productivity has increased somewhat faster than in the competing countries, it has not been able to compensate the price increase and therefore the unit costs have increased. Significant labor productivity improvement opportunities exist!


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7%

Canada Finland Germany Russia Sweden

Annual Change in Production of Employee 2010‐2015

‐4%

‐4%

‐3%

‐3%

‐2%

‐2%

‐1%

‐1%

0%

1%

1%

Canada Finland Germany Russia Sweden

Annual Change in Number of Employees 2010‐2015

Competitiveness – Product Features and ServiceRussia has traditionally had a disadvantage position but latest capacity investments and expansion outside Russia are changing the old unfavorable situation.

• In many cases, Russian sawmill industry continues to lag behind in product sales values relative to its competitors in several markets

• Log quality is good or some times even higher in comparison to competitors• This disadvantage position been due to perceived product quality issues resulting mainly from

– outdated technology – differences in service levels

• timeliness• ease of payments• claim handling

• These service issues are partly resulting from the lack of local presence – Russian companies have fewer sales offices or terminals/landed stock in the key export markets

• In addition, there is improvement potential in experience and skills in export sales, especially among the smaller companies


Competitiveness – Product Value OpportunitySawnwood-log price ratio of Russian sawmills has improved but higher value product opportunities exist.

• Sawnwood/log price ratio in Russia has developed more favorable than in the competing countries

• Also exchange rate has helped Russia when selling their products to export markets

• While logistics costs from Russia are somewhat higher than from other areas, product value can be increased through improved product offering (grades and sizes) as well as marketing

• High quality raw material allows the production of these higher value specialties

Softwood Sawnwood/Log Price Ratio 2010‐2015

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2010 2011 2012 2013 2014 2015

Sweden Finland CanadaRussia Austria Germany

Index 2010=100


Conclusions


ConclusionsOutlook showing significant opportunities as well as challenges both in production environment in Russia and at global sales markets.

• Russian sawmill industry has a log cost advantage relative to many competitors

– largely due to low stumpage costs – as inflation pushes logging and hauling

costs up the industry loses gradually this advantage

• Other costs (such as sawmill labor) are also increasing rapidly with inflation resulting also in lost cost competitive advantage

• The main means of improving competitiveness are through improving: labor productivity and yield (at sawmills and

in logging/hauling) infrastructure product/sawnwood value


Indicative Log Cost Breakdown

CountryA

CountryB

CountryC

CountryD

Russia

Transport

Harvesting

Stumpage

Share of total log cost

ConclusionsRussian sawmills can not rely on favorable exchange rate forever. Capital investments improving productivity and yield should be a priority. Correct mill size analysis crucial.

• Productivity, yield and infrastructure– capital investments in sawmills are a key

way to labor productivity and yield improvements

– however, since the log transport costs are considerable and infrastructure limited, the correct mill size has to be considered carefully. Log cost per m3 increases with mill size and other cost savings become marginal once a certain size has been passed


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Mill size

USD

sawmilling cost

wood cost

Mill Size Analysis

ConclusionsProduct and service offering in relation to market selection are among the key decisions regarding the future competitiveness.

• The third area for improving competitiveness is through product value increase

– The raw material quality is high and allows for the production of higher value specialties

• Planed, MSR, modified/treated products, CTL, EWPs, etc.

– Investments in grading optimization technology can also increase sales value

• Especially in North-West Russia


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1 000

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SPF2x4

#2&Btr

SPF2x4MSR

Pine5/4x6Std

Pine5/4x6Pre

EUspruce1x4 #2

EUspruce1x6 #2

WRC1x6 #1FSR

5/4x6R.E.D.Gr.

5/4x6R.E.D.KD

1/2x6Rustic

Framinglumber

Treated KDDecking

Common Boards

Fencing SidingWRC Decking

EUR/m3

March 2017 Spot Prices in the USA

SPF = Spruce-Pine-FirBtr = BetterMSR = Machine Stress Rated Std = StandardPre = Premium

WRC = Western Red CedarFSR = Full Sawn RoughR.E.D. = Radius Edge DeckingGr. = GreenKD = Kiln Dried

ConclusionsDetailed market and product opportunity analysis required as global sawnwood market facing changes.


• Global markets will face major changes in supply source structures offering opportunities bot in structural and non-structural applications

– Canadian exports to decrease to the US and Asia (China and Japan)

– European demand will not grow considerably

– New market areas are emerging – e.g. India where Russian volumes are limited

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Million m3

SW SWimports

From NZlogs

Fromlocal logs

Domesticproduction

Sawn Softwood Demand in India

Indufor OyEsterinportti 2FI-00240 HelsinkiFINLANDTel. +358 50 321 8217Fax +358 9 135 [email protected]

Indufor North America LLC1875 Connecticut Avenue, NWWashington, DC 20009 USAwww.indufor-na.com

Indufor Asia Pacific Ltd7th Floor, 55 Shortland StPO Box 105 039Auckland City 1143NEW ZEALANDTel. +64 9 281 4750Fax +64 9 281 4789www.indufor-ap.com

Indufor Asia Pacific (Australia) LtdPO Box 425Flinders Lane, Melbourne VIC 8009AUSTRALIATel. +61 3 9639 1472www.indufor-ap.com

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Competitiveness of the Russian Sawmilling Industry€¦ · Competitiveness –Labor Cost In Russia,...

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