Development of the Sawmill Industry in Russia

Development of the Sawmill Industry in Russia
61 st FEFPEB Congress 2008, Hamburg
Sampsa J. Auvinen
September 19 th , 2008

Agenda
• Short Profile of Pöyry
• How can Russia affect the European Packaging Industry?
• Overview of Russia’s Forest Resources
• The Russian Sawmill Industry
• Future Development of the Russian Forest Industry
• The Russian Packaging Market
• Outlook

Pöyry in brief
• Client- and technology-oriented globally
operating consulting and engineering
service company
• Core operations based on three knowhow
clusters:
– energy
– forest industry
– infrastructure & environment
• Pöyry operates globally in 45 countries
and employs a total of 7300 experts.
• Global market leader in forest industry
• Strong international position in energy,
infrastructure & environment

Pöyry Group - Turnover 1985-2007
EUR Mio
800
700
600
500
400
Infrastructure &
Environment
Energy
300
Forest Industry
200
100
12% annual growth
0
1985 1991 1997 2003 2006 2007

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How can Russia affect the European Packaging Industry?
• Russia is one of the biggest forest areas in the world
• The Russian government’s target is to force investments to the forest industry
sector and to promote a domestic competitive forest industry
• The whole sector is expected to face an investment boom during the next decade
Russia will emerge as one of the world’s largest producers and consumers of
wood products in the medium and long term.
How can Russia affect European Packaging Industry?
Raw material being purchased in Russia
Russia as a target market for European industrial packaging products / services
Competition in Europe by Russian players

Overview of Russia’s Forest Resources
• Forest Area
• Wood Species Distribution
• AAC vs. Actual Harvest
• Roundwood Prices

Resources - Forest Area
808
706
193
Europe
Russia
North & Central
America
832
635
436 283
Western &
Central Asia
1
South &
South East
Asia
- Million hectares -
South America
Africa
1
206
Oceania
• South America and Russia are the leading regions by forest area
• More than 50% of Russia are forested

Resources - Wood Species Distribution by Region
North West Russia
Ural
Russian Far East
Central Russia
South Russia
& Volga
Sibiria
• With ~80% softwoods dominate the Russian forests
• Overall, Larch is the most common wood species
Total Growing Stock in Russia
72.5 billion m 3
14%
20%
14%
20%
32%
Larch
Pine
Spruce
Other SW
Hardwoods

Resources - AAC vs. Actual Harvest by Region
150
120
90
150
Note: AAC and harvest for final fellings,
including fuelwood.
- Million m 3 -
60
120
150
150
120
90
60
30
0
30
0
AAC Harvest
AAC Harvest
150
120
90
60
30
0
90
60
30
0
AAC Harvest
AAC Harvest
120
90
60
30
0
AAC Harvest
Hardwood
Softwood
150
120
90
60
30
0
AAC Harvest
RUSSIA, TOTAL
• Underutilized harvest potential in nearly all regions – particularly of hardwood.
• Largest harvest potential is in Siberia and the Russian Far East.
AAC Harvest
SW 297 85
HW 211 32
Total 508 117

Resources - Roundwood Prices
Austria, spruce
Germany, south, spruce
Germany, south, pine
Finland, south, spruce
Finland, south, pine
Austria, pine
Sweden, north, pine
Sweden, south, pine
Sweden, central, pine
Sweden, north, spruce
Poland, spruce
Poland, pine
Sweden, south, spruce
Sweden, central, spruce
Latvia, spruce
Latvia, pine
Chile, radiata pine
European Russia, spruce
Canada East, SPF
European Russia, pine
Portugal, pine
USA South, SYP
New Zealand, radiata pine
Brazil, SYP
South Africa, pine
Argentina, SYP
- EUR/m³ sob -
Stumpage
Harvesting
Transport
Overhead
* 1.Q. 2008
0 10 20 30 40 50 60 70 80 90
• The Russian price level for roundwood is low compared to the roundwood prices both in
Central Europe and the Nordic Countries
• Comparably high harvesting and overhead costs

Sawmill Industry
• Supply & Demand
• Top 10 Producers
• Structure of Exports

Sawmill Industry - Sawn Softwood Supply & Demand
40
- Million m 3 -
30
20
10
0
1995 1996 1997 1.998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2015e
-10
-20
Exports according to statistics
Estimated Production
Production according to statistics
Estimated Consumption
Domestic Consumption
according to statistics
• Domestic consumption is by far higher than the numbers declared in official statistics
• Sawn softwood exports have continuously increased over the last few years.

Sawmill Industry - TOP 10 Sawn Softwood Producers
Investlesprom
Lesosibirsky LDK No. 1
Novoeniseisky
Ilim Drev
Titan Group
Swedwood/IKEA
Continental Management
Solombala
UPM
Sawmill No. 3
0 100 200 300 400 500 600 700 800
- 1,000 m³ -
• Major players with several sawmill sites have emerged over the last few years
• Compared to Central European and Nordic companies, these groups are still quite small

Sawmill Industry - Structure of Exports
18.000
16.000
14.000
12.000
- 1.000 m 3 -
Others
Japan
10.000
8.000
6.000
4.000
China
North Africa
CIS-States
2.000
Europe
0
2000 2001 2002 2003 2004 2005 2006 2007
• Russia’s export focus has been on the European markets to a large extent
• However, strong increases in its export to North Africa, Asia and the CIS countries have
been recorded over the last few years
• Shortage of port capacities limits export shipping

Future Development of the Russian Forest Industry
Sector
• Roundwood Export Duties
• Investment Activity
• Structural Change

Future Development - Roundwood Export Duties
Date
Duty*
Min. duty
Duty
No duty
Pre 01.07.2007
6.5 %
4 EUR/m3
Birch >15cm,
all spruce, all pine
Birch 15cm,
all spruce, all pine
Aspen
Birch 15cm,
all spruce, all pine
Aspen
Birch 15cm,
all spruce, all pine
Aspen
Birch

Future Development - Roundwood Export Duties
Main Implications
• Roundwood export from Russia will end by 2009/(2011) if duty programme is
implemented as planned.
• It will create a 20 million m 3 sub
gap to Nordic/Baltic wood markets and 30-50 million m 3 sub
gap in Northern China.
• Potential to increase local wood harvest in the Nordics/Baltics is limited and mobilisation
of additional wood volumes require/have led to significant price increases.
• Nordic/Baltic wood markets will be increasingly tight in the future and as a result some of
the existing forest industry capacity will be at risk.
• Wood prices have increased sharply this year both in Sweden and Finland partly driven by
preparatory measures to increasing duties.
• Roundwood duties will result in improved cost-competitiveness of Western Russia as a
production platform compared to Nordics/Baltics.
• For the Nordic forest product industry, duties will mean increased wood costs, decreased
cost-competitiveness and likely capacity shutdowns.
• Russian logging companies that are dependent on log exports will struggle to remain
profitable.

Future Development - Investment Activity
Company
Site
Production
Capacity
Start-up
Type of
Investment
Swedwood International AB Kostomus 120 Tsd. 2005 new
Metsä Botnia AB Podporodzhye 200 Tsd. 2006 new
ZAO ABA Kompanija Omsk 200 Tsd. 2006 new
Koskisen Oy Sheksna 20 Tsd. 2007 new
Mayr-Melnhof Holz Holding AG Tikhvin 310 Tsd. 2008 new
Trans-Sibirian Forest Group Ust-Kut 620 Tsd. 2008 new
Ruukki Group Oyj Manturovo 400 Tsd. 2008 new
Karelnet Syktyvkar 250 Tsd. 2008 new
UPM-Kymmene Oy /Sveza Sheksna 300 Tsd. 2009 new
Swedwood International AB Syktyvkar 250 Tsd. 2009 new
Ikea International A/S Tjumen 75 Tsd. 2010 new
Ilim Pulp Enterprise Kotlas 250 Tsd. ? new
Metsä Botnia AB Suda 200 Tsd. ? new
Mayr-Melnhof Holz Holding AG Syktyvkar 310 Tsd. ? new
Lenin Sawmill No. 23 Archangel 200 Tsd. 2006 capacity increase
Aspek Group Solomennoe 115 Tsd. 2007 capacity increase
Stora Enso Timber Oy Impilahti 140 Tsd. 2008 capacity increase
Stora Enso Timber Oy Nebolchi 220 Tsd. 2008 capacity increase
Aspek Group Petrozavodsk 180 Tsd. 2008 capacity increase
Source: EUWID / Pöyry Database
• North West Russia is one of the world’s most active areas in terms of forest investments
• As a consequence, sawn timber production and exports will increase substantially

Future Development - Structural Change
• Labor intensive and out-of-date harvest and production
• According to governmental plans, the roundwood that has been
exported so far will have to be processed domestically – requiring
additional capacities
• Increasing demand both domestically and in the CIS countries
• Inefficient cost structure international competitiveness
Urgent need for action
• Infrastructure and transports as well as policy framework only gradually
improving
• Modernization often difficult as in many regions the sawmills are the only
employer
• Construction and start-up times not comparable with Central Europe
• Markets for sawmill residues are often nonexistent
Structural change will drag on over several years

The Russian Packaging Market
• Market Drivers
• Raw material
• Packaging Association

Russian Packaging Market - Market Drivers
Development of Economic Indicators
Export by Product Group
14%
12%
10%
8%
GDP
Household
consumption
Machinery
6%
Wood and
forest industry
products
4%
Other
7%
6%
4%
2%
Chemical
products
6%
Oil, gas,
electricity
63%
0%
2000 2002 2004 2006 2008 2010 2012-15
Metal and -
products
14%
• The Russian economic development has been positive over the last few years and is
expected to continue with slightly lower growth rates
• The export of gas and oil is the main driver of the economy.
• As a consequence, also the domestic household consumption has increased continuously

Russian Packaging Market - Raw material
Sawn Timber
1,200,000 m³
Wood Based Panels
136,350 m³
Particleboard
72,000 m³
Fibreboard
31,350 m³
Plywood; 30,000 m³
OSB; 3,000 m³
• Sawn timber is by far the dominant material used in the Russian packaging industry
• Total consumption is comparatively low compared to Western European countries and
when taking into account the Russia market size

Russian Packaging Market - Packaging Association
www.ncpack.ru
• Industrial organizations in Russia are still in the development phase
• The degree of organization and their relevance to the industry are comparatively low
• The packaging association represents all types of packaging, no special division for
wooden packaging
• A common goal should be supporting the establishment of a sufficient wooden packaging
association in Russia to create common standards, information exchange, etc.

Outlook

SWOT - Analysis of the Russian Forest Industry
Strengths
• Dynamic growth of domestic
economy
• Large wood supply potential
• Strong cost competitiveness
Weaknesses
• Undeveloped infrastructure
• Low asset quality in existing
forest industries
• Norms, standards and resources
for project implementation
Opportunities
• Fast growing domestic market
and export market particularly
in Asia
• Potential to improve efficiency
and productivity in forest
industry and forestry
• Bioenergy/joint implementation
Threats
• Uncertainties related to forest
law & institutional reform and
duty policies
• Environmental pressures e.g.
related to old-growth forests
• Impacts of increasing wood
export duties

Russia's future impact on the European Packaging Industry
Raw material being purchased in Russia
• Imports of packaging lumber have been decreasing over the last few years
• Main focus of Russian (Siberian) exports will be on China, CIS and Far East
• Raw material purchase in Russia can be attractive but requires strategic
decisions such as own procurement offices, strategic partnerships, etc.
Russia as a target market for European industrial packaging products / services
• Fast growing market but mainly served by domestic players
• Market entrance possibly through existing “European” clients
• High country risk
Competition in Europe by Russian players
• Limited direct competition because of quality and service requirements
• The European packaging industry could come into the focus of Russian investors
and lead to acquisitions

Thank you for your attention
Pöyry Forest Industry Consulting
Sampsa J. Auvinen
Korovy Val Street 7, Office 21
RU-117049 Moscow
Thorsten Leicht
Erdinger Strasse 43b
D-85356 Freising
Tel.: +7-495-937-5257 Tel.: +49-8161-4806-6
Email: sampsa.auvinen@poyry.com
Internet: www.poyry.com
Email: thorsten.leicht@poyry.com
Internet: www.poyry.com