The decline in export volumes due to EU sanctions against the backdrop of rising transportation tariffs and a stronger ruble made the production of lumber unprofitable in the Russian North-West. In April 2022, the volume of lumber imports to China, according to Lesprom Analytics, fell by 20.1% y-o-y, to 2.2 million m3. Including supplies from Russia decreased by 11% to 1.04 million m3. The decline in lumber imports was due to lockdowns in ports in China due to quarantine, as well as a downturn in the country's construction industry. Home sales in physical terms in the first quarter fell by 25.6%, and the start of new construction in terms of area decreased by 17.5%.
The exports of Russian lumber to Japan also decreased in April. Against the backdrop of an increase in imports of lumber into the country by 5.6%, to 395.9 thousand m3, supplies from Russia decreased by 22.1% to 58.4 thousand m3. If a year ago Russia was in second place in terms of lumber volume exports to Japan, then last April it lost two places at once. Japanese house-building companies began to look for new suppliers of lumber after the largest transport companies Maersk and MSC stopped transporting Russian lumber on March 1.
The Russian domestic market will not be able to absorb the volumes released from exports. “The domestic market will be saturated with deliveries of lumber in June,” said Valery Pisarev, General Director of LHK Cherepovetsles (Vologda region, Russia). – The price of lumber has already begun to fall. The domestic market will not swallow the volumes that are exported. Russia produces about 40 million m3 of lumber per year. (According to Russian state statistics, the volume of industrial production of lumber in Russia in 2021 amounted to 30.6 million m3 – Lesprom Network). The Russian market needs about 10 million m3. And what to do with the remaining volumes that used to be exported? Of course, we will make our way to Asia, Egypt, Israel, Turkey, the United Arab Emirates. But there are other house-building traditions and wood is not used so much.”
By now, lumber production in Russia is at the level of the previous year, in January-April it amounted to 9,83 million m3 (+0.7% y-o-y). Inventories at Russian sawmills are growing. “There is nowhere to send the lumber,” says Valery Pisarev, “Back in February, our company sent about 25,000 m3 of lumber a month to foreign markets. And in May we were able to ship only 15,000 m3. The remaining 10,000 m3 went to the warehouse.”
Exports of lumber to Europe, the main market for sawmills in the Northwest of Russia, will end on July 9, when the grace period for deliveries under contracts concluded before the imposition of sanctions by the European Union ends. According to Valery Pisarev, after Europe is completely closed for Russian suppliers on July 9, there will simply be nowhere to put the falling volumes. “Big players are still working by inertia today,” he says. - There is another option before July 9 to send sawn timber to Europe. And after that, this stream will cease to exist and there will be nowhere to put the lumber. So from July 10, sawmilling will begin to stop.”
Exports of lumber to China have become unprofitable for companies. “Many companies rushed to send lumber to China. And now there are big problems associated with container transportation, - explains Valery Pisarev. - In addition, the ports where we used to transship in Rotterdam, Hamburg, etc. are now closed for us. Previously, our containers were reloaded there on ocean liners, but now these ports are closed, our ships are not allowed to go there. For shipment to China, only the railway remains, which was a bottleneck in logistics before.”
In addition, China is now dropping the price for Russian lumber while the cost of container transportation has increased several times. If back in March-April there was some profitability in sales of lumber to China, now Russian sawmills ship the lumber at a price below the cost price.
“The situation is difficult, - says Alexander Konyukhov, deputy director for production at SevLesPil (Komi Republic, Russia). - And the main problem is not to sell the goods, but to bring them. There is practically no logistics. Because of this, enterprises are forced to stop. Our production is still going on, and around us the sawmills are stopping. The reduction in capacity utilization began immediately after the imposition of sanctions against Russia. In our region, at many enterprises, instead of two or three shifts, only one was left.”
Lumber exporters are also negatively affected by the strengthening of the ruble, caused by a drop in imports into the country. Export revenue in ruble terms has decreased. “No one will work at a loss. It’s easier to stop production and wait until the market thins out,” Alexander Konyukhov concludes.
