The biggest pulp and paper companies has been striking the balance for the 2008 during the last few weeks. The results are frightening. In general, according to the RISI, global production of pulp was reduced by 2 million tons since September and up till December 2008 (and the whole global market produces 40 million tons per year). Pulp producers faced the problem of low demand and overproduction. They had to decrease production volumes and close down some enterprises.

Low demand led to quick decline of prices on market pulp. Although, the prices have not reached their critical point yet. “Should the price fall to 400 USD per ton and stay at this level for at least a year, the bigger part of the European companies would be in serious trouble. Such conditions will hardly be bearable for Russian companies,” the marketing director of Arkhangelsk Pulp and Paper Mill said.  Russia possesses one-fourth of forests of the world. The effective output is rather poor, however. Part of the Russian production at the global market equals to only 2-3%. Even such countries like Japan, Germany and Italy are ahead.

Another point is that redistribution of facilities is taking place in the world currently. Large companies construct their mills in those countries where the cost of raw materials is minimal. As a matter of fact, it takes Russian broadleaf forest from 50 to 100 years to reach the maturity which is required for processing. For eucalyptus – the major type of commercial timber in South America (Brazil, Uruguay) - this period makes up only 5-7 years.  Thus, competition is getting stronger and it will have a negative influence on the development of the Russian pulp and paper sector. 

Facing bankruptcy

Most weak pulp and paper mills of Russia may already be called bankrupts. It is since September 2008 that the influence of the global financial crisis on the pulp and paper industry became noticeable. Many companies faced low demand for their production (export of pulp to China decreased by 30-40%, of cardboard – by 25%), 30-40 % decline in prices and credit funds shortage and appreciation. As a result, the branch cut down on the production by over 7% (in rubles) in the last quarter of 2008 as compared to the same quarter a year ago.For some Russian pulp and paper mills one day to go or get close to go bankrupt was more than enough. Neman pulp and paper mill as well as Kamenogorsk offset paper mill belonging to North-West Timber Company are nearly bankrupts. Its investors have recently suggested repaying with creditor banks by office paper, planners, folders and envelopes. The total debt amounts to about 6 billion rubles (3 of them being the debt under credit and 1 billion – a funded loan debt).

The situation at Sokol Pulp and Paper Mill in the Vologda region is also difficult. Several hundred workers have been fired and one of the two papermaking machines has been stopped. The situation is so difficult that even the issue concerning mill’s payments of for natural gas has already been discussed by the government of the region.

Segezha Pulp and Paper Mill in Karelia is also cutting down its production. According to company representatives, it is going to stop the production of noncompetitive products about 20% of the total production output.  

Holdings are to survive

In 2008 RAO Bumprom (Russian Association of Pulp and Paper Industry Organizations and Enterprises) predicted an insignificant growth in production; in 2009 experts expect it to fall by over 12%. Such a result is quite predictable taking into consideration that in Russia there are just a few large producers. Their capacities exceed 200 thousand tons and make up over 80% of all pulp and paper products. All the others, especially “independent dwarfs” are likely to disappear.

Finally Russia will share the common trend to enlarge facilities in timber industry complex. There are about 200 functioning pulp and paper mills in the country now. To compare: in Finland their number is four times less but they produce two times as much pulp and paper products.

General increase in costs of raw materials, electricity and transportation makes investors search for ways of costs reduction and capacities optimization. If 10-15 years ago annual production output of a pulp and paper mill was about 450-500 thousand tons, today it has reached 700-1000 tons. Similar is the situation for paper and cardboard production facilities with their production volume making up 350-500 thousand tons per year.

It should be mentioned that the majority of these economical problems are experienced by paper “dwarfs”. Against such a background production output of Syktyvkar LPK plant (Mondi Group) in 2008 look like a challenge. In 2008 it produced 812.8 thousand tons of paper and cardboard, which is 1% more than the expected volume. However, the output figures in 2007 were less by 1% as well. The representatives of the mill say that “insignificant decrease in the output had been forecasted for 2008 because of STEP project and the necessity to stop the equipment for its modernization.

Particularly, in October and November 2008 such operations were successfully carried out on papermaking machine No. 14, which is used for production of Snegurochka office paper - the major brand of the mill. Moreover, by the end of the year managers of the project in Syktyvkar signed contracts for the total amount of 400 million EUR, the main equipment has been purchased”.

Other large Russian pulp and paper mills continue to operate normally. Particularly, the largest company in the branch - Ilim Pulp - continues to increase production, incl. corrugated cardboard production. It also plans to modernize facilities and increase pulp cooking at Bratsk Forest Complex.  

Exhausted potential

Nevertheless, it’s not a secret for many specialists that Russian pulp and paper mills have nearly exhausted their potentials. Output shown in prior years was mostly due to loading of existing facilities – up to 90%. For further development complete equipment modernization and new pulp and paper mills construction are required, which implies large investments. Foreign investments help to achieve this, but rather slowly and not that radically as desired.

Despite great potential of the Russian timber industry, Russian companies haven’t become global players in any of the branch sectors (pulp, paper and cardboard production). Russian influence in the world market is insignificant - Russian timber industry products making up just 3% of the world production volume. In terms of export profits the country falls behind the majority of foreign producers, e.g. at least six times behind Canada.  Besides, the demand and prices for different types of paper on the domestic market decreased with product cost and prices on energy resources increasing.  

In addition to this, domestic pulp and paper mills do not manufacture many kinds of products at all, i.e. some office paper types, art printing paper, food packaging paper, etc.  Domestic production is also inferior to the foreign analogues in terms of quality: this is true for office paper and paper for copy making machines, coated paper, magazine paper, cardboard for bottom and top liners with white coating.

Despite the unstable growth of the production volumes during the last decade, Russian pulp and paper industry failed to reach the maximum rate achieved in 1989.

There are about 165 pulp and paper mills, constructed in 1970s, either currently operating or in stand-by regime at the moment. Only ten of them are producing about 70% of Russian pulp and 80% of paper. Bratsk and Ust Ilimsk timber industry complexes in Irkutsk region, Kotlas Pulp and Paper Mill (Ilim Pulp), Arkhangelsk Pulp and Paper Mill, Segezha Pulp and Paper Mill together with Kodopoga in Karelia, Solikamskbumprom in the Perm  region, Volga, Mondi Syktyvkar LPK and Svetogorsk in the NizhnyNovgorod region. 

Russian Strategy

We still have a number of strategic advantages to fight for leading positions in some segments of the world market. On the one hand, we have a big sales market. On the other hand, European and Chinese markets are near. A serious fight for European market is likely to start in the nearest future. A number of soft wood processing facilities in Europe have dropped out and the Russians could occupy new segments. In other words, the idea to considerably raise export duties on round timber is wise enough. It should merely be strengthened by certain investments in woodworking.

Otherwise, western enterprises deprived of Russian pulp will purchase raw materials from South America. In its turn, to ensure the construction of large woodworking facilities woodworking development will demand investments in infrastructure. According to the representatives of Bumprom, harvesting is to reach 7-8 million cubic meters per year. All this will demand huge investments in transport infrastructure (roads and railways – to solve logistic problems of pulp and paper mills, forest roads – to ensure access to raw materials). There are no private investors able to do that. Nevertheless, the cost of infrastructure development is a determining factor when private investors make a decision to construct new pulp and paper mills.

The problem lies in the fact that there are no purely Russian strategic actors and projects for the government in the sector. All the investors are newcomers from other branches, which invite foreign businessmen to be their partners. One of the most realistic projects is the project introduced by Sveza in partnership with UPM.

It is admitted by the branch players that the government should seriously consider full participation in financing large capital-intensive and long pay-back projects in pulp and paper sector as players have not developed any schemes attractive to the government

.Forecasts

The global crisis will put an end to small and a number of medium enterprises of Russian pulp and paper industry. As the global market is becoming more and more competitive, the long-term perspective is not that optimistic. In order to survive, enterprises would need to invest into new large projects. Production increase in many branches of economy is considered to be a good sign, but as far as this sector is concerned, the trend to export materials has become extremely problematic (84% of pulp and 50% of cardboard and paper).  

Paper industry may become unprofitable already this year. According to Russian Governmental Business Trends Centre it has been more than a year since the decline in timber, woodworking, pulp and paper industries had began. In December 2008 pulp and paper production decreased by 20.9% as compared to the production peak.

According to Russian association of pulp and paper industry organizations and enterprises (RAO Bumprom), in 2009 production reduction will make up 12%, which would make it unprofitable. The chairman of the board, Vladimir Chuyko believes that such a result may take place due to decline in demand and price as well as price rate growth for the natural monopoly services and credit interest rate increase. “There is a slumping demand for the pulp and paper products in particular, and this holds for both, domestic and foreign markets. For instance, Pulp and Paper Mills selling their production on export markets only were badly affected.

The crisis will not last forever and experts are expecting urgent demand for the production when it is gone. According to Mr. Chuyko, it can grow as much as 1.5 times by 2015. As to Bumprom association experts, the production volume of the market pulp will increase 1.68 times, production of paper – as much as 1.7, of cardboard – as much as 2.2, but these changes require investments.

Business Support Bureau "Runa" www.runa.info