From the start of 2007, the Russian economy showed signs of a considerable upturn in growth, with a higher level of overseas investment, and production improvements in the manufacturing sector. The growth in capital investment has followed an increased trend just below 20%, which is more than double the mean average of 9.82% across the preceding five years.

In the wake of improved financial conditions for business, there has been an increase in wage levels of an estimated 15%. In some industries, such as construction, where there has been substantial growth of almost 24%, wages have moved even further ahead to around 23%.

While general inflation is under control, the government is concerned that it could become a problem if growth in the money supply gets out of control.

Along with wage rises and their extra costs to business, disposable income has also increased, and flagship companies such as IKEA have been investing in retail distribution to capitalise on the growing demand for consumer goods.

With more opportunities for the consumption of wood products in the domestic market, sawmills and wood processing plants are finding that returns on the home front are in many cases better, and easier to achieve, than in the export markets.

Processing volumes

In spite of difficult logging conditions over the winter, wood processing volumes in the first quarter of 2007 leapt forward by around 10% compared to the same period last year, and exceeded the growth rate of pulp and paper. At the same time, investments in wood-based products grew – a trend that is expected to continue.

Earlier this month German-based Pfleiderer AG announced plans to establish a new mill in Podbereje (Novgorod) to manufacture both medium and high density fibreboard (MDF/HDF). The company already produces around 500,000m3 of chipboard in the same region. It is anticipated that fibreboard production will begin in the third quarter of 2009, completing the company’s product portfolio destined for eastern Europe. The new plant will manufacture around 400,000m3 of MDF and HDF per year, and will complement the thin fibreboard made at Pfleiderer’s existing plant in Poland, which presses around 250,000m3 a year.

Pfleiderer AG’s executive board member for technology and eastern operations, Dr Robert Hopperdietzel, said Europe’s rapidly growing markets for engineered wood had been among Pfleiderer’s key growth factors for a long time and these products were gaining in importance due to their dynamic growth rate and earnings potential.

In the Russian plywood market, demand for birch plywood has become stronger among the packaging and furniture industries. Faced with the same log shortages as the softwood mills, plywood producers found themselves short of birch logs at the beginning of the year. Consequently, shipments fell behind, which drove prices upwards. In some cases, prices on the forward market almost doubled.

Demand from the domestic market and Continental Europe has continued to keep prices firm, but current selling rates within the UK have yet to reflect the full extent of replacement costs of goods still to be shipped.

Birch plywood grades currently imported to the UK are predominantly BB, BB/CP, CP/CP and C quality, all bonded with both interior and exterior glue lines. Thicknesses range from 3-24mm, although there are some mills producing thicker boards for speciality end uses. Birch plywood panel sizes are 2440x1220mm and 1525x1525mm.

Some UK-based agents and distributors have upgraded their divisions to take advantage of a growing opportunity. A spokesperson for the Panel Division of MBM Forest Products Ltd in Tilbury, Essex, said: “We have recognised the importance of Russia as a source of sustainable hardwood plywood. As a result of employing a specialist Russian buyer earlier this year, we have forged closer relationships with the mills, leading to improvements in our supply chain. Our stock in Russian birch at MBM and Falcon Panel Products Ltd (both part of the CTH Group) is higher than last year, and shipments are coming on a regular basis.”

New mill

Andy Green of Multiply Birch Plywood Company Ltd, sole UK agent for Syktyvar Plywood in the Komi Republic, told TTJ that the Russian company is investing in a new mill at Gagarin, Smolensk. Production is expected to begin in 2011, when the mill will produce 150,000m3 of birch plywood for both the domestic and export market. Around 50% of production will be

further processed to produce phenolic-coated mesh-faced plywood for uses such as vehicle construction, mezzanines and leisure equipment.

Mr Green said the expansion formed part of a US$270m (€200m) investment programme in Russia, and a new 400,000m3 per year chipboard mill was already under construction in Gagarin and due to open next year. The production will include some standard grade chipboard, he added, but the mill will concentrate on value-added products such as melamine and veneered boards for the domestic market.

On the softwood front, Russian prices have been steadily increasing throughout 2007, with redwood continuing to break all previous levels. Shipments from the north-west region have been consistent through the spring and early summer, but there are notable shortages in redwood specifications as volumes shipped have been less than contracted for.

A number of sawmills are holding higher volumes of whitewood logs than redwood, which indicates that cargoes yet to be shipped after the summer holidays will contain a larger proportion of spruce than pine.

Redwood prices

The current high price being obtained for redwood has encouraged some UK planing mills to switch to the better grades of whitewood as an alternative. But while whitewood is used extensively on the Continent for joinery, UK manufacturers still prefer the intrinsic properties of redwood for cutting and jointing.

Although sales of Russian softwood have been relatively buoyant over the last few months, the poor weather in July has affected sales for many merchant outlets, and demand for decking has been well below most peoples’ projections. Whether sales will catch up should the situation improve is anyone’s guess, but there are some specifications available in decking thicknesses of 32mm and 38mm for prompt delivery.

Yet the future does look promising for softwood, as the urgent need to increase housebuilding is being highlighted in the media from all sides of the political spectrum. For UK importers, any upward trend will be welcome, because landed stocks of carcassing are currently too high in relation to demand. It may take several months before the carcassing market regains the necessary balance and, during that time, buyers will be adopting an ultra-cautious approach to forward contracts.

Some importers are taking the same approach to joinery grades, and many feel that prices of Russian redwood will plateau in the near future.

As growth and investment in the forest products industry continues, Russia’s geographical proximity to China’s rapidly expanding market will ensure further growth in demand for commodity products such as sawn timber and value-added wood products. In eastern Europe, the expansion of wood-based manufacturing will also create further need for a new wave of Russian hi-tech production plants. These will produce the higher margin returns in the forestry sector that the government wishes to see.