Coronavirus hits timber industry

Many exporters of the Russian timber industry are suffering losses because of the coronavirus. The majority were forced to change their strategies and look for new markets. However, this opportunity is not available to everybody. Even more so because the restrictions caused by the epidemic are not the first and potentially not the hardest blows on the export expansion of the timber industry, including to China.

According to the Federal Service for National Statistics, exports from the timber industry, one of the leading sectors of the Russian economy, are the sixth largest in the structure of Russian exports (3.1% in 2018). At the same time, the scope of demand for Russian wood from China that has been our number one partner in the past years (21.9% of all foreign trade) is twice as high as the average figure, with exports of Russian timber and wooden products having the second largest share (6.3%) in the total exports to this country. Between 2015 and 2018, the value of exports to China increased by over 50%, with the growth rate reaching almost 8% in 2017 alone.

Clearly, any restrictions in this strategic segment are rather tangible. The impact of the coronavirus on this sector can be divided into two types: one is a rebound of specific and most likely short-term anti-epidemic measures and the other one is a long-term echo in the form of falling demand (not only from China) and redistribution of export vectors on the global market in general.

The specific preventive measures include Russia’s closure of land-based checkpoints leading to China since late January. The measure forced exporters to consider alternative delivery methods such as by sea. In an interview with TASS information agency, Pavel Korchagin, Director General of the Primorye Association of Timber Companies and Wood Exporters, estimated that companies are incurring big losses due to the closure of checkpoints because it is “extremely difficult” to promptly switch to maritime transport. Obviously, changes in the established logistics chains lead to significant expenses. There are also additional consulting and legal fees related to changing delivery terms and essentially the entire legal paperwork.  

“The coronavirus pandemic has already led to higher delivery fees to this region,” said Vitaly Demidenko, Sales Director at Sveza, the world’s leader in birch plywood production.

However, Yury Ponomarev, Head of the Laboratory of Infrastructure and Spatial Studies at the Institute of Industrial Markets and Infrastructure, the Russian Presidential Academy of National Economy and Public Administration (RANEPA), believes that timber exporters’ transportation losses are exaggerated:

“Wood and timber are mainly transported by sea (container ships) and railway. Given that the cargo railway transit with China has been restored through the most checkpoints that were previously closed, there is no significant rerouting of deliveries or an increase in shippers’ losses.”

At the same time, the coronavirus preventive measures are not the first, and probably not the most important, blow to the timber exporters to China. Last year, due to the trade war between the US and China and the stagnation of the Chinese economy, the world prices for basic timber dropped by 25%-30% and lower. Against this backdrop, starting January 1, 2020 export duties on unprocessed timber from the Far Eastern Federal District were increased from 25% to 60%. In 2021, the duties will be raised to 80%. The timber industry lobby of the region asked the new prime minister to cancel the increase of export duties due to the industrial crisis. But it seems that it will not happen. Vice-president of the Russian Union of Timber Industrialists and Exporters Valery Prilipov said: “I don’t see that the epidemic has affected the industry. Duties are what affect exports: to make deliveries, you need to pay the duties.”

Moreover, on February 1, 2020, the Chinese authorities introduced restrictions for Russian timber exports by tightening phytosanitary regulations. It affected, first of all, round timber, 80% of which is exported from the Far Eastern Federal District: according to the new rules, it must be either cleared from bark (in order to remove parasites) or have a phytosanitary certificate issued by the Russian Federal Service for Veterinary and Phytosanitary Supervision (Rosselkhoznadzor). According to timber companies, it is impossible to build an infrastructure for phytosanitary disinfecting at such short notice, which means that the future of exports is unclear.   

“This is going to be even worse than the coronavirus outbreak,” Director General of the Primorye Association of Timber Companies and Wood Exporters Pavel Korchagin told TASS.

In this context, global long-term effects of the outbreak, which imply a change in the demand for timber industry products worldwide, remain rather volatile. In this regard, strategic flexibility and mobility of each specific company could play a vital role. Some players in this market have already managed to promptly redeploy the business.  

“A major macroeconomic outcome of the epidemic is a global economic slowdown, and the overall effects on the world economy are negative. According to experts, Russia alone is currently losing some RUR 1 bln ($13.4 mio) per day due to the outbreak. In the long run, the demand will fall in many countries, and now it is hard to forecast how long it will take to be restored,” Sales Director at Sveza Vitaly Demidenkonotes. “Sveza is the world’s major birch plywood manufacturer, with owns 22% of the respective global market. We are fully dependant on the overall state of the global economy and local markets in particular. Speaking specifically of our product markets, the coronavirus outbreak is cutting demand in China as well as in a number of neighboring Asian countries. Our imports to China are relatively low, and we have redirected them to other countries. At the same time, there is now less competition from Chinese plywood manufacturers. Although we are present in various market niches, the temporary lack of inexpensive Chinese products has a positive effect on the demand for our plywood, which is more pricey. In addition, we are implementing a program for the company’s production optimization and cost reduction, which allows us to feel more confident in the current situation. The major issue is the uncertainty: nobody knows how rapidly the coronavirus will spread, when the outbreak will be curbed, and whether it will grow into a pandemic. Anyway, we hope for a prompt resolution of the crisis, especially as there are positive signals, with vaccine development and tests underway.”     

By Marina Talskaya

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