Friday, June 01, 2007

Pulp mill builders want better guarantees of timber supply

Timber tariffs decrease investors' interest in Russian forest industry
Pulp mill builders want better guarantees of timber supply

Export tariffs imposed by Russia on raw timber are likely to make Finnish forest companies less willing to invest in Russia's forest industry.
The tariffs will cause practical problems for Russia if the "wrong" types of wood harvested during felling cannot be exported.

The export tariffs are to take effect from the beginning of July. Initially the fee will be EUR 10 per cubic metre, and it is to increase by degrees to EUR 50.
The idea behind the tariffs is to force Western companies who want to use Russian raw material to invest in production in Russia.
Finnish experts see the tactic as strange. Most countries who want to attract foreign investment use positive incentives, but Russia is resorting to the threat of punitive measures.

So far, Finns have invested fairly little in the Russian forest sector. A few sawmills, a plywood plant and a cardboard mill have been put up, but pulp and paper projects are still in the planning stages.
The most serious project is a pulp mill planned by Metsä-Botnia in the Vologda region.
Metsä-Botnia CEO Erkki Varis says that sudden administrative moves, such as the export tariffs imposed by Russia, are "always poison" for investors, as they create uncertainty.
The tariffs also pose concrete difficulties for pulp mills operating in Russia.
"No factory exists that would be able to use all of the tree species in a certain area. If a factory produces pulp from coniferous trees, the forest might yield three times as much leafy trees and unusable wood", Varis says.
"There is no use for them in Russia. If tariffs are imposed on them, what are we supposed to do. Burn them?"
Varis says that the Vologda pulp mill is a long-term project that might be implemented in the next decade. He notes that nobody knows what will be happening in Russia at that time.

The greatest risks in the pulp mill project involve the availability of raw material, Varis admits. A promise from the local governor that there will be enough wood is not good enough for an investor.
"We have to be certain that the mill will get 300 truckloads of raw material every day. We need to have enough long-term and permanent felling contracts in our back pockets."

Timo Uronen, head of the forest industry section of the Ernst & Young auditing service, says that the equipment in Russia's forest sector is old and in poor condition. "There is a need for EUR 10 billion in investments", he states.
In Uronen's opinion, Russia has many opportunities, but the risks are considerable. "They apply to wood acquisition and logistics."
"The timber tariffs and the behaviour linked with them will certainly not increase confidence. Hopefully the whole thing will go away, but it does have an impact on the willingness of companies to invest", Uronen says.

Russia has vast forest resources, but they are used inefficiently. Plans are for annual felling of 576 million cubic metres, but currently only 130 million cubic metres are harvested from Russia's forests.
Russia's production of pulp, paper, and cardboard is 10 million tonnes a year, whereas Finland produces 14 million tonnes.

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