This year's Paper Week is meeting at a time when business conditions for U.S. forest industry could not be worse. I was more optimistic a year ago. But the U.S. deficit, the protracted conflict in Iraq, and the on-going, low-cost advantages of emerging countries, makes a recovery for the industry, unlikely for some time.
The publicity for Paper Week, by RISI/Paperloop for one, stated that "North American markets… have largely matured, while the emerging markets of Eastern Europe and Southeast Asia are poised for explosive growth." Put it another way, domestic industry has nowhere to go at the moment, except to close, merge, sell off or move abroad. US industry badly needs to find capital as over 50% of its machinery is 20 years old or more. The awesome amount of money needed to bring these mills up to speed is just not there.
I wrote last year, "The real threat for the US pulp and paper industry is that, no matter how healthy the economy, the scale of domestic investment may be too high a hurdle. So, new investment could go offshore."
Russia?
So where will it go? How about Russia? Three conferences I attended in the past four months all had papers on Russia's forest industries. Right now, prospects in that country aren't great. But they will be. Its industrial base is sound. Its oil and gas reserves match those of Saudi Arabia and it is a major player in the gold, diamonds and rare metals markets. Russia has a well educated population of 145 million—much of it grounded in engineering and technology skills. International Paper is already there, as are a few Europeans.
Since the collapse of Communism in 1989, Russia's forest industry has performed poorly. There has not been much new investment; most of the activity has been to tweak a little more from existing machinery and de-bottleneck the old stuff. By last year, this practice had reached its limit. So now, Russian industry seriously needs to invest to improve productivity, profitability and gain market share. There are signs that this is beginning to happen, and Voith (for one) has seen them and, in January, set up a new service to supply forming, press and dryer fabrics to Russian papermakers. The service has headquarters in St. Petersburg and branch offices in Moscow, Petrosavodsk and Perm.
Consumer Demand
The other signs include increasing domestic consumption and rapid growth in sawmilling and wood processing. A recent (Nov. 03) Jaakko Poyry study on Russia estimates that future growth will be driven by GDP, not by population growth. In other words, the standard of living will rise and Russians will develop a voracious taste for consumer goods not previously available to them. The study has already tracked healthy growth for packaging and hygiene grades. Tissue paper demand growth is predicted to rise 5.5% in 2201-2015 to 1.4 million tons per year
Last year, per capita consumption of paper and board was around 25 kgs; in the US it is 325kgs. So, when the GDP increases, the only way for Russian shoppers is up.
The leading Russian players have already attracted foreign ownership by Austrian, South African, German, Swedish, Finnish and US pulp and paper companies. But Russia wants much more direct forest investment, for which rules are being relaxed. The early investors seem to be happy with their investments.
Production in Russia in 2002 (million/tpy):
- Total paper: 3.5
- Total board: 2.2
- Total paper & board: 5.8
- Market pulp: 2.2
(Source: Hawkins Wright, Nov '03)
Timber Reserves
But more important, at present, than production and consumption is Russia's huge timber reserves. According to Earthscan and the FAO, Russia has 850 million hectares of temperate and boreal forests—or over 22% of the world's total—and the largest forest area in any one country. Some of the stands are degraded, especially around industrial centers in the Urals, the Kola Peninsula and Norilsk in Siberia. But there is still a lot of good quality timber available to the industry.
All forests in Russia are state-owned and are divided into three groups for management purposes:
Group I - Protected (21%)
Group II - Multipurpose (6%)
Group III -Commercial (73%)
(Source: Earthscan and FAO, 2002)
Russia's prospects are:
One of the best growing paper markets
Long-term growth drivers in place
Large population and rising GDP
Existing mills are competitive for domestic and export markets
Exports will increase
But the country's asset base is out-of-date and its investment needs are huge. The question remains: Who will risk it?
