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The Far East says goodbye to round timber

On December 5, the last carriage with an export consignment of round timber will leave for the border with China. Alexander Sidorenko, chairman of the Dalexportles association, spoke about what will happen next with the forest industry of the Far East in an interview with EastRussia.

In two weeks, a kind of "deadline" will come, which the railroad workers set out to timber merchants to ship round exports for export from the Far East. In accordance with the instruction of the President to the Government of the Russian Federation, from January 1, the export of unprocessed timber should be prohibited. Export duties on round timber have been raised since 2007 - then they were raised to 20%, now they are 80% of the delivery price. The business, which has historically and systematically been engaged in the export of "round timber", has long and persistently been offered to engage in wood processing. However, in fact, only a few organized it. According to an industry expert, in the near future the industry will face an almost universal shutdown: enterprises will begin to be mothballed or completely closed. The reasons for this business behavior are that under the current conditions woodworking in the Far East threatens enterprises with bankruptcy, believes Alexander Sidorenko, chairman of the Dalexportles association. He told EastRussia how the industry lives and what awaits it in the near future.

The Far East says goodbye to round timber
Photo: "Dalexportles"

- Alexander Nikolaevich, what is the Far Eastern Association of Timber Industry and Timber Exporters in 2021?

- The Dalexportles Association was founded 31 years ago, consists of 24 largest timber holdings and companies in the Far East, it also includes shipping companies, banks, owners of rolling stock. The total export volume exceeds USD 0,5 billion per year. For woodworking enterprises, this is approximately 80% of the woodworking of the Far East. The number of people employed at the enterprises of the association is over 15 thousand people. These are the most progressive enterprises, the management of which is thinking not only about making money, but also about systematically developing the industry, improving the quality of life of people living here in the Far East.

- What is the mood in the industry on the eve of the ban on the export of round timber? Recently, the news came across that in the first half of the year exporters of "round timber" increased their income by 20% due to high demand. And, despite the prohibitive duties, 61,4% of the export volume of timber products from the Khabarovsk region, for example, is precisely round timber. In total, according to the Rosselkhoznadzor, the region exported 3,44 million m3 forest products. Is this an attempt to "breathe" in front of the inevitable?

- Of course not. You can't breathe here. And there is nothing impressive in this data. Profitability rose on the back of rush demand, this is a one-time, short-term surge. As for export volumes, for the Khabarovsk Territory the normal figures are 8,5 million cubic meters per year - and this is an average figure. In general, the Khabarovsk Territory should export 12 million m3 annually. So the current 3,44 million cubic meters in six months are depressing indicators and the autumn months and December will not bring radical improvements. JSC Russian Railways and railway carriers have already warned that the last carriage for export from the Khabarovsk Territory should leave by December 5, because until it reaches the border, until all the procedures, registration are completed, and it is guaranteed to cross the border by 24:00 hours on December 31 2021, because then he simply cannot physically do it, even if the cargo is declared. Therefore, the indicators for the year will not increase much.

- What is your forecast?

- Our latest official statistics from Dalexportles show that in 10 months of this year, the volume of exports from the Far East decreased by 20,2% compared to 10 months of last year. At the end of the year, a reduction of up to 50% is forecasted. That is, we can say so that the 21st year is degrading compared to the 20th, the 20th - degraded compared to 2019, and this trend can be traced up to 2007. Every year we export less and less.

- And what now, when the barrier will go down altogether? What is the mood in the industry? Everyone covered their heads with their hands - closed their eyes and ears, waiting for what will happen?

- There are no fearful ones in this industry, no one closes their ears and eyes. There is a cold-blooded assessment of the possibilities. The situation is such that from January 1, 2022, severe restrictions on the export of untreated timber come into force. This is out of the question. Everyone is now thinking - what can be done in this situation. It would seem that the organization of processing suggests itself, but now, due to various restrictions, including pandemic ones, we have a delivery time for domestic sawmilling equipment - from seven to ten months, and a year ago the deadline was two months, and for imported ones earlier than 2023 the year is not necessary. Here is an example "Terneyles" ordered drying chambers in February 2021, under the contract they will pass in March 2022. Installation under the contract for four months. And they will start working only in October 2022, when the packaging line is put into operation, since it is difficult to manually remove 300 thousand cubic meters of boards from the drying chambers and pack them. There are no so many people. Therefore, each manager, owner of an enterprise engaged in the forestry industry, assesses what specifically he can do now, in these conditions. At the same time, no one indulges in the reasoning "is it good or bad." At the moment, this is so. And to put it bluntly - in fact, no one is able to increase wood processing from January 1, 2022.

- Was it not too late for managers and owners to start this assessment?

- And then let's ask ourselves this question - the very strategy of industrialization of the forestry industry and the requirements for the transition to deep processing began 14 years ago - in 2007. And they tell us: "We warned you!" But we also want to ask: "What have you done so that we can build factories?" During these 14 years, we have not built a single kilometer of power lines, we have not built a single kilometer of railways. The network of motor roads in the region is several times less per capita than in the European part of Russia. And the territory is much larger. They object to us - they say, you earn, and build yourself! But one must understand that it will not be possible to shift the underdevelopment of the infrastructure to the cost of the board. This board has a limitation - consumer value. Shifting the underdeveloped infrastructure of the territory onto the business, the cost of the board becomes more expensive than the market price. Business is unable to fulfill government powers. From Komsomolsk-on-Amur to Nikolaevsk-on-Amur, businesses are unable to build transmission lines that would provide an acceptable tariff and cost of electricity. Small villages in the taiga are supplied with electricity by subsidized diesel power plants - 42 rubles kilowatt / hour, how much will the board sawn there cost? The timber business is also unable to build a railway from Komsomolsk-on-Amur to Nikolaevsk-on-Amur in order to reduce the cost of logistics. What are we talking about?

- And everyone worked as they worked ...

- Yes, everyone worked as they did. Business is adapting to existing opportunities. We know that it is necessary to organize woodworking, we support it, but there are no conditions for this.

- But some elementary woodworking could be established nevertheless?

- And what do you mean by elementary woodworking, raw board? For example, the PRC market consumes raw boards. This market does not require dry boards in principle. And we supply them there. Since July 1, a 10% duty has been introduced on a raw board. Chinese buyers say: "If you want - dry, but we will not pay extra for it!" Why transfer European consumer properties to the Asian market?

- How did the news that the previously promised state corporation, a single exporter of round timber, will not be reflected on the industry? Was it not such that everyone hoped for her to the last, hoping to earn at least a little by handing in their "round timber", and now they were left with nothing?

- It is unlikely that some heads of forest industry enterprises were betting on the fact that such a state-owned company would appear. Yes, it was planned, but it did not work out - and okay. They took into account, of course, calculated, but here everyone is looking not at who promises and plans what, but at what has been done and what regulations exist. Maybe someone has a habit of "eating with their eyes", but not those people with whom I work.

- And what, will all be closed in January?

- Why since January? They are already closing, stopping the workpiece. As I already said, the last carriage must be sent in the direction of Grodekovo by December 5, and the carriages have not been loaded in the direction of seaports since October. Because there are simply no steamers. What does it mean? This means that the timber industry enterprises no longer bring timber from the taiga to their warehouse, since everything was taken out of the taiga back in September, and in the taiga they finished cutting it back in August, and since August the industry began to reduce both harvesting and supplies. All timber warehouses should be empty by December.

- All that will be filed for bankruptcy now?

- Everyone decides for himself what to do. There is no single recipe. Most likely, they will simply close, mothball production. To close it means to cut staff and close the office. This is not bankruptcy.

- Well, here, for example, the Shelekhovsky timber industry enterprise, their warehouse is full of timber, there is nowhere to send. So what? The leader will gather everyone in January and say: “Everyone is free”?

- No, he will tell you right now. The industry employs people who are always looking ahead. In accounting there is such an item - "Deferred expenses". At the moment, the manager bears expenses that in six months will only bring returns, and if nothing happens in six months, he will refuse these expenses today. Therefore, enterprises are already curtailing their economic activities. As a result, from January 1, 2022, 25-30% of enterprises from the total number of those who are now employed in the timber industry of the Far East will remain in operation.

- Isn't it an attempt at such pressure, they say, "Let the authorities, save us!"

- What pressure can there be? Who will refuse to earn money? If there were conditions in which processing was profitable - cheap electricity, logistics - do you think someone would give up the opportunity to earn money? We have been set clear and reasonable requirements - from January 1, stop the export of round timber. What we can do? We can only stop. Refining is now unprofitable. And if the export of round timber stops, it will become even more unprofitable. To continue processing now means that the cost will exceed the profitability, which means deliberately driving oneself into bankruptcy, with all the ensuing arbitration and criminal consequences. Therefore, the most reasonable way out for most is to close and start a business in another industry, or even go on a really well-deserved rest. The industry is aging. Young people don't come. Young people do not consider their future in the taiga without work.

- But they promised support measures, cheap loans, to those lumberjacks who take up processing and start organizing sawmills and drying facilities. Isn't this a working diagram?

- Getting a soft loan is a working scheme, but returning it is already non-working. You can take the money, and they will give it, but you will not be able to return it. Because, I repeat, in the current conditions in the Far East, processing is unprofitable. At least, because our electricity is 4 rubles per kilowatt / hour, and in the Irkutsk region - below the ruble. Because on half of the territory of the Khabarovsk Territory, there is no railway, and where there is a railway, the tariff is constantly increasing so that it makes it unprofitable to deliver a log even to Siberia, and even more so further to the west. We have an acute shortage of people ... You see, the leaders of the timber industry enterprises are smart people. And if something doesn’t work out for them, it’s not because they don’t know something, they don’t know how, or they have malicious intent. Objective circumstances are such that, under the existing conditions, processing is not profitable. We have Arkaim, Business Marketing, Rimbunan Hijau, RFP Group at last - all at a loss. They didn't get stupid, and the results got worse.

Look how it was - let's count on the same Amur in the early 90s the timber was loaded for export - in Nikolaevsk-on-Amur, Mago, Podgorny, Takhta, Bulava, Novaya Ferma, Nizhnyaya Gavan, Decisive, Kiselevka, Litvintsevo - ten port points from where the forest was loaded onto steamers. And now? Nikolaevsk-on-Amur, Tsimmermanovka, Litvintsevo - three out of ten. And what - the people who earned there, cut off their income? They are not suicides! And this once again confirms that the existing conditions do not allow making money on processing.

- But why is everything so bad? Is there really no chance to make wood processing profitable in the Far East?

- We are in the conditions of international, global competition - with the USA, Canada, New Zealand, Europe and at the stage of logging we are still competitive. Our prime cost is comparable to the American one, to the European one, but when we start woodworking, our prime cost rises sharply and exceeds the international one, and we cannot withstand this competition and are forced to sell at a loss. We are losing precisely in the cost of woodworking, in its prime cost. In the current conditions - infrastructural, logistics, tariff, tax - the Far East can compete in the forest industry on international markets only at the level of raw materials. As soon as processing technologies are connected, we all lose. It's not a business that has created such conditions for itself! There are a lot of factors here. Let's not forget that our wood is by no means of premium quality, half of which is thin larch, which is capricious in processing, and is not even suitable for cellulose. At the same time in Japan the price for Siberian larch is eight dollars higher than for ours.

- And export to Siberia for processing?

- There are two points. Siberians may and are ready to take our log for processing, but again at the price, how much it costs from them with its cost price. Who will pay for the carriage? In addition, I have not heard that in Siberia, for some reason, a business has suddenly created excess woodworking capacities in advance, so that by the way, by the way, millions of cubic meters will receive third-party timber. There, too, investors monitor the comparability of the volume of woodworking with the volume of logging. And then - what will it fundamentally change for the Far Eastern timber industry? Will we cease to be a raw materials appendage of China, and will we become a raw materials appendage of Siberia? It is clear that when delivering to Siberia, everything happens in one country. But we live not in Siberia, but in the Far East. How will the welfare of the population living in the Far East and the quality of life improve? Selling to the PRC we at least earned, but selling to Siberia we will exhaust ourselves and all the participants in the process, then we need to subsidize the tariff, and the issue has not yet been resolved, then not all volumes will be able to accept volumes. Our electricity tariffs will not decrease, the "shoulder" of transportation from the taiga will not decrease either, as will the high cost of finished products, which, taking into account all the factors, as it has already become clear to everyone, is uncompetitive.

- What's in the bottom line?

- Nothing new. The business works where it is profitable for it, where it can earn. Where it is unprofitable - he will not work, there is no place for him. This is objective. 

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