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"It's impossible to change the rules every year, and everyone jumped and ran."

The head of the Far Eastern leading enterprise in wood processing and export of round timber on the situation in the industry and on the attitude towards the possible emergence of a single state operator with the exclusive right to export round timber.

How does the forest industry of the Far East live now, who and under what conditions can still export round timber, why a pulp and paper mill has not yet been built in the Far East, and there is no processing of low-grade timber, and also - will it be a blessing (and for whom) to create a single state operator with the exclusive right to export round timber abroad - all these questions of EastRussia are answered by the General Director of the RFP Group Management Company Konstantin Lashkevich

"It's impossible to change the rules every year, and everyone jumped and ran."
Photo: RFP Group

Konstantin Lashkevich

CEO of RFP Group Management Company

- What is the current situation in the industry and specifically at the RFP group enterprises?

 - We, the company, are the leader of the forest industry in the Far East, and, of course, the state policy that is being implemented today concerns us directly. Historically, since 2007, a course has been taken to close the export of round timber and process everything within the country. For this, rather than investment conditions were created, but restrictive - protective duties were introduced, which, it seemed to the state, would stimulate timber processing. Of course, we all went to banks (large companies that were engaged in a purely forestry business), took out loans, set up production facilities, but the construction period takes 5-7 years (setting up equipment, designing, etc.), and all this time Since 2007, we have paid 25% of the duty on the sale price of round timber. That is, in fact, in good times it was a small plus, because there was a good market, in bad times it was a minus, but we could not stop logging, because this is a continuous technological process, and it’s like a part of forestry - logging. Therefore, we did not earn anything on the round wood, but we built timber processing and learned to make money on it. 

Image: RFP Group

And in general, the situation in the Far East, plus or minus, is the same for everyone: someone withstood such a regime of withdrawing profits through a duty and the simultaneous construction of capacities for borrowed credit resources, but if you look at the industry that way, those who went according to targeted programs are on today everyone is bankrupt, except for us. And our situation is difficult. The only player in the Far East operating efficiently and profitably is Terneyles, which is geographically advantageous and has understandable strategic investors from Japan.

- How much are you currently paying duties for round timber?

- Today we are working within the quota that the Ministry of Industry and Trade allocates for wood processors. Today it is not a timber processor who cannot export timber in the Far East. We pay 13%.

 - That is, in general? Even at 80%, can't a “non-processor” export now?

 - Maybe, but 80% is a protective duty, in fact it cannot. This is impossible, unless you declare a ruble and violate all conceivable and inconceivable laws. Therefore, now a “non-processor” cannot export timber.

Why do we continue to export timber, despite the fact that we have built processing facilities? The fact is that people who are far from the forest always have two questions: "Why is the forest being cut down ?!" - this, they say, is bad, and the second - “How is it that round timber is exported ?! How can this be, we need to recycle everything! " Industry experts, they all understand the problem, for others I will explain: you all imagine the shape of a tree: at the root it is thicker, at the top it is thinner. In the lower part - the first 4 meters, there are often many defects, we call it "balance", that is, a high percentage of rejection of this wood goes into balance, that is, it cannot be mechanically processed. Plus what is less than 20 cm in diameter, what goes closer to the top, it is also unprofitable to recycle mechanically - the saws themselves take some percentage of the logs, plus you will have boards, respectively, with bark and ... Accordingly, you have you get an output of 50% on average, well, according to statistics. If the diameters are less than 20 cm, then 70% of you will go to waste. Therefore, in general, somewhere around 50 percent of the log is a good log that is suitable for mechanical processing, and the rest is what is inefficient, raw materials.

And traditionally, this ineffective raw material is used for cellulose, because there is a chemical processing method: it is dissolved and fibers are obtained. And, in fact, for the central regions of Russia, for Siberia, the ban on the export of round timber or the introduction of protective duties is not a problem, but is just a restriction under which loggers are forced to give these balances to the pulp and paper mill for processing, and, accordingly, the pulp and paper mill has a lot raw materials. We do not have a pulp and paper mill in the Far East.

 - This is another question - why do we have no pulp and paper mill?

 - Very simple. Larch dominates in our country, no cellulose is made from larch, and if they do, then less than 10% is added there, resulting in specific cellulose, which, in general, is not a market driver today. And 50% of our raw material is larch. We attracted Pierre's company (international consulting and engineering firm Pöyry PLC, which later merged with the Swedish company ÅF in AFRY - ed.)... They studied all our resources, they calculated everything for us and said: "Guys, the pulp and paper mill does not fly with you, unfortunately." Unfortunately, the pulp project in the Far East is not economically viable.

Image: RFP Group

Then we have gigantic distances, from Primorye to the north of the Khabarovsk Territory, several thousand kilometers, that is, there is no localization. We have the growth of rocks, we have hills, and this is a complex relief, and we do not have such a cubic density of output, as, for example, in Siberia, and such diameters. Our forest is very mature, that is, it is of good quality. Our larch and Christmas tree are much denser, they have excellent physical and mechanical indicators, but volumetric indicators - the density per hectare that we shoot, it is less. Therefore, in general, there are no prerequisites for a pulp and paper mill.

- But half of your forest is spruce?

- And there it is impossible ... Here is at least a plant with a “million” is needed. To load it, you need 7 million cubic meters, for example, to aggregate only balances and small-sized meters, where can we get such a volume? The entire harvesting of the Far East today - 10 million needles. It is impossible to accumulate it in one place today, and small pulp and paper mills are also economically ineffective. Well, by and large, well, well, we will make a pulp and paper mill for the Christmas tree, but what for the larch? The same plus or minus mechanisms must then be for a given breed. Therefore, this story does not work, everyone tried, but in the end everyone understands that this is a non-working story.

And plus we also have seasonality, for example, in winter we harvest more larch, we harvest it excessively, and in summer we harvest more Christmas trees. But, for example, in the winter we also need to recycle the tree, the factories must work, well, this is a Kalashnikov assault rifle, it must work, this is a conveyor belt, this is a clear, continuous production around the clock. And it turns out that I have to design capacities and do logging in a narrow way. That is, accordingly, I have an excess of larch in winter, which I need to export, but I cannot stop harvesting. And it's the same with the tree. Therefore, there is a surplus, a conditional surplus of this round timber, which I need to put somewhere in order to provide my processing with 100% high-quality, classy raw materials.

And the only opportunity that existed and exists today within the Far East is export. Because China accepts all these raw materials, they have a huge number of small processors, plus pulp and paper mills, which collect and select all this. Yes, pulpwoods are quite cheap, sawlogs cost good money, but overall this is a very understandable market. And today we are faced with a situation that the ban on the export of round timber leads to the fact that we have to conditionally throw 30% in the forest or somehow dispose of them, but we cannot quickly make some kind of recycler at the snap of our fingers. Theoretically, it is possible, in the horizon of 5-7 years, but we cannot quickly. And the second point is that this winter / summer difference, what to do with this surplus forest? That is, we cannot, roughly speaking, store a large volume for six months, so that it lasts from winter to summer or from summer to winter. Accordingly, there is also an imbalance in the balance. And this is all, unfortunately, this is the state policy that is under way today, it loses sight of this, because it is a very narrow specificity of the region.

 - As we all remember, since 2007, the state policy has been aimed at increasing processing, why over these 14 years the enterprises themselves have not created opportunities for processing those very surpluses?

- It's very simple: the question is in the economy. For example, today there are no obvious products that, through mechanical processing of this low-grade, pulpwood, small-sized, get a profitable product. There are simply no obvious solutions. Only in the last five years has a market appeared, for example, for fuel pellets for long-term offeys with Japan. And the economy works there only if you take timber waste. If you take a “balance” - a whole log, even if it is not as high quality as a “sawlog”, you will get a minus economy on it. Therefore, the whole question rests on the economy. You cannot build a pulp and paper mill, because it is not the same structure, but the processing of low-grade wood, it is very low-profitable or unprofitable.

Image: RFP Group

Why, for example, do the Chinese manage to cut, but we do not? Because there is a huge number of small consumers in China and a huge number of those who keep sawmills. So he bought three logs, looked at it: "Yeah, then I sawed it two meters apart, cut out a defect, then I will cut it into packaging, slats, dissolve, here for this, and I have waste at the pulp and paper mill." There is simply a huge number of consumers, a huge number of buyers, so this is possible. And we have a conveyor system, that is, only standardized raw materials, mass processing and commodities that we send are effective. Therefore, there is simply no cost-effective product that, given the current cost of borrowed money in the Russian Federation, would allow us to obtain an economically effective project.

 - What way out of this situation do you see?

- The rescue of drowning people is the work of the drowning people themselves. We are told: "Build capacities!" We understand: a year - for design, a year - for the beginning of construction, contracting, if this is a serious production, financing, cook all the legal mess, and you can build some kind of large production. A small sawmill can be built even tomorrow, but today it does not fly, because there are also restrictions on wood products, that is, there are requirements for wood products, otherwise they also begin to be subject to protective duties. Therefore, we simply do not have time to do it.

In general, there are many recipes. You can make your policy consistent. That is, roughly speaking, there is a quota for wood processors. Here it works, and leave it as it is. All mechanisms have already been created for the Far East, just now, due to the fact that a new initiative has come, they simply reset everything that was done in the Far East separately, and are trying to drive everyone into the same rules. Therefore, the first thing is to leave the Far East, as the policy has already been worked out over time: a quota for the Far East for wood processors. Roughly speaking, we provide ourselves with raw materials, we sell everything that is not needed. This is, as it were, one option - do not touch anything.

The second option - this is what Yuri Petrovich Trutnev proposed, recently discussed in the press - this is the creation of a kind of unified state-owned company that would export round timber that is not in demand by timber processors. So that it is a kind of such a valve, a single portal in order to dump to the export market that wood that we cannot export, and, for example, the income earned from this process, to reinvest just in these low-margin projects, in utilizers at Dalniy East in a public-private partnership or in some kind of joint projects. I think this is a good idea. The question is - so as not to turn it into someone else's, so to speak, structure ...

 - Feeder?

- Feeder, yes. Therefore, I would like to present to your attention our vision of a way out of the situation.

Image: RFP Group

We are wood processors and also loggers, but we do not do all logging ourselves: many contractors, many small suppliers, etc. That is, today there is a mechanism: the Ministry of Industry and Trade gives a quota to timber processors. We suggest leaving it that way. That is, the Ministry of Industry and Trade gives a quota to timber processors, we send high-quality timber for processing, and unclaimed round timber, that is, these are reserve volumes and low varieties are sent for export with the help of the state operator.

How do we see the work of a state operator? For example, the Russian Direct Investment Fund, KRDV, state banks create such a state-owned company, for example, RDIF can enter the assets and competencies of the RFP Group. You can offer to join the project to other wood processors, as founders or on the board of directors. Why do I think this is important? Because then transparency will be ensured. That is, we understand everything, we, the market experts, will understand whether our round timber, which we transfer to the state operator, is being sold at market prices or not. Here transparency must be ensured. And we, as we see: that, for example, from the "balance sheets" the state operator will take conditionally "zero", because if only it was bought for any money above the cost price. From a "sawlog" less than 18 cm - 5% of the price, and 18+ - you can take 15-20%. This is assuming a good market. When the market is bad, all this must be zeroed out in order to be able to withstand competition in this market. And all this should be exported.

According to our calculations, with a quota of 4 million for the Far East, this state structure will accumulate about $ 20-40 million a year in profit, well, margin. There will be some operating costs, etc., but in general it is from 20 million. That is, this is just an investment resource that can be generated by a state structure and already create investment projects also with wood processors or with some strategic investors. It would be a good valve, an understandable investment mechanism, understandable investors, an understandable structure, an understandable system, transparent, understandable, in accordance with the president's decision and, in general, taking into account the specifics of the Far East.

- But this system will immediately knock the spirit out of the numerous army of small purveyors, not processors.

- Well, firstly, in the Far East, small processors who have not built timber processing, they no longer exist. All. This topic is already closed.

- That is, anyone who has a sawmill, who has a clearing, will be able to export surplus timber, so it turns out?

- Anyone who has not just a Chinese sawmill, but that it is a technological, complex processing, so that waste does not spoil the environment, that there is pellet production or some kind of slab production, so that there is mechanical processing, so that everything is according to the project. Not that they set up sawing somewhere, burned the waste, roughly processed it and sent it - no. Here the state operator is within the framework of a quota, that is, a quota is issued by the Ministry of Industry, it is issued, in fact, only to those companies that confirm their production capacity.

As for small ones, no one bothers to build a processing plant, get timber, apply for a quota to the Ministry of Industry and Trade and then export unclaimed timber through the operator. This is a very understandable mechanism. But with a prerequisite - you become a processor. And as for small logging companies, who, for example, say: yes, we don't want to build anything, we don't want processing ... No problem - make long-term contracts with timber processors for the purchase and sale of timber or logging, and we can easily create such a market, what, guys, here you are, even we can transfer our rented forest to you, please come in, work, show your efficiency, bring us all the timber, we will take the necessary one for processing, send the unnecessary for export. And an understandable design, where a state company is at the head of the pyramid, then wood processors go and then loggers go, who globally form the main cost in general in this process.

- So you said that, according to rough estimates, the state operator will withdraw something in the region of 40 million from the market, right? I look at the official export figures of the Far Eastern Customs Administration, which were given for 2020: exported from the Far East - all timber there - for, roughly speaking, $ 900 million. It turns out that 40 million will have to be withdrawn from this money. Are the companies ready to give it back?

- Look, let's see how much we give today through the export duty? We give the same amount, even more. Therefore, by and large, if for a state operator, of course, the duty is "zero", he simply takes this money in a targeted way and then invests in a targeted way. Of course, we will be ready to give it away in a high market. Well, zero "balance" ... I have "balance" and "thin measurements" - the biggest problem. 0 and 5% will arrange me for the operator's services. If I have this excess sawlog, I am also ready to give 20% in a good market. I gave 25% for 10 years. Therefore, for me, it’s an understandable story. Yes, when there is a bad market, we will all come and say: guys, the market is bad now, let's change the conditions.

Image: RFP Group

Now I will just give you an example of what a bad market is. Here's a look, from 2012 to 2020. You see, the "red" zone is a sharp fall in the markets, in which we all went simply into a terrible negative. You see, it takes a long time to recover, then it sinks again. You see, here are 2019 and 2020 - we have a severe drawdown, but we are only now experiencing a rebound in prices, that is, a new cycle is on the rise. Therefore, this is a very cyclical story, a very volatile market, a very spot one, so here, of course, like in oil, withdrawals should occur only during the period when the market is good.

 - And why do we, for example, do not supply massively products to America, but limit ourselves only to China and neighboring countries? In America, the volume of housing construction has now skyrocketed. More recently, American homebuilders have asked President Biden to lift duties on Canadian timber imports altogether. But Canadian shipments are falling steadily, and Canadians are limiting logging in their main forested province, British Columbia. Accordingly, America is forced to replace all these stories with supplies from Europe, from other provinces of Canada.

- Now is really the time of the rise, and at the same time a completely limited supply. And the winners are those countries that have developed intensive forest management, such as New Zealand. New Zealand is the No. 1 exporter of roundwood to China, it supplies more roundwood than the entire Russian Federation, you can imagine, that is, it just ... it always amazed me. And we, of course, have lost this market, it is a fact, both in Japan and in China, we have lost this market.

Why don't we ship to America? This is logistics. We have a very low trade turnover with the United States, we do not have such a traffic of return cargoes of cheap, specialized ports. If from New Zealand, for example, a 40th ship loaded with timber travels to China, then we have 5th ships - this is the maximum, and it is always expensive, it takes a long time to load. That is, we are losing the port logistics in terms of logistics. Therefore, the answer is simple: very expensive logistics. It is impossible to shoot round wood to the USA.

As for sawn timber, I want to say that many are now reorienting from Russia, many are now finding these markets. By the way, the Korean sawnwood market has just boomed over the past month, prices there have grown 1,5 times, moreover, we were strangled there all the covid year just harshly. Why? Because Europe was offended by the Koreans, left for America, and the Koreans were left without lumber at all. Therefore, we are now, to some extent, everything that we can produce, we are shipping, there are good prices now.

On the whole, everything is positive on the market, the main thing now is to ensure a balanced policy for enterprises in the Far East and throughout the Russian Federation as a whole, so that we can these markets, we can be competitive in them. And the factors of competitiveness are actually not so few, and most of them are not in our favor.

- Can we now recycle everything that we procure in the Far East? To the West, balance - the log will be golden. What imbalances do we have?

- Well, about 30% we will need to mulch, dispose of in the forest. This will entail an increase in the cost of timber harvesting by 1,5 times. This will lead to an increase in the cost price from, conditionally, $ 200 to $ 300 per board, that is, it will again nail us even at the level of high market prices to zero profitability, so this is a disaster, and this is at best. Therefore, it is very important for us to find a solution to export this unclaimed reserve and pulpwood, and small-sized ones.

Picture sam8927 from the website Pixabay

Of course, we need to build capacities, we understand that there is no other way, we need to focus on mechanical processing, which is more, maybe, difficult, to learn to work like the Chinese, only on the scale of our industry, to attract investors for more finished products, to make glued products here etc. CLT-panels, for example - you can cut these "thin meters" for them. Pellets to do with the Japanese, on long-term offtakes to conclude contracts. We just need time, we need 5-7 years to accumulate resources in order for this process to be evolutionary ... well, even this is a revolutionary approach anyway - in 5-7 years to turn the industry around in a low-grade way. But in general, there is no other balanced and painless way.

- That is, it is already unprofitable for you to drive round timber for export, right?

- No, now it is still profitable, within the framework of the quota. But now I am already preparing a reduction for those areas that do not fit into my quota and which do not fit into the technological balance under 2022.

- By the way, the quota, you do not have enough of it, it turns out. How is it formed? How much would you like to export for export, but how much do they give you?

- Now, the distribution was 4 million cubic meters of round timber for the entire Far East. In principle, this is a normal volume, it was calculated strategically, it was almost never chosen, because it was not launched here, it was not launched there, it is not at full capacity, etc. Plus, there were prohibitions that, for example, you should only take your round timber, but you could not save a comrade who was behind the wall, because there was no explanation that it was possible, for example, they could take this round timber for yourself, part for export because everyone is afraid. We are a "white company", we are afraid that we will be called "black", so we are very careful about all these state histories.

But in general, they said that it was 4 million, and immediately a bill came out - to cut it in half. Now, if they cut it in half - that's it, we will face the problem of 2022 already in September. Therefore, we are all afraid now and are waiting for this to be cut off from us. There is a draft resolution, it went through all state procedures. The entire Far East, which wrote its objections, remarks, proposals in the framework of public discussion, was absolutely such a clear answer: there is a decision of the president and, relatively speaking, it is not subject to discussion.

- To summarize - if this single company appears with the exclusive right to export timber, and you dump your balance to it, will this be the best way out for you?

- Yes, we will be glad, we will be glad to participate in this with our expertise, because we are the successors of the Soviet "Dallesprom", we have all the expertise, we will help, we will prompt. Our shareholders are the Russian Direct Investment Fund, this is a state corporation, and we generally understand that transparency and strategic character of this process can be ensured and we very much hope that Yuri Petrovich will develop this idea further, and Vladimir Vladimirovich will hear.

- Well, for complete clarity. That is, you will throw this forest there, you will not make money on it?

- Let's just say - we will not lose, that's what is important. That is, today, if you bury it in the forest, relatively speaking, dispose of, mulch, grind - this (I'm not talking about environmental consequences, if we do everything according to the rules, this is all normal, but we are a responsible company, and many may not do) is primarily the economy. When I don’t take 50%, well 30-50% from a felling area as a commodity, even if I sell it at cost, then my conditionally fixed costs will all fall on the sawlog that I carry. It will become gold for me, and I will become uncompetitive in comparison with Siberia, not to mention New Zealand and everyone else. So it's just a matter of competitiveness.

 - Barrage measures were introduced, among other things, to bring such “black lumberjacks” out into the open, who, despite all the information systems, still manage to sell timber abroad. Now the pilot project Lesvostok is to start working in the Khabarovsk Territory and Transbaikalia. Have you heard anything about this? Do you expect anything from this? Or are you more worried about the issue of 2022?

 - Of course, we are more worried about the problem of 2022, because it's like dealing with accounting problems when your production is stopped. But, nevertheless, it is very important to ensure transparency in the forest. In general, there must be a master in the forest. The state today is a cheesy master, cheesy. Because all over the world, if you look at it, either there is private ownership of some separate land plots, the most fertile forest plots, and there they are engaged in intensive forest use. If, for example, 10% of forest resources in the Russian Federation are made private property, then this will be a tremendous relief for nature, and for business, and for everything. But so far there is no such political will. Although the whole world is moving towards partially allocating the most fertile forest areas for private property, and around the pulp and paper mill within a radius of 200 km.

As for the accounting system, here today the existing EGAIS, in principle, he disciplined us, we began to do a lot of things, he even helped us to establish accounting. There were many at first such stories, unworked, raw, but then twisted, tweaked. Is it possible to bypass it? Any system can be bypassed. But, nevertheless, today, as, you know, there is a map ... Any forest management today is outdated in our country: what is growing in reality and what is on paper is all outdated documentation. Today we have a calculated cut of 3 million, and we are harvesting 1,5 million, and not because we do not want more, no more. Outdated forest management, it is necessary to correct it, it is necessary to change it.

And this should be done by the state, it is the owner. We also build roads, we also maintain the entire forest infrastructure, fire extinguishing, fire protection measures - everything is on us, on the tenants. Of course, when companies are small, they don’t do any of this: they made their way there, chopped up, ran away, left everything. All restorative landings on us. Therefore, today we are private companies, large companies, as it were, is forestry. Unfortunately, today the system of leshozes, it is practically destroyed, today there is no owner in the forest. And the fact that this should be done seriously ... But this should be done on a scale of 20, 30, 50, 100 years, to look long-term and be consistent. You can't change the rules every year, and everyone jumped and ran. And, unfortunately, this is not a carrot, but just a whip and whip. And we are doing this, and the shareholders are not doing this because it is profitable for us, for 10 years we have been in this business, we have not earned anything, we are only investing.

Those companies that did not deal with these issues stopped paying on loans, stopped paying taxes, went into the gray zone, they went bankrupt there, criminal cases, etc. But this is not because bad people did it, understand that, in principle, people tried to survive, but in a different way. We had the opportunity to negotiate with banks, restructure, take money from shareholders, and something else. But most of the companies that started there, projects such as Asia-Les, Arkaim, are all now in bankruptcy. Why? Because the conditions for business were quite difficult, it was easier to fly into this gray zone and into crime than to develop. Expensive money, there are always a lot of obstacles of all sorts, a lot of administration ... Of course, we are children and the brainchild of the current politics. But I believe in a bright future, I believe that we can find sound solutions, investment decisions, we have wonderful people working in the industry, professionals, they still exist. We, large companies, are engaged in the reproduction of their personnel, but, unfortunately, it is difficult to raise the best personnel when we are so low-margin, unprofitable due to the withdrawal of profits by the state through duties.

- The last question - how long do you think it will take to create such a single state operator? Now you are planning your actions based on the fact that the export will be closed, in the hope that there will be a single exporter. How long does it take to create it?

 - This process is not fast, because it requires coordination at various levels - federal, etc. God grant that this will appear before the end of the year, if now this initiative develops in some kind of applied direction. Unfortunately, it can take a long time from statements and a good idea to implementation, and she risks dying along the way at different stages. Therefore, if there is the will of the president and he hears this problem, and within the framework of the global strategy this will be an understandable decision for him, then this, of course, will happen quickly. If it comes from our initiative, from some kind of regional initiative, it will be practically impossible. Therefore, here we are faced with the fact that the strategy does not take into account tactical regional issues, and only the president of the country can make the decision to create a state operator for exporting round timber from the Far East.


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