The energy situation in Central Europe is quite complex, whereas for the Finnish forest industry, energy has become a competitive advantage. Inflation in the eurozone was high last year, and, according to experts, this has also affected Finland’s forest and sawmill industry. An important background factor was and remains the war started by Russia in Ukraine on 24 February.
According to information provided by Pellervo Economic Research PTT, electricity prices rose significantly in 2022, which is not unequivocally a negative factor for the Finnish forest industry. The forest industry consumes a lot of electricity, but at the same time, its production processes also generate electricity and heat. Only a portion of what is produced is needed by the companies themselves.
Companies sell their energy surplus to the national grid and local heating networks. The forest industry groups UPM, Stora Enso, and Metsä Group also directly or indirectly own shares in nuclear and hydroelectric power plants.
“At current electricity prices and during the expected price increases, these are significant competitive advantages,” notes PTT forest economist Marjo Maidela (Marjo Maidell). She believes it is likely that factories, especially in Central Europe, will be closed. This could be due to the fact that their operations are not profitable and energy availability is poor.
“In fact, energy has become a competitive advantage for the Finnish chemical forest industry,” says M. Maidela.
Production would be halted in an emergency
Energy cost inflation could also negatively affect the forest industry. As Maarit Lindström (Maarit Lindström), chief economist of the Finnish Forest Industries Federation, points out, in an emergency, a sharp rise in energy prices and electricity supply restrictions could lead to factory closures, which would create short-term difficulties in product availability.
“So far, no such signs have been observed in Finland. Many measures are being taken in Finland and other countries to secure energy supply, limit price levels, and save electricity,” explains M. Lindström.
Rising costs
M. Lindström emphasises that both in Finland and the rest of the eurozone, the “dominant” phenomenon is cost inflation caused by the combined impact of energy, imported product, transport, and raw material costs.
“Rising costs mean that companies will have to operate with lower profits if market conditions only allow part of the increase to be passed on to product prices,” notes M. Lindström.
According to her, inflation forces companies to be more cautious regarding investments. It is expected that monetary policy will become tighter and market interest rates will rise, which will affect the calculated profitability of investments.
Most of Finland’s forest industry production is exported both to the EU and other countries. Inflation weakens consumer purchasing power and can easily affect customer demand.
“Inflation gradually slows down investment and economic growth in the exporting country. This means that the exports of Finnish forest industry companies will decrease unless there are positive changes in other market factors,” explains M. Lindström. However, she does not think that inflation will necessarily lead to a rise in prices for forest industry consumer products, as international competition is sufficiently intense.
Sawmill supply volume will decrease
Tino Aalto (Tino Aalto), Executive Director of the Finnish Sawmills Association, predicts that the volume of domestic sawmill supplies will decrease.
Sawmill production is mainly used in construction. This applies, for example, to single-family homes, holiday homes, terraces, and other garden structures, which will be affected by inflation and higher interest rates.
“Many who would like to invest in, for example, a wooden house or a summer cottage, will have less money than before,” says T. Aalto. He notes that wood construction volumes grew significantly during the COVID-19 pandemic, but have now fallen.
Finland exports approximately 3/4 of the sawn timber produced in the country. Although global construction volumes have decreased significantly, Tino Aalto is confident that demand for Finnish sawn timber will remain stable, as there is currently no export of relevant materials from Russia, Belarus, and Ukraine.