The forestry sector in Latvia has historically been and remains one of the cornerstones of the economy, showing steady growth year after year. Both volumes and the value of production have also grown rapidly in recent years. However, given two globally significant factors – the war in Ukraine and Europe's drive to reach climate goals – Latvia's forestry sector will be forced to change. This will compel producers to look towards growth directions that involve the manufacturing of more complex products.
The forestry sector is understood to encompass forestry, timber processing and furniture manufacturing, and it accounts for approximately 5% of total added value (a level that has been maintained since 1995). The sector is developing in line with the overall economy, and its significance has remained unchanged over the last 25 years. The forestry sector accounts for approximately 20% of goods exports or 15% of total goods and services exports. Timber processing is the largest sub-sector of manufacturing, providing more than a quarter of manufacturing output.
The forestry sector as a whole coped successfully with the challenges of Covid-19 and experienced a rapid recovery in 2021 – demand for both sawn timber and other wood products grew significantly, and companies in all sub-sectors achieved record-high turnover. The year 2022 was marked by a different picture – demand for coniferous timber began to wane and prices for coniferous sawlogs experienced a slight decline. At the same time, the price of energy wood reached an unprecedented level, influenced by demand resulting from rising gas prices, creating previously unseen market conditions.
Impact of the Green Deal
Despite short-term fluctuations, the forestry sector stands out from others due to its distinctly long-term approach. Currently, it is facing change – the European Green Deal aims to both maintain high standards of living and protect the planet from the growing impact of human activity. Wood is a fully renewable resource with great potential for replacing various energy-intensive materials, yet it is already clear that forest harvesting volumes will decrease1 and economic forest areas will end up on the list of protected areas.
As the availability of raw materials decreases, the prices of both raw materials and end products will rise. The availability of raw materials is nothing new to the industry; manufacturers are already facing this in various forms. For example, this year the issue of the availability of wood chips, which are widely used in the production of various products, has become acute.
Although logging volumes in Latvia have remained almost unchanged over the last ten years, changes are expected in the foreseeable future – supply will continue to decline, as EU requirements regarding protected forest territories mandate that 30% of the land area must be protected (in Latvia, approximately 18% is currently protected). Furthermore, one-third of the aforementioned 30% will be land where all economic activity is prohibited. It would be in Latvia's interest to secure more time to gradually adapt to these requirements and to be able to compensate for at least a portion of the timber (not) harvested in protected forests with raw materials coming from so-called economic or semi-economically used forests.
Geopolitical aspects
The availability of raw materials is also negatively affected by the cessation of supplies from Belarus and Russia – due to their aggression in Ukraine, these countries can no longer be considered as cooperation partners in any form. Logging volumes in Latvia are fully absorbed by local manufacturers – as the processing capacity of sawmills is greater than the raw material available in Latvia, approximately 13% of sawlogs are imported (mostly from Lithuania). And in Lithuania, the main supplier of roundwood was precisely Russia and Belarus (accounting for up to 60% of import volume). Replacing this portion of imports entirely will be difficult; it may affect not only price but also the actual availability of raw materials.
This is another argument in favour of the European Green Deal being adapted for Latvia and the Baltic states to our actual capabilities to, at least partially, align climate goals with economic and employment objectives. In turn, for Latvia's forestry sector, this means seeking future growth in downstream products with a longer value chain. This goal is set out in the development strategy for the Latvian forestry sector, indicating that by 2030, the value added per workplace in the sector will be doubled2.
Latvia's potential
Latvian timber processing companies have huge potential to develop both the wood processing and furniture manufacturing sectors. It should be taken into account that, for example, the relevance of wood usage in construction will be determined by the aforementioned Green Deal, which will require an assessment of the “ecological footprint” of buildings. And for wood, this is significantly lower than for other popular building materials. Global steel and concrete production accounts for almost one-sixth of the world's carbon emissions. By using timber as a building material, these emissions would be significantly reduced.
The example of Estonia shows that there is great growth potential in, for example, the production and sale of wooden construction houses in the Nordic countries. Currently, Estonia is one of the largest exporters of wooden construction houses. In Sweden, imports of such houses from Estonia account for approximately 20% of the total market in this niche. It should be noted that in Norway, Sweden and Finland, wooden houses are in high demand – their market share is approximately 90% (in the family residential house segment)3.
Finnish scientists have calculated that if the share of wooden buildings in Europe grows continuously from 10% in 2020 to 80% in 2040, and if these buildings contain more wood parts than previously (beams, floors, ceilings, panelling), then 0.42 gigatonnes of carbon could be stored in total over a 20-year period. Combined with sustainable forest management, wooden construction could increase carbon sequestration in cities as well, not just in forests.4
Cooperation between state and industry
The transition to a new, more complex production model that is more exposed to the risks of fluctuation requires investment and cooperation with the state. As a financier, we are already prioritizing investment in green and sustainable initiatives, and there will be more and more such projects for the transformation of companies in the forestry sector. One of the investment directions relevant to Latvia will be the production of downstream products with a longer value chain. To promote development, cooperation with the public sector is also needed. For example, in Sweden, Norway and Denmark, legislative changes made in the 1990s allowed timber to be used more widely in the load-bearing structures of buildings without limitations on the number of storeys. The architecture industry is currently experiencing a renaissance of timber. Although timber structures are not yet as common in office and other public buildings, by combining timber with new methods, possibilities are being found for increasingly complex buildings. Latvia has several successful examples of timber architecture, but the state and municipalities will play a major role in the wider application of wood.
The EU's goal is to reduce net greenhouse gas emissions by at least 55% by 2030 (compared to 1990 emission levels). All involved parties will need courage, enterprise and foresight to transform this sector, which is so significant for Latvia, and to overcome its diverse challenges. Decisive steps must be taken simultaneously in three directions – in the representation of Latvian interests at the EU level, in the modernisation of the forestry sector by adapting to the new conditions of limited resources and growing demand, and in the wider use of wood as a sustainable building material in future projects of both the state and municipal and private sectors.
1. It is expected that logging volumes in Europe will fall by at least 20-30%. “Forestry sector 2050”: http://zalasmajas.lv/wp-content/uploads/2022/01/LV-mezu-nozare-2050_web.pdf
2. “Forestry sector 2050”: http://zalasmajas.lv/wp-content/uploads/2022/01/LV-mezu-nozare-2050_web.pdf
3. Schauerte, T. “Wooden house construction in Scandinavia – a model for Europe”. Paper and Wood Insights, 2010.
4. Ali Amiri et al 2020 Environ. Res. Lett. 15 094076