Coniferous structural material manufacturers have encountered a significant drop in demand for their products and, consequently, a decline in prices across European and Asian markets. Meanwhile, they are forced to purchase the necessary sawlogs for production from the state forest manager at 'fat year' prices, resulting in a loss of competitiveness and the sounding of alarm bells in the hope of ministerial and government involvement to normalise the situation.
The situation is made even harsher by the fact that in other countries competing with Latvian sawn timber producers, the same raw material – coniferous sawlogs – can be purchased at significantly lower prices (by as much as 40%) than those supplied in accordance with contracts by AS Latvijas valsts meži (LVM). As a result, companies are trying to mix the super-expensive sawlogs from state-managed forests with cheaper ones purchased from private forest owners or importing them from Scandinavia. At the same time, discussions about this problem are being held not only within industry business organisations but now also at another level, as the issue was also debated last week at the German-Baltic Chamber of Commerce.
Market crisis
“There is a crisis in the European construction market, with various countries seeing a 30–50% drop, similar to what was experienced in 2008,” says Sampsa Auvinen, Chairman of the European Organisation of the Sawmill Industry, describing the overall market situation. He points out that price increases have made many prospective homeowners very cautious, and furthermore, in an effort to curb inflation, the cost of money (loan interest rates) has risen significantly. “These factors have halted new housing construction; only those projects already underway are being completed,” notes S. Auvinen. He admits, however, that such a radical deterioration in the situation will only be visible in statistical data at the beginning of next year. “Unfortunately, there are no indicators at the moment that would allow for optimistic forecasts for the approaching 2024; there is only an assumption that the situation in European markets will start to improve in 2025,” says S. Auvinen. He is quick to add that the situation is no better in other regions of the world, such as Asia. Specifically, the inclusion of Russian timber on the sanctions list and the ban on its delivery to Europe have resulted in products from that country becoming cheap and flooding the Asian market, and not just that region. “But the Asian market has been a very important outlet for Latvian and indeed all European sawn timber,” explains S. Auvinen. He stresses that it is precisely because of this market situation that sawmills in Europe have faced a shortage of orders and, at best, are only working three days a week.
The indexation mechanism is not working
The crisis in construction, lower order volumes, and in particular the significant price drop for sawn timber, should, in the opinion of sawmillers, also be reflected in changes to the contract prices for coniferous sawlog deliveries previously concluded with the state-owned forest manager LVM. “It is paradoxical that Latvia's state-owned and, effectively, most important supplier of timber resources insists on timber sales prices that are effectively killing off sawmills,” says S. Auvinen, expressing his surprise. He cannot understand why the price monitoring system is not working or why it does not reflect the reality of the market. “Currently, the coniferous sawlog sales prices of the Latvian state forest manager are the highest in the world, and they are killing sawmills rather than fostering the development of this traditional Latvian industry,” concludes S. Auvinen. He feels surprised by this situation, as for more than 20 years LVM had demonstrated an understanding of the market situation for their timber buyers and had acted accordingly as partners (maintaining all agreements, supplying products of appropriate quality, ensuring timely deliveries, etc.) in the best sense of the word for those who purchase timber products from the company. “Perhaps the reason is that the company’s management has completely changed, or perhaps the root of the problem lies in the supervisory (Ministry of Agriculture) ministry,” answers S. Auvinen when asked where the problem might lie. In his view, if there is a political desire to preserve the woodworking industry in Latvia, then a solution will also have to be found at this level, allowing the coniferous sawn timber producers working here to regain their competitiveness. “This situation is directly affecting the Latvian economy, as Latvia’s reputation as a reliable supplier of sawn timber is being called into question. Sawn timber buyers know about the LVM log prices and are starting to buy these products from other countries, which they now consider more reliable,” says S. Auvinen.
Latvian suppliers replaced by Scandinavians
“Currently, it is more economically advantageous – cheaper – to purchase pre-cut timber in Scandinavia than to produce it ourselves in Latvia,” is how Andris Veide, Chairman of the Board of the timber trading company SIA Lameko Impex, harshly describes the situation. He points out that they are buying timber for finished production from a Swedish manufacturer. “Is it not absurd that Latvia, where one of the essential sectors of the economy is woodworking and which over the years has become one of the world's leading suppliers of coniferous sawn timber, can no longer produce this product from its own raw materials at economically adequate prices?” A. Veide says with indignation. He points out that this paradoxical situation is currently being successfully exploited by Scandinavian manufacturers, who are also entering Latvia and taking the market away from domestic producers.
Revenue does not cover costs
“Coniferous sawn timber producers began to raise the alarm about this problem and have been discussing it with the other contracting party, LVM, ever since timber prices in foreign markets began to fall. However, the indexation of sawlog prices in the direction of a price reduction not only failed to follow but at first even worked in reverse, which means that there is an error – flaws – in the price indexation calculation algorithm introduced for the first time,” explains Voldemārs Ciršs, Chairman of the Board of the coniferous sawn timber production company SIA Smiltene Impex. He points out that for timber companies working in Latvia that have signed long-term contracts with the state forest manager for the supply of coniferous sawlogs, the situation is becoming more critical every day, as the sales prices for some timber assortments on the market have already fallen to the purchase price of the logs.
“Sawn timber prices have been falling for 16 consecutive months, as there is profound stagnation in construction and timber markets globally, but the log sales prices for LVM’s long-term contract partners were only finally reduced to late 2021 purchase prices in the 4th quarter of this year,” says V. Ciršs, answering a question about the root of the problem. He recalls that the first signs of a slowdown in demand and prices for sawn products were observed at the end of the summer of 2021, while the trend that began in the middle of the summer of 2022 has still not changed direction. “It is significant that the current stagnation in the coniferous sawn timber market is being observed all over the world, whereas in 2007–2008 it was only in Europe, which meant there were opportunities to sell our products at acceptable prices outside Europe, but at the moment such opportunities do not exist,” explains V. Ciršs. He points out that this is exactly why a solution must be found and action taken immediately, as the situation for the woodworking industry has become critical over these 16 months.
“Since the middle of the summer of 2022, when the decline in sawn timber prices in the market began, we have spoken, written, discussed, and continue to do so in various formats and at various levels (individually, through the association), but until this moment, there has been no real action to resolve the problem from LVM or its capital shareholder, the Ministry of Agriculture. Therefore, we asked for support from the Baltic-German Chamber of Commerce, of which our company is a member, and the chamber’s management reacted immediately,” notes V. Ciršs. He admits that the current situation is a dead end for manufacturers, which has resulted in a loss of competitiveness for businesses in external markets and even the loss of market share or these markets entirely, significantly lower production volumes, frequent forced downtime – all of which cause continuous losses for companies – as well as staff layoffs, which increase people’s uncertainty about the future and also affects the well-being of those living in specific residential areas.
Several solutions
V. Ciršs emphasises that there can be several solutions to get out of this particular situation – the dead end: “The simplest is the indexation of sawlog prices in existing contracts in accordance with the real situation in the sawn timber market and continuing the contracts, or terminating the concluded contracts on the basis of mutual agreement without penalties against the party initiating this, and re-auctioning the freed-up volumes. As a compromise, extending the final year of execution of the concluded contracts by two more years with the allocation of additional logging volumes in state forests to compensate for the annual volume reduction, or there could be some other solution.”
“If, just recently, when electricity prices rose very sharply, the Latvian state-owned energy company AS Latvenergo could terminate contracts for electricity supply with almost everyone it had contracted with and immediately conclude new ones at a price corresponding to the market situation, then I do not understand why another company owned by the Latvian state – LVM – cannot do exactly the same?” answers S. Auvinen with a counter-question when asked what should be done.
The Ministry will not stand aside
Normunds Šmits, Parliamentary Secretary of the Ministry of Agriculture
The current situation, where the prices of finished products have experienced a significant drop, but the raw materials required for production or a significant part of them are being bought at 'fat year' prices, is unacceptable; this is not a path to sustainable development, much less growth. At the same time, I would like to remind you that the entrepreneurs themselves, by participating in the public procurement procedure, submitted their price offers at which they were ready to purchase coniferous sawlogs from LVM over a longer term. Moreover, both the long-term sawlog purchase procedures and the price-setting mechanism were developed jointly with industry business organisations, and it was known to everyone before the entrepreneurs submitted their price offers. Yes, the situation in the sawn timber sales markets has changed radically, but it is impossible to change the terms of a contract concluded in a public procurement procedure, as this could trigger various processes whose consequences could be devastating not only for those who initiate them but also for the industry as a whole. The simplest approach right now is for the Ministry of Agriculture to get involved, raising this issue at the government level to ensure the export capacity and competitiveness of the woodworking industry on an international level. The forestry and woodworking industry was, is, and will be a significant cornerstone of the Latvian economy. We have familiarised ourselves with this complex situation, and I see several possible solutions, which are currently still under discussion, with their impact, benefits, and losses being evaluated.
Prices in Latvia threaten investments
Florian Schröder, Head of the German-Baltic Chamber of Commerce
The competitiveness of the Latvian woodworking industry is causing concern due to very high raw material sales prices. Companies in Latvia are already forced to buy coniferous sawlogs at significantly higher prices than, for example, in Sweden, Finland, Lithuania, or Germany. This also affects our member companies from Germany working here, which have made significant investments in Latvia. The current situation is a dead end for manufacturers, resulting in a loss of competitiveness for businesses in external markets and even the loss of market share or these markets entirely, with significantly lower production volumes, frequent forced downtime, which all causes continuous losses for companies, and also staff layoffs, which increases people's uncertainty about the future and also affects the well-being of those living in specific areas.