Changes in timber markets following the start of the war in Ukraine have significantly increased the demand for all types of roundwood in Latvia, which has in turn created a deficit in the availability of logging and roundwood transport services.

Artūrs Bukonts, Executive Director of the Latvian Woodworking Industry and Exporters Association, points to a problem that will affect wood processors and, consequently, production volumes and export income.

The issue of supplies

“The state forest manager, Latvijas valsts meži (LVM), is unable to fulfil roundwood supply obligations, contrary to public concerns about a dramatic increase in logging volumes due to changes in felling diameters, on the one hand, and hopes for an increase in the volume of wood available on the market for energy use, on the other. Latvijas valsts meži is warning clients of its inability to fulfil planned Q3 supplies, with some companies reporting that even half of the volume purchased at auctions will not be delivered on time,” states A. Bukonts. Furthermore, according to publicly available information, Latvijas valsts meži has unexpectedly and radically reduced the volume of roundwood available for purchase by producers in the final quarter of this year as well – for instance, while 67,000 m³ of birch firewood was offered in Q3, only 14,500 m³ has been put on the market for Q4. In contrast, LVM Forestry Director Andris Balodis stresses that LVM has so far responsibly fulfilled, is fulfilling, and will continue to fulfil all contractual obligations entered into to ensure the supply of wood products to wood processing and heat production companies in Latvia. “Given the significant changes in timber markets after the start of the war in Ukraine, there has been a considerable increase in demand for all types of roundwood in Latvia, which has created a deficit in the availability of logging and roundwood transport services,” says A. Balodis. He stresses that such a rapid increase in demand for services cannot be met by Latvian service providers in such a short time, as there is no additional logging and wood transport equipment available on the market, let alone experienced forest machine operators and timber truck drivers. “The situation that has arisen affects both private forest owners and LVM as the state forest manager. Since the spring, LVM has been actively offering Latvian logging service providers the opportunity to sign new service contracts, but the supply has not been sufficient. As a result, the fulfilment of some concluded supply contracts requires more time, yet LVM has no concerns that the wood volumes agreed upon under all contracts will be delivered to clients,” says A. Balodis.

A predicted problem

A. Bukonts admits that the industry is discussing potential reasons, and one of the main ones is certainly LVM’s inability to attract logging service providers. “As early as the beginning of February, before the full-scale war in Ukraine, loggers warned LVM that rising costs were jeopardising their ability to fulfil signed service contracts. If at that time diesel prices, the cost of repairing and maintaining machinery, the cost of purchasing new equipment, and rising staff wages had increased logging production costs by 25-30%, then when the war started, the situation became several times worse – fuel prices practically doubled, and total inflation is now in double digits. LVM did not hear these warning signals and stuck to the belief that the service price indexation system developed for peacetime would eventually catch up with both rising fuel prices and inflation in general,” says A. Bukonts. In his opinion, this was a mistake, as a result of which logging service providers chose to focus more on operations in the private sector, which apparently reacted quickly to the situation and offered adequate terms. This mistake will now cost dearly, not only for LVM itself but for the state as a whole. “Given that, for small and medium-sized woodworking companies, LVM supplies make up as much as 70% of their purchased raw material volume, changes to raw material supply plans will prevent woodworking companies from fulfilling the obligations they have already undertaken towards their own clients – the buyers of wood products – let alone planning production for the coming months. In addition, it is safe to say that the small volume of roundwood that will be available on the market and for which very many companies will compete will artificially drive the already high prices of roundwood assortments to the skies, which (not to mention electricity prices, which in our case are often the highest in Europe) further calls into question the competitiveness of our producers in export markets and their survival in general, as the prices of many wood products are falling in global markets,” explains A. Bukonts.

Everyone is waiting for a solution

“We call on the LVM council, the board, and the political leadership of the industry to find a way out of this situation, even if belated,” says A. Bukonts. He reminds us that small and medium-sized forest industry enterprises are a very significant employer in Latvia’s regions, and the income for the people working in them will be very necessary this winter. “LVM has also currently announced several new procurements for logging and wood transport services, but interest from companies remains low, so we invite logging companies and their interest organisations to invest rapidly in both human resources – forest machine operators and timber truck drivers – and in the expansion of their machinery fleets,” says A. Balodis.

What could 2023 be like for Latvian woodworkers?

The year has only just begun, and forecasting for the whole year under current conditions would be very risky on my part. It is clear that there are changes in the wood products market and that producers will have to be able to adapt to them. The prices of wood products have already fallen, but there is no reason to hope that they will return to the level of a few years ago, especially since their production costs have increased. There are hopes that the wood products market will revive in the spring of this year, as traders’ warehouse stocks will have been depleted. At the same time, the first few months of 2023 at least will be a relatively complicated and difficult time for producers, as costs will remain relatively high while finished product prices have already fallen; it seems there will be situations where producers, in order not to stop production, will also have to use some of the money earned in 2021 and also 2022. Such is the harsh reality – at one moment you manage to earn well, but the next, that excess profit has to be put back, because for large and also medium-sized companies in particular, in the context of Latvia, stopping production for several weeks or even months makes it very problematic to restart. Yes, unlike Norway, Finland and Sweden, not a single industrial plant in the industry is completely closed in Latvia. True, we have reduced output, and smaller companies have suspended operations for a time.

Is this situation influenced by the removal of Russian and Belarusian wood products from Europe?

Calculating the subjection of wood products from both mentioned countries to sanctions and their proportion against the total consumption of European wood products, one must essentially conclude that there is an impact, but it is not very huge because demand has fallen while warehouses are full. Of course, this issue would require more detail. Even more so if wood products have appeared in Europe from several countries that have relatively few forests and where woodworking can be talked about only relatively speaking, and therefore there are suspicions of sanctions evasion. A completely different picture emerges when looking at the wood product manufacturers operating in Latvia who consumed industrial wood products produced in Belarus and Russia for the manufacture of their goods. The most significant item of impact is softwood sawn timber, of which 750.4 thousand m³ was imported from Belarus in 2021, and 613.1 thousand m³ in 2020, while 352.4 thousand m³ was imported from Russia in 2021, and 228.4 thousand m³ in 2020. In total, both countries provided more than 1 million m³, or just over 72%, of the total imports of 1.49 million m³ of softwood sawn timber. Plywood was imported from Russia in the amount of 57.9 thousand m³ in 2021 (almost 53% of the total import volume of this product), which is less than in 2020, when its amount was even higher – 65.1 thousand m³. Reorienting was not easy because there were significant price level differences between wood materials produced in Latvia and those in Russia or Belarus, as a result of which several industry players faced existential questions, as they had to significantly increase the prices of final products. It was not easy for manufacturers of wooden building structures and furniture to implement these changes, even more so when there was high demand from buyers of sawn timber and panel materials in Europe at that moment and there simply were no excess wood products in warehouses not covered by buyer contracts. Currently, this issue has been partially resolved, but as a result, many wood products have a different – much higher – selling price.

But Latvia imported enough energy wood from Russia and Belarus!

That was the case. At the same time, it should be taken into account that not all of the import volume was consumed in Latvia. Part of the wood chips and wood pellets for burning were indeed consumed in our country, but part was essentially re-export – Latvia imported them and subsequently delivered them on to other European countries. Along with the drying up of the flow of wood for burning from Russia and Belarus, as well as concerns about natural gas availability and prices for energy wood – wood chips, firewood, briquettes and pellets – prices increased significantly in 2022, not only in Latvia but throughout Europe. Although people in Latvia complained about the high prices of wood pellets – around 600 euros/t – it was still significantly lower than in Central Europe, where in some countries the maximum price exceeded 850 euros/t. At present, the hype observed in the summer and autumn of last year has subsided, and wood fuel prices have also fallen, yet it has not reached the level it was several years ago. Who could have imagined that the price of firewood would reach 80-90 euros/m³, if 20-25 euros/m³ was previously considered a normal price? And can one currently say that a price of 50-60 euros/m³ is low or, on the contrary, high? Energy independence and energy security mean that the consumption of wood chips for burning in Latvia will grow from 6 million loose cubic metres a year to about 8 million loose cubic metres. In a way, this is and will be an opportunity for forest owners to get money by selling low-value wood. At the same time, the fall in prices for all wood assortments will mean that some portion of forest owners, especially private forest owners, will reduce their forest felling volumes. This means that smaller volumes of available wood will create pressure on wood prices. At the same time, it will also mean that the largest forest manager, Latvijas valsts meži, should not have problems with the capacity for forestry work and, consequently, its execution, which was a very significant problem in 2022, when logging service providers tried to work for private forest owners who paid a higher price than that specified in the contracts concluded with Latvijas valsts meži. In such a situation, service providers should return to work for Latvijas valsts meži.