Forestry companies achieved an unprecedented 25% growth in net turnover last year, setting a new record driven by global product inflation and increased production levels. This is according to data from annual reports submitted to the Lursoft database. In terms of net turnover in the 2018 financial year, the industry leaders – state forest manager AS Latvijas valsts meži and AS Latvijas Finieris – maintained their positions, with SIA Kronospan Riga remaining in third place. Meanwhile, 22 companies achieved significant turnover growth of more than €10 million last year, and 79 companies managed to grow by more than €1 million. Industry experts cannot recall such rapid income growth in the sector; 5% is usually a good indicator, 10% is considered excellent, and 25% is viewed as “fantastic” – visible, yet almost unbelievable.

+ €670 million

The total net turnover of the top 100 industry companies in 2018 increased by €670.5 million, or 25.1%, compared to 2017, with an average increase of €6.7 million per company. It should be noted that many companies have financial years that differ from the standard calendar year. As more than 80% of production is sold in foreign markets, these figures demonstrate that Latvian entrepreneurs are successfully capitalising on international market conditions and are both flexible and mobile. Many industry participants have invested in increasing production efficiency and reducing costs, thereby boosting competitiveness. The return on investments from previous years in establishing new facilities and expanding existing ones is also visible in the industry’s Top 100. Every company has its own “recipe” for increasing net turnover: for some, it is higher volumes; for others, more expensive products; and for a third group, a combination of both. Woodworkers are dedicating more and more energy to converting an increasing amount of primary processed products manufactured in Latvia into other goods with higher added value, and the results are clear. Naturally, there are also companies that experienced a decline in net turnover last year. In total, there are around 3,000 companies operating in the sector, and today it is one of the pillars of Latvian exports. Interestingly, the net turnover threshold for entering the Top 100 in 2018 was €6.5 million, while in 2017, €4.9 million was sufficient.

A testament to the past

“This is a photograph showing the past – the year 2018. We are currently approaching the end of 2019, which presents a completely different picture,” notes Kristaps Klauss, Executive Director of the Latvian Forest Industry Federation. The year 2018 should be considered an exception, during which industry companies accumulated significant reserves that allow them to successfully weather a period of relative global price deflation. “Last year will go down in history with numerous positive coincidences that allowed the industry to show an unprecedented surge in almost all economic activity indicators. As a result, companies are well-cushioned, and the sector can look calmly at this year’s unfortunate series of events,” he describes. Therefore, last year should not be viewed as a year of “celebration,” but rather as a period during which reserves were built.

Higher production volumes

“The lion’s share of the turnover growth was provided by higher production volumes at our plywood plant in Kuldīga, with the remainder coming from favourable market price conditions,” says Andris Ramoliņš, board member of SIA Stiga RM, when asked how the company managed a 46% (or €7.63 million) increase in net turnover in 2018 compared to 2017. He admits that the 2019 result will be equivalent to last year’s or, in the best-case scenario, perhaps slightly higher. “We are working just as we did last year – the factory is producing more, and forestry is on par with the rest of the year; however, net turnover is being affected by price drops in almost all markets,” A. Ramoliņš explains.

The demand effect

“Growth in market demand combined with a rise in prices,” is how Armands Apfelbaums, co-owner of the wood import and export firm SIA ACA Timber, explains how they managed to increase net turnover by almost 140% (or €23.29 million) last year. The company has strived to adapt to the most unimaginable market changes that have occurred over the last few years. The results followed. “Last year, we successfully exploited the high demand for raw materials (pulpwood) from large Scandinavian pulp mills, and we were shipping 5–6 vessels of this cargo every month,” says A. Apfelbaums. He points out that in the trade of pulp raw materials, there are times when very large spikes are observed, but these are followed by drops, which can be clearly seen in the “leaps” in companies' net turnover. Furthermore, the excellent wood product price climate also allowed SIA ACA Timber to operate successfully in the sawn timber import segment. “Everything is ‘upside down’ this year because sawmills are counting and recalculating three times over whether it is more profitable for them to import timber or to use what has grown in local forests, and demand for pulpwood has also fallen,” A. Apfelbaums says, outlining the current situation. He is currently focusing more on the import and export of firewood. “Everything flows, everything changes, and one must be able to adapt,” A. Apfelbaums replies when asked about the future. In the timber trade, one year rarely “copies” the previous one, and that is exactly what has been visible over the last two years when comparing 2019 with 2018. “Forecasts are a very ungrateful thing these days because how can one look ahead seriously and reasonably if no one is clear about the ‘Brexit’ saga and its outcome – for example, the impact on the forest sector in Europe and also in Latvia. Economic growth in Europe is also becoming increasingly weak, and that reflects on us as well. There are also active large-scale international disputes (trade wars) that affect the EU to a greater or lesser extent,” A. Apfelbaums points out regarding the uncertainties. At the same time, he reminds us that the EU has set a goal to reduce all types of emissions and to become “greener.” “If plastic bags and single-use utensils are truly banned or subject to a very high fossil fuel tax, it would be logical for them to be replaced with analogue paper products, which, in turn, will mean greater demand for pulp and its raw materials,” the entrepreneur suggests regarding the possible future.

The result of three factors

“The result of the interaction of three factors. Namely, the number of our members increased last year, and the volume of work grew, which was further influenced by high timber selling prices,” says Grigorijs Rozentāls, Chairman of the Board of the forestry services cooperative Mežsaimnieks, when asked how they managed to increase net turnover by 131.2%, or €3.7 million. The €6.51 million net turnover “bar” reached last year will also be cleared this year. “Currently, Mežsaimnieks has already sold approximately 100,000 m3 of timber for about €5.5 million, whereas last year 106,000 m3 of timber were sold in the whole year, but prices were higher. Overall, this year will see a larger volume of timber sales and higher net turnover compared to 2018,” G. Rozentāls estimates. He admits that the initial goal – to reach the €8 million net turnover mark in 2019 – will likely not be met because of a different timber assortment and pricing. “The number of members in the cooperative society continues to rise, and now – in the autumn season – logging volumes will again be at spring levels,” says G. Rozentāls.

Largest forest industry companies by net turnover, € million

* formerly SIA SBE Latvia

Source: DB based on company annual reports in the SIA Lursoft database

Largest taxpayers in 2018 (million euro, according to VID data in the SIA Lursoft database)

Forest industry companies (largest net turnover growth 2018/2017, million euro)