Russia's invasion of Ukraine on 24 February came as a shock to many in Europe and around the world. In addition to the human cost, the war is having a significant impact on global markets, including the trade in forest products. We can see that the conflict is affecting forest product markets in three main ways:
1. Trade restrictions.
Western countries have introduced trade sanctions against Russia and Belarus on both the import and export of many products. Russia and Belarus, in turn, are responding with counter-sanctions. Meanwhile, Ukraine's production and export of forest products will drop sharply while the war rages in the country. Forest products from all three countries are now classified as “conflict timber” and are thus no longer certified by leading forest certification organisations. Together, these restrictions are shifting global trade flows. Some of these changes will be long-lasting.
2. Macroeconomic consequences.
Energy prices have risen sharply worldwide. In Europe, where Russia provides 40% of natural gas supplies, gas prices have more than doubled, driving up energy costs in many industrial sectors. Russia supplies 11% of the world's oil, and in 2022 we have experienced the sharpest global rise in oil prices in 50 years.
Higher energy costs and trade restrictions will affect the economy as a whole. GDP growth forecasts in Europe and globally have been revised downwards. As a result, the growth in demand for forest products will decrease.
3. Russian industrial growth:
Russia has large forest resources, including 33% of the world's softwood stocks and 14% of global softwood timber production. As Russia has large reserves of underutilised timber and some of the lowest timber costs in the world, it has long hoped to play a greater role in the global supply of forest products in the future.
The Russian government has set ambitious targets for industry growth by 2030. However, it is currently unlikely that these targets will be met, as the Russian industry is struggling to secure foreign equipment, spare parts, and expertise. Increasing capacity will be a challenge, but so will maintaining equipment and the quality of the forest products produced.
These three trends will define the forest products market in 2022 and beyond. The impact will be felt in both sanctioning and non-sanctioning countries in the short, medium and long term.
In 2021, Russia, Belarus and Ukraine exported forest products worth 17.3 billion US dollars, accounting for approximately 5% of total global exports. More than 70% of exports were from Russia, 16% from Belarus and 12% from Ukraine. The most important market for Russia is Asia, which accounted for 47% of export volume in 2021. However, Europe is also an important market, receiving 26% of Russian exports and 83% of exports from Belarus and Ukraine.
Regarding demand for forest products, these three countries are less significant in global markets. Given the large domestic forest products industry, imports of most forest products are relatively modest – 4.5 billion US dollars in 2021.
Softwood sawn timber is the most important forest product exported by Russia, valued at 5.8 billion US dollars in 2021, accounting for 46% of total forest product exports. Other important exports are paper and cardboard (16% of exports), panels (15%) and pulp (11%). Logs account for only 8% of exports, but they are an important source of raw material for China's sawmill industry and Finland's pulp and paper industry. In 2021, Russia also exported more than 2 million tonnes of wood pellets, mainly to Europe.
Impact on sawn timber markets
One of the immediate consequences of the war in Ukraine will be a tighter softwood sawn timber market in Europe. Approximately 20% of European sawn timber imports and 9% of European supply come from Russia, Belarus and Ukraine (hereinafter referred to as BRU) – a total of almost 9 million m3 in 2021.
The largest importers are the United Kingdom, Italy and the Netherlands, but the loss of this volume will disrupt the balance of supply and demand across Europe. Europe is a net exporter of sawn timber – to the tune of almost 20 million m3, mainly to the US and China. To maintain the current market balance in Europe, sawn timber exports might need to be almost halved. However, many producers' export deals, particularly to the US, are already well-established and committed. Increased competition between European and export customers is inevitable.
At the same time, Europe will struggle, at least in the short term, to expand production in the region, as yields in Central Europe are set to decline following the spruce bark beetle infestation. Other parts of Europe, mainly the Nordic countries, have potential to increase the supply of sawlogs and sawn timber. However, such expansion will take time and will not begin before 2023/24.
China is the second largest recipient of sawn timber from BRU. China has not announced trade sanctions, and it is unlikely to do so. However, there are at least two reasons why these exports will be affected anyway: the loss of timber certification and the problems now faced by BRU sawmills in maintaining and expanding their facilities. Demand for certified forest products among Chinese consumers is low, despite the growing proportion of urban residents and high-income earners.
More importantly, timber buyers in China may require certified timber to use the wood for export-oriented products, including furniture and packaging. Now these buyers will be forced to look for alternatives. This could lead to an increase in demand for European sawn timber.
The war in Ukraine will disrupt global softwood sawn timber trade flows. Reduced BRU exports to Europe may lead to a decrease in European exports to the US and Asia. The US, where strong demand growth continues and there are few supply alternatives in the short term, will compete to maintain imports from Europe. The loss of Russian timber certification and the difficulty in expanding production in line with Chinese import demand will likely increase China's demand for European sawn timber. The current global balance of exports and imports seems increasingly difficult to resolve; all major export regions face supply constraints, and high demand is expected in most import regions. Supply must be increased somewhere, most likely in the US South. It seems that global softwood sawn timber markets will be tight in the short term.
Impact on log and wood chip markets
The war in Ukraine will affect European sawlog and wood chip markets, but sawlog markets will be affected less. Log exports from Belarus and Ukraine are small. Russia is a major exporter of logs and wood chips, but sawlog exports are mainly to China. Europe mainly receives lower-quality hardwood sawlogs and softwood chips. Finland is the largest recipient of Russian pulpwood and chips, with smaller volumes also exported to Sweden and the Baltic countries.
Russian log and wood chip exports to Russia have fallen over the last 15 years due to several trade restrictions, including export tariffs (in 2007-2008) and an export ban on softwood logs and high-grade hardwood logs introduced in January 2022. In the context of the war in Ukraine, a new trend is the EU's restrictions on all imports – now even for wood chips and hardwood sawlogs.
This is a significant challenge for the Finnish pulp and paper industry. Imports from Russia account for 36% of the hardwood pulp supply and 84% of imports, while wood chip imports account for 31% of supply and 79% of imports. It will be difficult for Finland to replace its hardwood chip supply, and a tight market across the Baltic Sea region seems inevitable. Wood chip supply is linked to sawmill operations, which could increase if timber markets are strong and it is possible to increase softwood harvesting.
These developments may affect the European sawmill industry in different ways. Overall, price increases are expected for both sawlogs and sawmill by-products (as well as sawn timber). In Northern Europe, there will be increasing pressure on wood chip prices, at least for hardwood, but possibly also for softwood due to demand substitution.
Competition from Chinese buyers for European sawlogs is likely to intensify as logging decreases in Central Europe and some Chinese sawmills look for new sources of certified timber. The decline in Russian wood pellet imports is unlikely to affect demand for European-produced pellets and European sawmill sawdust, as pellet imports are mainly intended for the industrial market, rather than the housing market served by local sawmills.
Global impact
Overall, we expect many short- and long-term disruptions to global forest product trade following the war in Ukraine. Several of these will directly affect European timber producers:
– European sawn timber markets will shrink as imports from Russia and Belarus are banned and imports from Ukraine decrease, together accounting for approximately 9% of European sawn timber consumption. Europe is likely to reduce exports to the US and China.
– China will look for new suppliers of certified sawn timber and logs to replace “conflict timber” in cases where certification is important (mainly for export products).
– Investment in sawmills in Russia and Belarus will decline as access to foreign capital, equipment and expert knowledge is restricted. Product quality will also suffer.
– Russian exports will become even more concentrated on China, and this will affect other trade flows. The new global geopolitical situation could mean that this trend will persist.
– There will be increased interest in investing in other softwood fibre producing regions to create new softwood sawn timber, pulp and paper production capacity. The US South is one of the regions where investment is likely to increase, as log prices are competitive and there is potential for additional supply. In Europe, a tighter situation in sawn timber markets could encourage sawmill capacity increases in the Nordic region.