Entrepreneurs working in the forestry sector are feeling the consequences of the coronavirus in different ways and are trying to adapt to the new conditions. The most important thing is to reduce frozen assets at every stage and to create a two-week work plan, while remaining prepared for a situation where demand increases rapidly.

Entrepreneurs point out that the economic situation in the industry is being influenced more by the actions of the governments of timber-importing countries and the buyers of industrial products in those countries, as well as by manufacturers in competing countries, rather than by the restrictions imposed by the Latvian government to stop the spread of the coronavirus.

"The situation in the current circumstances tends to change not just by the day, but sometimes by the hour and even by the minute, which is why what was relevant a week ago is no longer so today," explains Kristaps Klauss, Executive Director of the Forest Industry Federation of Latvia, to the magazine "Dienas Bizness".

He points out that as of 1 April, there is no state of emergency at the core of the forestry sector, as working hours have not been reduced and no staff are being laid off, even though there are difficulties with the sale of timber products. "Timber manufacturers mostly do not see their future beyond two weeks, even though planning is still taking place on a monthly basis," says K. Klauss.

He admits that this situation has arisen because there is a great deal of caution all around, especially in the largest markets for timber products. It is necessary to balance the flow of timber from the forest to the production facilities, because due to an unprecedented winter, it had become "stuck" in forest storage depots, but is now being delivered to timber manufacturers in increased volumes.

"The forestry sector is one of the strategic and prospective sectors of the Latvian national economy, which is not currently asking for help, but wants to be sure that it will be able to receive it in a moment of need. We must already start working on what we will be like after the crisis," suggests K. Klauss.

He admits that forest owners do not want to let their commercial timber rot at forest depots, while timber manufacturers already have enough roundwood in their warehouses and do not need additional volumes in the current circumstances. “For some forest owners, this situation creates a sense that the timber industry is ‘stalling’. That is not the case, but timber manufacturers want smaller warehouse stocks so that, in the event that the ‘zero hour’ arrives and work comes to a standstill, commercial timber does not have to be left to rot,” emphasizes K. Klauss. The mentioned conditions mean that a search for a new relationship and balance is currently taking place between forest owners and timber manufacturers. “A few weeks ago, when other sectors stopped as a result of the virus's impact, timber manufacturers had not even lowered their roundwood purchase prices! One must count on the fact that uncertainty about the future is increasing, not decreasing,” says K. Klauss. He admits that manufacturers of some timber products are feeling a drop in demand, especially if products were previously supplied in large quantities to consumers in Italy, for example. At the same time, producers of softwood sawn timber and panels are experiencing a shift in foreign customers.

“Yes, it is ‘quieter’ in Europe than it could be, while in Asia, a strong economic recovery is being observed, which is increasing demand for timber products. In fact, the current situation is diametrically opposed to the situation a month ago,” comments Kristaps Klauss when asked about changes in the markets. He adds that there is no uniform situation for everyone at the moment, as much depends on: who the foreign clients were, what kind of relationships Latvian manufacturers had with them, and what the strategy of the business partners is. “As a result of these factors, there are timber manufacturers who have had the ‘emergency brake pulled’ on them in certain markets; in the market of that same country, for another Latvian manufacturer, everything is proceeding as before,” explains K. Klauss. He admits that in foreign markets, the decisions of national governments are of great importance: whether construction will continue, whether it will be restricted due to the pandemic, or whether it will be stopped altogether. “Another important factor: time (how long this situation will last), because it is one scenario if it lasts for a few weeks, and quite another if it lasts for 3–6 months,” outlines K. Klauss. For example, in Germany, France, and Italy, so-called ‘do-it-yourself’ shops were sold out even before they were closed (people thus ‘filled’ the time spent at home with furniture assembly and interior work). As a result, the respective warehouses are half-empty and manufacturers must orient themselves towards massive demand at the moment when shops open again. “The only question is when that will happen! Every manufacturer may have their own strategy for how to satisfy this demand,” concludes K. Klauss.

Operating at 100% capacity

“There are regions and countries where buyers are cancelling orders, while at the same time, for example, in Asia, the opposite is happening — the volume of orders is growing,” says Andris Ramoliņš, board member of the plywood manufacturing company SIA Stiga RM. He points out that sellers are under the greatest pressure in these times. “You have to ‘keep exercising’ all the time, without relaxing for a single moment,” says A. Ramoliņš. He explains that unprecedented precautionary measures have been introduced at the Stiga RM factory in Kuldīga. “We are disinfecting, there are specific restrictions set for lorry drivers, some are not allowed to step out of their cabs, for others a maximum distance from their vehicle is set, etc.,” explains A. Ramoliņš. He emphasizes that, despite the situation, the factory is operating at full capacity because there are no stock levels in the warehouses. “Looking at the order book, April currently looks very promising,” comments A. Ramoliņš on the current situation, while noting that in several product groups, a price drop is being observed, although there will always be price fluctuations in the market. “There are no indicators that all construction sites in almost the whole world might be closed, therefore there will be demand! We must be able to seize it,” believes A. Ramoliņš. He recalls the experience of the end of the year, when due to a price drop, several product assortments were ‘held back’, but in December, January, and February, these stocks were successfully sold. “Fluctuations are an everyday occurrence, not something extraordinary,” says Andris Ramoliņš, adding that there are no plans to reduce either salaries or the number of employees, although he does not exclude the possibility that they might have to ‘slow down’ the use of some services.

The combined interaction of four factors

“In a situation where 95% of income comes from abroad, but the movement of people is restricted and there is a lot of uncertainty, this affects economic activity,” assesses Ivars Reinhards, owner of the wooden frame house manufacturer SIA WWL House. He explains that the company's employees usually travelled abroad and engaged in the assembly of the houses produced, which is not possible now. “Transport companies are also worried about the possibilities of crossing borders, which is why they are refusing some transport offers.” I. Reinhards admits that alongside the aforementioned problems, the company's foreign clients do not really know how to proceed. “There are some foreign partners who are simply ‘pausing’, because their clients are also uncertain about the future and their purchasing power,” says I. Reinhards, believing that there is currently a lot of inconvenience and waiting. If the situation does not change by the end of May, problems may also arise. “If the Chinese scenario plays out in Europe, by the end of May everything should slowly return to normal tracks. If it happens differently, nothing good is to be expected!” I. Reinhards, however, predicts that the European Commission will have the most significant role in the processes. “If Europe opens its borders, Latvia will do exactly the same in 99.99% of cases!”

“Recovering” from the virus

“The state of emergency is causing inconvenience, as flooring showrooms in Europe are closed, demand is shrinking, and as a result so is turnover; there are breaks in transport flows. Traders of the company's products in several countries have ‘caught’ the coronavirus. We are monitoring the situation regularly, everyone is ‘getting treatment’ and, as soon as possible, they are preparing to resume operations,” explains the situation Ivars Akerfelds, co-owner of the two-layer flooring manufacturing company SIA Amber Wood. He says that the global supply chain has currently collapsed, specifically, many production plants in Europe have restricted their operations or are closed, but users of the respective equipment need spare parts, for example, engine parts. Since the production process takes place on a single production line, the entire production is effectively halted, even though there is demand in the market for the respective products. If one manufacturer cannot produce the respective product, another manufacturer will. “If spare parts for ‘old’ equipment can still be found somewhere, spare parts for new production equipment are specific, and they are most often made by a single manufacturer. If that one is closed, it is a problem that has no solution,” explains I. Akerfelds. This is the shadow side of globalization, which will be felt around the world. “As far as we can, we are reorienting ourselves. We will have to step back a few steps, simplify a few processes, but at the same time we are working at full capacity,” says I. Akerfelds. The situation will affect the company's financial performance indicators.

So far, better than last year

“Every cloud has a silver lining and at the moment there is no basis to talk about any significant shifts! Long-term forecasts are, however, not possible in conditions of such uncertainty,” outlines the overall situation Aivars Tauriņš, Chairman of the Board of the forestry and wood processing company SIA Rīgas meži. He supports his statement with facts that the situation in the timber market in the first quarter of this year was better than at the end of last year. “Unexpectedly, but for certain sawn timber products, there is a minimal, yet still existing, price increase,” A. Tauriņš explains the thought about a better situation in the sawn timber market. He does, however, hasten to add that concerns are being raised by the ‘slowing down’ of other industries abroad. “Undeniably, the timber industry and the entire forestry sector as a whole have a certain inertia, but in any case, construction and repairs will still continue, which is why there is no basis for exaggerated pessimism, but optimism is being ‘slowed down’ by the lack of long-term forecasts.” A. Tauriņš explains that the situation in forestry is slightly different. “Large timber manufacturers have provided themselves with relatively good stocks of roundwood for processing, whereas smaller players are currently reducing capacities, some have even gone on leave, which is why the demand for roundwood raw materials is shrinking.” He admits that in the first quarter of this year, they almost managed to achieve the financial indicators planned for last year. “At the moment, it seems that we will also be able to finish the second quarter of the year at the initially intended financial control figures, however, what the third and fourth quarters will be like is difficult to forecast at the beginning of April, because the coronavirus problem prevents the use of traditional instruments for understanding market directions.”

Unprecedented situation

“The situation does not allow for living peacefully. Due to various reasons, including deliveries, sales have shrunk by about 20–25%,” says Andris Dombrovskis, a representative of the pressed wood block manufacturing company SIA Baltic Block. He does, however, point out that this 20% is not anything dramatic: if manufacturers of industrial goods who use CP pallets are ‘slowing down’, industries (food) that use EPAL pallets are producing more. “The situation is dual, because some are approaching or are already in downtime, others are increasing production and thus influencing pallet manufacturing.” A. Dombrovskis admits that the future is shrouded in fog. “Initially, there were problems with product deliveries to foreign buyers, because lorries languished at borders for several days,” says A. Dombrovskis, admitting that such a situation has not been experienced before, but it is too early to talk about its impact.

Must think about tomorrow

“The sector must hibernate, unlike other spheres, about whose needs and sizes, and ability to recover after the pandemic, there are many questions and uncertainties,” is how Kristaps Klauss, Executive Director of the Forest Industry Federation of Latvia, describes the situation. He emphasizes that as soon as the crisis ends, the sector's product markets will revive, even though, unlike other sectors, they are not completely closed even now.

“The forestry sector is one of the strategic and prospective sectors of the Latvian national economy, which is not currently asking for help, but wants to be sure that it will be able to receive it in a moment of need! We must start working on post-crisis plans,” suggests K. Klauss. In his opinion, it is important for the state to develop various forms of support for overcoming the crisis. “We must remember that support is not a solution to today's problems! To reduce the consequences caused by the crisis in the national economy and to promote its recovery, the government must help export-capable industrial and service companies to ‘hibernate’!” K. Klauss reminds that the government's promised safety cushion for the national economy – 2 billion euros – seems like a huge figure, but, looking at it in the context of one large export sector, the government has grounds to be cautious! Namely, the turnover of the forestry sector (forestry, timber industry, furniture industry) is about 4 billion euros per year, of which 2.6 billion is made up of export revenue.

“There is a belief that ‘the big ones will manage on their own’. The risks? One problem – today, payment terms are being requested to be extended not only for new invoices, but existing ones are already being delayed. A 10-day extension of the post-payment term in export transactions surprises no one today, but it freezes about 70 million euros in total,” K. Klauss points out regarding a looming problem. He reminds that about 40 thousand employees are employed in the sector, whose income, according to “conservative calculations”, directly affects the well-being of at least 7 other Latvian residents. “If these employees are primarily people working in rural areas and regions, the indirect impact on regional development through tax payments is also significant!” K. Klauss does, however, hasten to add that he is not considering a complete stoppage of the sector even in the worst-case scenario, but downtime in many companies will not be a surprise. “Labour costs in the forestry sector exceed 0.5 billion euros per year, and even without using downtime support and just reducing salaries by 10%, purchasing power would decrease by at least 50 million euros. If we add the impact of the price drop and the drop in logging volumes on the wallets of private forest owners, it is not unrealistic to ‘reach’ about 100 million euros. That is more than a 50 euro drop in purchasing power for every Latvian resident!!!!” K. Klauss responds to the request to describe the sector's impact on Latvia as a whole.

Forestry sector product exports and imports (million euros)

Source: Ministry of Agriculture based on Central Statistical Bureau data

Largest markets % by revenue in 2019

Source: Ministry of Agriculture

Forestry sector product* exports (million euros)

* with the largest share

Source: Ministry of Agriculture