Segezha redirecting products to Asia, Africa, but sees possibility of resuming plywood exports to Europe

MOSCOW. Aug 29 (Interfax) - Segezha Group , the forestry division of Russian investment group Sistema PJSFC , expects to restore birch plywood production volumes and profitability in this business segment in the next few months after a drop due to higher logistics costs and the ban on exports to the European market, the company's vice president for finance and investment, Rovshan Aliyev said.

"We continue to make money on plywood, and I think it's a matter of a few months for us to reach previous volumes. We virtually did not reduce [production], the margin decreased somewhat, but I think that there is every chance of finding new customers and returning the margin to the level it was at," Aliyev told reporters.

A factor in the plywood market's recovery could be the resumption of exports to the European, which is quite dependent on Russian product, he said, adding that there is a good chance of plywood being excluded from the European Union's sanctions list.

"It's important to bear in mind that European plywood consumers are now working with inventories that they had. These inventories will end literally in a month or two and there will be an acute shortage of plywood, because 60% of the European plywood market was supplied by Russian producers. Therefore, there will be a very acute shortage and I think that it is highly likely that these items will be excluded from sanctions lists or there will be some possibility to ship plywood to Europe through third countries, there will be purchasing agents and so on. That is, this market will also recover, I think," Aliyev said.

While the European market has not recovered, Segezha is redirecting both plywood and other forest products from Northwest Russia, which is traditionally oriented toward Europe, to other markets.

The company can no longer ship and sell products to Europe, so "everything that went to Europe, and this was primarily plywood and lumber from the northwest region, is now going to the East - China, India, Southeast Asia, the Middle East, Africa and so on," Aliyev said.

"The Chinese market is huge, it's clear that the volumes that we produce - and we're not number one among plywood producers [the largest birch plywood producer in Russia and the world is Sveza] - will find their customer in China. It's only a question of margin and logistics. The logistics, naturally, are expensive, because everything is going East from the whole country, not just us, but pretty much all producers who shipped to Europe have begun to ship in the direction of China and Novorossiysk, so cargo traffic there has increased, prices have risen," Aliyev said, describing the situation with shipments to the main alternative market, China.

Segezha reported that logistics costs jumped by 50-100% in the first half of 2022. Among the group's lumber producers, Onega Sawmills is having problems shipping products and was forced to suspend an expansion project. Due to the redirection of exports, Onega's logistics costs tripled to $120 per cubic meter from $40. Segezha is now taking steps to charter bulk vessels and plans to redirect Onega's products to markets such as Egypt, where it has leased a warehouse for subsequent resale of products.

Aliyev also said that Russian companies' arrival on Asian and African markets is not bringing down prices for products because suppliers who previously shipped to these markets are redirecting product to the undersupplied and more expensive European market.

"In principle, lumber consumption has not decreased much and supply has not increased much, meaning the global market remains as it was and a redistribution of commodity flows is just taking place. This will take some time, but one [cannot] say that everyone has gone to China and prices in China have fallen sharply. Yes, naturally, prices there, in China, are not rising, but we're not seeing a significant drop either," Aliyev said.

As for paper, the market has already rebalanced and the volumes that previously went to Europe are now being sold on the world market, he said.

"Basically, we virtually didn't lose anything on paper, except higher logistics costs. But taking into account the added value on the weight of paper, these logistics costs have not been fundamentally significant," Aliyev said.