Segezha expects prices for its products to recover within 9 months

MOSCOW. Aug 30 (Interfax) - Russian forestry company Segezha Group , which on Tuesday reported OIBDA down by half and revenue down by almost 25% in the second quarter of 2023 amid a drop in prices for its products, expects the price situation to recover in the next three to nine months.

This foremost applies to lumber in China market, the company's biggest market, Segezha president Mikhail Shamolin said in a conference call on Tuesday. He said contract prices for August and September are already moving upward.

"When will prices increase? We see that in August prices have already risen a bit compared to July, we see that in September prices have risen a little compared to August. And in general it's clear that inventories on the Chinese market are starting to gradually decrease [...] If this is the case, then this is a sign of price growth. It's very difficult to say on what horizon - three months, six months, nine months at worst. I honestly don't expect, don't see a scenario where this will be more than nine months, this is extremely conservative. Probably three to six months, I think we should see prices return to average cyclical levels, if not higher," Shamolin said.

"Right now the price is at absolute minimums for all Russian players, not just for Segezha Group, but also for other major lumber producers. Current prices in China, taking into account logistics, mean working at virtually zero profitability or about there. Obviously, such a situation cannot continue for long," he said, adding that production facilities are being closed due to weak demand on western markets as well.

Segezha, which is controlled by investment group Sistema PJSFC , said in a press release on the publication of its financial statements that prices for virtually all of its main products fell in the second quarter of 2023 compared to the previous reporting period. Average prices dropped 13% to 151 euros/cubic meter for lumber, 13% to 570 euros/tonne for bag paper and 8% to 407 euros/cubic meter for birch plywood. Prices rose 28% to 270 euros/cubic meter for glued laminated timber, but prices for all these products remain below the average for the past five years.

"We have seen this type of situation in the industry several times for various reasons in the past 20 years, there have been such times. And they have always ended with prices rising sharply, a classic cyclical scenario. The steep drop in prices, which in this case, as I've said, was due to a drop in demand on the construction market, is now leading to the closure of capacity, reduction of production volumes," Shamolin said.

"As soon as the market - we can talk for certain about the Chinese market, because it is our largest and closest - as soon as the market feels that volumes are starting to decrease and a shortage is looming, the price starts to rise fairly quickly," he said.

The recovery of prices to average levels will mean an "instant change in the dynamic of profitability," because "production cost is not growing in rubles," Shamolin said.

He also noted the gradual decrease of logistics costs. "The cost of logistics is falling right before our eyes. Fairly substantial progress has been made in this area in the past three to four months, specifically in the Northwest. And now rates are also falling for marine shipments, including through the port of St. Petersburg. And we are seeing the start of a downward trend in prices on eastern [railways] because empty containers have started going, if only in a thin stream so far, and consequently there is good news for a decrease in rates there as well," Shamolin said.

But for now the low prices and weak demand are also affecting the implementation of Segezha's investment projects, not just its financial results.

Shamolin said in the conference call that management is discussing the format and timeframe for a project to modernize the Sokol pulp-and-paper mill. The company has already almost completed installation of a new paper mill, but launching new production requires additional investment.

"Does it make sense to do this now and on what scale? We are now debating this internally. But at least we have a solution where we can build and install this machine for relatively little additional investment, without the reconstruction of the whole Sokol mill, and launch this machine, for example, for production of cardboard from wastepaper or wastepaper with a small addition of pulp [...] Then this is a completely reasonable project economically and at this point we leaning in this direction. And, furthermore, we can also use this machine in place of the existing, fairly old, Soviet-made machine," Shamolin said.

The project, the cost of which was estimated at 15 billion rubles, initially called for launching the new paper mill this year.

"The project is not being written off, it will be finished. The question is on what scale and when. But I think that in 2024 is quite realistic, at least finishing the machine itself, if we're not talking about the rest of the mill's reconstruction," Shamolin said.

Segezha reported on Tuesday that its OIBDA fell by half to 2.93 billion rubles in the second quarter of 2023 from 5.9 billion rubles a year earlier. Revenue fell 24% year-on-year to 21.1 billion rubles. The OIBDA margin dropped to 14% in the second quarter from 21% a year earlier. The company posted a net loss of 3.9 billion rubles in the quarter, compared to a net profit of 19.8 billion rubles a year earlier.