Itämeren alueen puumarkkinatHelsinki, 14.02.2012

Challenges of a sawmill investment in Russia

Sampsa J. AuvinenNorvik Timber Industries 

Index

1.Norvik Timber Industries (NTI)

2.NTI in Russia

3.NTI’s Sawmill Project in Russia 2004 -

4.Opportunities and Challenges in Sawmilling in Russia

5. What Usually Goes Wrong?

6. Conclusion

Norvik Timber Industries, part ofthe Icelandic Norvik Group, is aEuropean forest industrycompany involved in forestharvesting, sawmilling, furtherprocessing and logistics.

The turnover of Norvik TimberIndustries is about €190 millionand it employs 1100 people.

NTI - 15 independent forest industry companies in 5 countries.

in Russia

NTI in Russia 

Norvik Group has been doing business with Russia since 1976.

Key figures for 2011:

• Log harvesting: 230 000 m3

• Sawn timber production & trading: 50 000 m3

• Total number of employees: 347

• Fully FSC certified

Norwood Sawmillin Syktyvkar

Yasnoglesprom Logging Company in Yasnog

KLB Logging and Sawmilling Company in Puzla

Trading Office in Kotlas

NTI’s Businesses in Komi, Russia

NTI’s Sawmill Project in Komi 2004 -

Modern 300 000 m3 Sawmill in Syktyvkar

•Total Investment of EUR 82 million with payback in 5-6 years.

• Financing was secured from EBRD and western banks.

• Total number of employees: 150.

Original Plan ‐ Pre‐Crisis

35 Hectare Site Acquired in 2004 in Syktyvkar

The project was frozen at the end of 2007:

• Global economic downturn.

• Demand outlook for sawn wood deteriorating.

• Raw material availability was unclear.

• Signs of possible difficulties in dealings with authorities.

Sawmill Project has been taken out of “muff‐balls”• Investigation started in early 2010 to analyze Norvik’s strategic

options with Russian assets.

• Our raw material base, existing industrial site, good local management, Norvik’s sales channels and further processing companies make it a good base to start a modern sawmill.

• Our analysis has confirmed that the sawmill will be profitable if the investment is kept low and technology modern but simple.

• A 10 year old sawmill was acquired from Norway in 2011 and it was moved to Syktyvkar. Startup is expected in Q2 2012.

• Markets where goods will be sold: Ex CIS Countries, Iran and Latvia (Byko-Lat).

• The sawmill being built will be a 60 000 m3 output factory (1 shift) and plan will be to produce 100 000 m3.

Opportunities and Challenges in Sawmilling 

in Russia 

Top 15 – Sawmilling Companies in Russia, 2012Q1

Most of the companies in the Top-15 list are one mill companies. The capacities inthe Top-15 list are distributed through North-West Russia, Siberia and Russian FarEast.

Source: Pöyry DB

1000 m³/a

SAWN SOFTWOOD CAPACITIES AND EXPANSION PLANS

Legend by regions:

COPYRIGHT@PÖYRY

Russia has Largest Forest Resources in the WorldRussia’s so-called Forest Fund comprises some 1.2 billion hectares, approximately

775 million of which are areas of productive forests.

Russia has the largest forest area in the world (21%of the global forests).

0

20

40

60

80

100

120

Finland Sweden Latvia Estonia North West Russia

Germany Austria

Average (Pine & Spruce) SUB DLD to Sawmill in EUR Jan 2012

Sawn Log Price Comparison

Sources: Metsalehti, Skogsindustrierna, Norvik Timber

Cost comparison with Estonian sawmill project

Cost per Sawn m3 in EUR

Estonia Norwood

Admin costs 6.9 6.9

Production costs 20.0 19.2

Number of people

Estonia Norwood

8 11

18 41

Transportation 4.5 26.0

Other Transport 1.1 5.8

32.5 57.9

Transport  packaging

Transport  packaging

Transport  packaging

Transport  packaging and railway/admin costs

Each Wagon Load 85 m3

Total m3 per Wagon EUR/M3

Packaging Timber in Each Wagon 1.9 1.8

Poles & Metal on Each Wagon 1.8

Railroad, customs & state services 2.2

Total 5.8

% of ExW Sales price

1.5%

1.5%

1.8%

4.8%

34

36

38

40

42

44

46

48

One of the main risks for the sawmill project is the development of the Ruble exchange rate

Ruble/EUR Exchange rate

Other Challenges in Russian Sawmilling Operations 

• Current export tax has impacted logging companies’ viability ⇒ poor market/lack of players in North West Russia for birch pulp logs⇒ sawmills in Karelia and Leningrad region lacking sawn logs⇒ will this change with Russia joining the WTO? Or is there too much damage already done?

• Infrastructure requires significant investments:⇒ Roads, power distribution, railway, etc.⇒ In 2011 there were sever availability problem of railway wagons

• Competition and dealings with Russian companies operating in the “grey/black market”

• Uncertainties related to legislation & institutional reform and duty policies

What Usually Goes Wrong?

Russia gets Bad Publicity as a Difficult Country to do Business in when Foreign Companies Fail

BUT

In Many Cases the Foreign Companies Fail Because They Don’t to do their Homework and are Gullible

• Attempt to overtake the Russian market with the rules of logic and rules of business which work in Europe.

• Failure to learn to live and manage in crisis.

• The available raw material base, ie. forests are not properly analyzed in case of sawmilling industry => Lack of right type of raw material.

• Time schedules and budgets are overly ambitious.

• Corruption is omnipresent in Russia and it is not managed properly.

• Failure to cultivate relationships with government agencies at all levels.

Typical Mistakes that Foreign Companies do 

Conclusion

Doing business in Russia will remain a challenging undertaking for theforeseeable future. The economic potential of Russia, however, warrantsthe interest and presence of international companies.

Although doing business in Russia is difficult, the fact that it ischallenging also has some advantages. The current challengingatmosphere creates a situation where companies without specializedknowledge of how to operate businesses in Russia are likely to fail.

This lack of knowledge, however, creates greater possibilities for thosefirms that acquire this knowledge.

Conclusion

Спасибо

www.norviktimber.com