Resolution of infrastructure issues, private ownership of forests, and intensive forest management are prerequisites to sustainable development of the Russian timber industry.
In East Siberia, Ilim Group is implementing one of the largest projects in the history of the Russian timber industry to ensure sustainable utilization of local resources. In his interview to Expert magazine, Zakhar D. Smushkin, Chairman of the Board of Directors of Ilim Group, spoke about the status of the project, the situation in the global timber industry, and the best possible forest road construction solution.
– Ilim Group's investment program involving construction of new facilities (including those in East Siberia) and upgrade and rebuild of the existing mills is one of the largest in the global timber industry. Are you satisfied with the progress?
– Yes, we are. Despite some short-term issues, the Company manages its long-term investment activities very well. We have our program planned up to 2014 with total investments amounting to USD 1.4 billion. Two huge projects make up the basis of the program: construction of a new paper machine in Koryazhma (Arkhangelsk Oblast) which costs USD 270 million, and a new pulp mill in Bratsk (Irkutsk Oblast) with an estimated cost of USD 700 million.
In fact, the investment program is split in two geographical segments. In East Siberia we are undertaking a complete rebuild of former Bratskkomplexholding (the Big Bratsk project) aimed at increasing its production capacity up to over a million tons, market pulp mostly. The new pulp mill will allow Ilim to boost its output by at least 300,000 tons in the near future. Taking into consideration the rebuild of the Ust-Ilimsk Mill as our next step, our total production increase in the Siberian region is to amount to 500,000 tons.
The Big Bratsk project was preceded by the Company's forestry investment project and large-scale purchases of up-to-date forestry equipment: harvesters, trucks, road construction machinery, and comfortable shift camp cabins for our workers. We invested over USD 160 million to purchase about 500 units of equipment in 2008-2009.
In Koryazhma, the Company invested USD 50 million and started up one of the world's largest NSSC pulp plants in 2009. The output of the plant is 310,000 tons per year.
Russia will see its first 70,000 tons per year coated paper plant after a new paper machine is installed in Koryazhma. Our strategy is to increase its capacity in the future.
– What major difficulties have you come across during the implementation of Big Bratsk, your largest project?
– In general, we are satisfied with how work is done there. Of course, some things go very well while in some areas we are a bit behind the schedule. The major obstacle for us is the lack of engineers and construction workers. The Big Bratsk team is multinational: we have people from Russia, Czech Republic, USA, Poland, Austria and China working there. We had to draw experts from all over the world because there were not enough qualified human resources in Bratsk. It has been quite a while since Bratsk saw its last large-scale construction activities. The organizations have been dissolved. A lot of human resources have been lost.
Working Towards the Goal
– There has long been much discussion around East Siberian resources and their development. What is the potential role of the forest industry in improving the efficiency of utilization of natural resources in Siberia?
– The resources there should be used to the full because Siberia has huge amounts of the world's best quality softwood. However, the Irkutsk Oblast is Russia's leader not just in harvesting. It is also famous for its value-added wood products. Three pulp mills located in the region produce over 50% of all Russian market pulp.
We all see the potential and development opportunities. The question is how we are going to utilize the potential. The solution must be market-based, and one that requires effective management. Our strategy is to develop market pulp, board and specialty pulp production in East Siberia. Manufacturing of value-added products, like white papers, is out of scope. Delivering such products to the European part of Russia would be complicated and costly in terms of logistics, which would affect production costs. The domestic market in the region is still very small, while China does not need any of these products because its internal demand is fully covered by local facilities. This is why in today's Siberia it is economically feasible to produce different types of pulp and board.
One of the development opportunities for Siberian pulp and paper industry is larch. Ilim's leased timberland can potentially provide over a million cubic meters of larch wood annually. Larch has unique properties – it has very high basis weight and strength parameters. However, these properties prevent larch wood from being processed using the traditional technology. Last year our Company together with the St. Petersburg State Technological University of Plant Polymers won a contest held by the Ministry of Education and Science of the Russian Federation to be granted RUB 150 million for developing a process for making larch pulp. The project will deliver a new type of pulp and other value-added products. First cooking trials were made in Bratsk a short while ago. The results look pretty good. Now the pulp is being tested by potential customers.
– The Big Bratsk products will be mostly geared for the Chinese market. How prepared is the market for your new capacities? What is your estimate of potential demand?
– My opinion is that Russian forest companies should think about acquiring shares in Chinese pulp and paper companies. This is what we have to achieve in the long run despite the fact that there still are a lot of obstacles, both in politics and economics.
With a total annual output of 2.5 million tons, Ilim Group currently exports about one million tons of its products to China. In the near future we intend to get over the 1.2 million ton threshold thanks to implementation of our project in Bratsk. Pulp consumption in China grows by 1 million tons annually. I am totally sure China will be able to buy everything we can offer.
Fighting to Turn the Page
– You are among the champions of private ownership of forest land in Russia. A lot of people, mostly in the forest industry, support this idea. However, there are still many of those who do not. Has there been much progress in this discussion?
– It is dynamic, but no specific resolutions have yet made.
I think that the Russian forest industry needs three things for full-fledged sustainable development. First comes intensive forest management. Forest management intensity is very low in areas where the main wood processing facilities are located, and wood yield in Russia is only 0.3-2.0 m3/ha per year (against 3.0-4.0 m3/ha per year in Finland). The required harvesting volumes can only be achieved by further expansion of the leased areas, which leads to higher logging and delivery costs. This in turn impairs competitiveness of forestry products and reduces the investment appeal of the Russian forest industry.
The alternative here is to adopt the intensive forest management model. This model allows cultivation of stock with specific species composition and size depending on the processor's needs while the forest management activities affect the whole lifetime of a tree. Thus we could influence the tree growth, enhance the qualities we need and perform clear cutting operations upon reaching a certain average stand diameter rather than age.
According to Scandinavian best practices, this model motivates the owner (lessee) to perform reforestation using the most efficient methods, ensure higher quality forest tending, implement cutting-edge forest management technologies, and maximize the economic effect.
Secondly, the road issue needs to be addressed. Currently there is no systematic approach to forest road construction. The roads are built by the forest users but who are unable to ensure proper infrastructural development. This hinders forest development thus limiting wood processing capacities. We believe that permanent roads should be constructed by the government according to its forest planning for every region, while temporary roads branching from the arterial roads should be built and maintained by forest users.
And finally – introducing the above mentioned private ownership of timberland. We are consistent here, and our view is that privatization is inevitable.
However, it should be made clear that not all forests must be privatized. We are talking only about industrial forests that supply wood to large mills.
The key argument our opponents have is that privatization might result in deforestation. We think no forest industrialist will ever treat his resources that way because people are always interested in saving and adding value to the things they own. The legislator can also enforce reforestation obligations.
Privatization will improve the investment appeal of the Russian forest industry which is currently very low. Investors will know that their projects will have sustainable wood supply in the long term, which will eliminate another significant investment risk.
Last but not least, private timberland will sufficiently increase capitalization of forest industry businesses. The companies will be able to use this new asset to improve their borrowing capacity.
This page is yet to be turned.
– What is the situation in the Russian and global forest product markets? Have the markets recovered? What trends do you observe?
– Generally, the industry development trends are still the same: significant demand increase in the Southeast Asia – China, India and Vietnam – and small but dynamic growth of demand in Eastern Europe and in Russia.
The industry was rather quick to recover after the recession. The recession forced many high-cost facilities to shut down thus making the supply situation healthier. Recovery of demand has led to gradual increase in prices. However, the recovery has been patchy.
The development of the industry in Russia will depend primarily on the growth of domestic demand. As for Ilim Group, our strategy remains the same: develop retail production in the North-West for the domestic and European markets, produce export goods in Siberia to sell in the South-East Asia, mainly in China.
– There has been much discussion recently about a new global recession. Will it affect your plans?
– Well, in fact, I think the world has not yet left the recent recession behind. There still are a lot of issues to be solved. Even if concerns about a new recession materialize, our investment program should not be materially affected. We hedge our risks. The only thing the recession may change is the project payback period. Our current estimate for the Big Bratsk project to pay back is five years.