Ukraine conflict affects timber markets

(Courtesy: https://www.woodprices.com/)

One immediate impact of the war in Ukraine and the sanctions by Western countries has been a dramatic reduction in exports of forest products from Russia, Belarus and Ukraine.

In the year 2021, the total exports from these three countries were valued collectively at US$ 17 billion.

In addition to the sanctions, the Russian forest industry will struggle to source parts, equipment and finance, which will force even non-sanctioning countries, such as China, to adapt to changes in trade flows.

Wood Resource International’s new focus report, ‘Ukrainian War Fallout: Disruptions in Global Trade of Forest Products’, investigates the short-term and potential long-term implications of the war and its impact on worldwide shipments of timber, panels, wood pellets, logs, wood chips, pulp and paper products.

Softwood timber accounted for almost half of the export value for Belarus, Russia and Ukraine in 2021. The disruption in trade has significantly impacted global markets because the three countries accounted for nearly 25% of worldwide lumber shipments last year.

The halt in timber shipments to Europe and some countries in Asia has had the most significant impact.

‘Conflict timber’

Still, trade with non-sanctioning countries is also likely to change as Russian and Belarusian companies struggle to make financial transactions and secure credit.

There is a likely change in the designation of their forest products status from being certified (ensures products come from responsibly managed forests) to “conflict timber”.

The label “conflict timber” limits exports of Russian timber to furniture manufacturers in China, which export certified product to Europe and North America.

In addition, Russian sawmills, which in the past have shipped timber to customers in Europe, cannot quickly shift to other markets in the short term.

For example, sending timber by ship or rail from sawmills in north-western Russia to China meets logistical challenges, and the Middle East/North Africa (MENA) region, which is a lower-grade wood market, is currently not in a robust expansion mode.

Belarus, Russia and Ukraine exported 8.5 million cubic metres of softwood timber to Europe in 2021, almost 10% of the continent’s total demand.

In the short-term, European sawmills could redirect overseas shipments to the European market if financially expedient to mitigate the lost supply from the three countries.

In the longer term, some lumber-producing companies may consider investing in new production capacities, although log supply in many regions of Europe is becoming tighter.

In addition, the major overseas markets (China, US, Japan and the MENA region) are diverse in product demand, price acceptance, exchange rate volatility, political stability, and consumption outlook.

These varied market conditions could result in European exporters limiting their overseas exposure to fewer markets that fit their product mix and risk tolerance.

This development would mainly affect China, which relies on the import of forest products, including logs, wood chips, lumber, pulp and paper from North America, Europe, Oceania and Latin America for domestic use.

These world regions are considering expanded sanctions for Russia and countries that directly or indirectly support Russia’s attack on Ukraine.

Russia’s role

Russia exported forest products that were valued at over US$ 12 billion in 2021, and imports of paper products (mainly) are valued at about US$ 2 billion, according to Wood Resource Quarterly. Much of this trade is in jeopardy.

Russia is the largest timber exporter globally and ranks as the seventh-biggest exporter of forest products worldwide. It has vastly underutilised forest resources and has the potential to increase timber harvests to supply its domestic industry.

To meet increased global demand for forest products, the Russian government recently initiated programmes to encourage investments in the sector to both expand and modernise existing manufacturing plants and build green-field facilities.

However, it is likely that many investment projects in the forest products manufacturing sector in Russia will grind to a halt as the growing list of sanctions and financial transaction restrictions take effect.

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