How will war in Ukraine shape forest product markets?

Disruptions in global trade of forest products

Russia’s invasion of Ukraine on February 24 came as a shock to many in Europe and around the world. Beyond the human cost of the war, it’s having profound impacts on global markets – including markets for forest products.

We see the conflict impacting markets for forest products in three main ways:

1. Trade restrictions. Western countries have introduced trade bans against Russia and Belarus for both the import and export of many products. Russia and Belarus are in turn retaliating with their own sanctions. Meanwhile, Ukraine’s production and export of forest products will fall dramatically while war rages in the country. Forest products from all three countries are now classified as “conflict timber” and thereby no longer certified by leading forest certification organizations. All these restrictions are reshaping global trade flows, and some changes will be long-lasting.
2. Macro-economic consequences. Energy prices have risen sharply around the world. In Europe, where Russia provides 40% of natural gas supply, gas prices have more than doubled, driving up energy costs for many industries. Russia supply’s 11% of the world’s oil and 2022 has shown the sharpest rise in global oil prices in 50 years. Higher energy costs and trade restrictions will impact the broader economy. Expectations for GDP growth globally, and in Europe especially, have been revised downward. This will mean slower demand growth for forest products.
3. Russian industry growth: Russia is home to vast forest resources, including 33% of global softwood growing stock and 14% of softwood harvest. With large unutilized wood supply and among the lowest wood costs in the world, Russia has long held promise of a larger future role in the world’s supply of forest products. Russia’s government set ambitious goals for industry growth by 2030, but those goals are now unlikely to be met as its industry struggles to source foreign equipment, spare parts, and expertise. Not only will capacity expansion be difficult, but also maintenance of facilities and the quality of the forest products manufactured.

Together these dynamics will shape forest product markets in 2022 and beyond. The effects will be felt in sanctioning and non-sanctioning countries alike, in the short and mid- to long-term (Figure 1).

Trading partners and products

Russia, Belarus, and Ukraine exported forest products worth 17.3 USD billion in 2021, representing about 5% of all exports globally. More than 70% of the export was from Russia, 16% from Belarus and 12% from Ukraine. Asia is the most important market for Russia, receiving 47% of exports. But Europe is also an important market, receiving 26% of export from Russia and 83% of exports from Belarus and Ukraine (Figure 2).

In terms of forest products demand, the three countries are less important. With large domestic forest products industries, import of most forest products is relatively modest, at 4.5 USD billion in 2021.

Softwood lumber is by far the most important forest product exported by Russia, with a value of 5.8 USD billion in 2021, representing 46% of total forest product exports .

Other important exports include paper and paperboard (16% of exports), panels (15%), and market pulp (11%). Logs are only 8% of exports but represent an important source of raw materials for China’s sawmill industry and Finland’s pulp and paper industry. Russia also exported more than 2 million tonnes of wood pellets in 2021, mainly to Europe.

Impact on lumber markets

One immediate impact of the war in Ukraine, will be a tighter market for softwood lumber in Europe. About 20% of European lumber import and 9% of European supply is lumber from Russia, Belarus, and Ukraine (“BRU”) – in total, almost 9 million m3 in 2011 (Figure 3). The largest importers include the UK, Italy, and Netherlands, but the supply-demand balance throughout Europe will be upset with the loss of this volume. Europe is a net exporter of lumber, of almost 20 million m3, mostly to the US and China. To maintain the current market balance in Europe could therefore require exports to decline by almost half. But export trade, especially to the US, is increasingly established and committed, and any increased competition between European and export customers is inevitable.

Meanwhile Europe will struggle to expand production within the region, at least short-term, as harvests in Central Europe decline in the wake of the spruce bark beetle. Other parts of Europe, mainly the Nordics, have room to increase sawlog and lumber supply, but such expansion will take time – coming online in 2023-24 at the earliest.

China is the other large recipient of lumber from “BRU” (Figure 3). China has not announced any trade sanctions and is unlikely to do so. But there are at least two reasons why this export will still be impacted; the loss of timber certification, and the challenges the BRU sawmill industries now face to maintain and expand their facilities. Demand for certified forest products among Chinese consumers is low despite a growing urban and high-income segment. More importantly, buyers of lumber in China for use in products for export, including furniture and packaging, can require certified wood and will now be forced to look for alternatives – demand for European lumber could rise as a result.

The war in Ukraine will upset global trade flows in softwood lumber (Figure 4). Reduced Russian export to Europe risks causing lower European exports to the US and Asia. The US, with continued strong demand growth and few supply alternatives short-term, will compete to retain imports from Europe. Russia’s loss of certification and difficulties in expanding production at pace with China import demand, will likely caused increased Chinese demand for European lumber. The current global balance of export and import appears increasingly difficult to resolve, with all key export regions facing supply constraints, and most import regions expecting stronger demand. Supply growth is required somewhere, most likely in the US South. And in the short term it seems global softwood lumber markets will be tight.

Impact on log and chip markets

The war in Ukraine will primarily impact European pulplog and chip markets, not sawlog trade. Log exports form Belarus and Ukraine are only small. Russia is a large exporter of logs and chips, but the export of sawlog qualities is mainly to China, while Europe receives mainly lower-grade hardwood pulplogs and softwood chip. Finland is by far the largest recipient of Russian log and chip exports, with smaller volumes also exported to Sweden and the Baltics.

Russia’s export of logs and chips to has declined over the last 15 years as a result of various restrictions, including export tariffs (2007-08) and an export ban introduced in January 2022 on softwood logs and high-end hardwood logs. The new development due to the war in Ukraine is the EU’s restrictions on all imports – now also including woodchips and hardwood pulplogs (Figure 5).

This presents a significant challenge for Finland’s pulp and paper industry. Imports from Russia represent 36% of hardwood pulpwood supply and 84% of imports, while the import of chips represents 31% of supply and 79% of imports. Finland will struggle to replace the hardwood chip supply, and tight markets throughout the Baltic sea region seems inevitable. Woodchip supply is linked to sawmill activity, which could grow with strong lumber markets and room to increase softwood harvests.

These developments could impact Europe’s sawmill industry in different ways. In general, we should expect stronger pricing both for sawlogs and sawmill by-products (as well as lumber). There will be upward pressure on wood chip prices in Northern Europe, for hardwood at least but probably softwood also due to demand substitution.

Competition from Chinese buyers for European sawlogs will likely intensify, due to reduced harvest in Central Europe and at least some Chinese sawmills’ need to find new sources of certified timber. The loss of Russian wood pellet imports is unlikely to impact demand for European-made pellets and sawdust from European sawmills, because the pellet imports are mainly for the industrial market, not the residential market served by local mills.

Global implications

In summary, we expect many short- and long-term disruptions to global trade of forest products following the war in Ukraine, including several that will directly impact European lumber producers:

• Lumber markets will tighten in Europe, as import from Russia and Belarus is banned and import from Ukraine declines, together representing about 9% of European lumber consumption. Europe will likely reduce export to the US and China.
• China will seek new suppliers of certified lumber and logs to replace “conflict timber” in applications where certification is important (mainly production for export).
• Investment in Russia and Belarus forest industries, including sawmills, will slow with reduced access to foreign capital, equipment, and specialist expertise. Product quality will also suffer.
• Russian exports will shift focus even more heavily towards China, with flow-on effects on other trade flows. With a new geopolitical landscape, this pattern is likely to endure for some time.
• Interest will grow in investing in other softwood fiber regions, to build new softwood lumber, pulp and paper capacity. The US South is one region where increased investment is very likely, with competitive log prices and additional supply potential. Within Europe, tighter lumber markets could drive expansion of the sawmill capacity in the Nordic region.

In a new Focus Report: Ukraine war fallout – Disruptions in global trade of forest products, the consulting companies Wood Resources International and O’Kelly Acumen explore the impact of the war on global markets for lumber, logs and chips, pulp and paper. For more information about the study visit our webshop: https://www.okelly.se/webshop/