EEF-2019: Mikhail Shamolin, President of Segezha Group, Speaks at Session Dedicated to Development of Forest Industry

On September 4, during the first day of the Eastern Economic Forum, which takes place in Vladivostok on September 4-6, Mikhail Shamolin, President and Chairman of the Board of Segezha Group (part of Sistema JSFC), spoke at the session entitled “From Raw Materials to Deep Processing: How Will the Forest Industry of the Far East Develop.”

Viktor Evtukhov, Official Secretary and Deputy Minister of Industry and Trade of the Russian Federation, opened the panel discussion. Year 2018 was one of the most successful years for the forest industry, he said. Growth of raw non-energy exports reached 19%, total revenue of Russian forest industry companies increased by 18-20%. At the same time, according to Mr. Evtukhov, the first half of 2019 was less optimistic due to a number of factors, including negative trends in the Chinese economy due to trade wars with the United States and currency devaluation, tighter environmental standards, and other factors. Accordingly, economic relations between Russia and China – the main consumer of Russian forest products for export – suffered a decline in exports by more than 5%. Mr. Evtukhov also named India among other strategic partners, it being one of the fastest growing economies of the world with the forecast GDP growth of some 9.5%. He also mentioned the task of overcoming considerable trade barriers (high customs duties on lumber, plywood, boards and packaging paper), and referred to them as excessive measures aimed at protecting the home market of India. The market of Japan, the Deputy Minister said, stands out with stable deliveries but requires expansion of partnership; there exist difficulties with product certification and quality requirements.

“Currently we are starting on a complex systemic transformation program in the Far East. Our main goal is to lower the export of raw wood, round wood, and step up production and export of deep processing products with high added value,” Viktor Evtukhov said. He also touched upon the issue of tariff quotas for export of round wood of Far Eastern types of wood with a fee of 6.5%, which will be increased next year to 13% to match all other regions. Outside the quotas, the tariff will be increased to 80% up until 2021. Starting in 2023 the fee for exporting any type of wood from the Far East will amount to 80%. He also noted that decrease of raw wood export in 2019 amounted to 25%. To this end, Viktor Evtukhov said, this will stimulate investors in forest processing industries to create new processing capacities – large projects with good technological equipment. Additional incentives, in addition to the support mechanism through the status of priority investment projects, he said, could include corporate competitiveness programs (when investors can get access to bank financing at preferential interest rates) and adoption of the law introducing the SPIC 2.0 appropriation tool for companies transferring new advanced technologies to Russia or creating such technologies on their own.

Nikolay Nikolayev, Chairman of the Committee of the State Duma of the Federal Assembly of the Russian Federation on Natural Resources, Property and Land Relations, touched upon the issue of legislation regarding the resources that the forest industry needs. In his opinion, three main directions must be considered to achieve development of the forest industry. The first direction is providing reliable information on the available resources – forests. As of today, the information is scattered, and all the current documents on the problem of forest surveying are 20 years old, which hinders business planning. Managing the resources cannot be effective until the unified information space is created, Nikolay Nikolaev said. The Chairman of the Committee also mentioned the importance of having the documents used for transporting wood and registering transactions tied directly to land plots where forest harvesting took place. The draft law on creating the unified information base has already been introduced into the State Duma. The speaker also noted that he favored just and fair access to forest resources. In his words, some of the areas that were rented out many years ago, are being used according to the rentier principle, and this issue must be resolved.

The first representative of the business community to speak at the panel discussion was President and Chairman of the Board of Segezha Group, Mikhail Shamolin. In the context of the topic being discussed, the head of the forest industry group of companies talked about the state interests as the industry searched for the main direction of a possible breakthrough in the development of the forest industry of the Russian Federation. He suggested that the industry use the experience of Finland, where a total of 50 pulp-and-paper mills were modernized, built and successfully entered into operation over the past 40 years. Mikhail Shamolin asked his audience to ponder the fact that Finland, which is comparable in size to Leningrad Region, takes the first place worldwide in export of pulp onto the global market, and harvests 76 million cubic meters of wood a year, while Russia harvests a total of 220 million cubic meters a year, while having a considerably greater stock of raw materials.

“The world market of pulp is assessed at $550 billion, it is a large commodity market. The cost of these products in Finland, when delivered to the consumer, is around $500 per ton. In Russia, if we consider the net costs of Russian forest and our potential, our net cost can be at $350. If Russia should decide to develop this industry in all seriousness, our country would have not 2% of the market as we do today, but 20-25%,” Mikhail Shamolin said. “This issue cannot be resolved, perhaps, without the appearance of a national project, a high-level state objective that would help resolve the problem in a comprehensive manner. It is a well-known fact that over the past 40 years there was only one PP line built in Russia, the one in Bratsk.”

In the context of the problem, the President of Segezha Group introduced the term “scale effect.”

“Building a pulp-and-paper mill with the output capacity of less than a million tons is economically unfeasible, since it would not be competitive in terms of costs,” Mikhail Shamoilin said. “1 million tons of pulp means at least 5 million cubic meters of balance raw materials; in terms of annual cut it must be 7.5-8 million cubic meters per million tons of pulp. Meanwhile, the cost of raw materials delivered to the gates of the mill must be under $25. If the state would not be able to guarantee such conditions, and would not provide well-prepared materials at such costs, investments would not be profitable.” According to the speaker, for the project to be profitable, the materials must be economically feasible, and transport infrastructure must be set up within the radius of deliveries.

The next block of questions, the Head of the company said, related to construction – normative requirements, issues of ecology, construction Norms and Regulations, project solutions.

“We’ve run several calculations; on average building a pulp-and-paper mill in Russia is 1.5 times more expensive than in Finland. Just copying the Finnish project would not work, because we have different specifications. Changing specifications would not take us anywhere because someone would have to take on responsibility for changing them. That requires long coordination in various institutions, expert assessments, and that might take years,” the president of Segezha Group said. According to him, for Russia to take 20-25% of the global pulp market, the scale of the project would require considerable state support, first and foremost when it comes to providing low cost of raw materials. Without this, there will be no investments.

“The scaling effect,” Mikhail Shamolin said, also takes place in construction of new sawmill plants. Building a plant with the output of less than 500,000 cubic meters is not feasible today. The prices vary considerably, the market has been commotized. Last year the price was $280 per cubic meter, and all sawmills were profitable, now the price fell to $200, and half of them went bust. If the cost of sawlogs should be no more than RUB 1,500 per cubic meter at the gate of the sawmill, Russia will have some competitive advantage.

“I think that a global program must be adopted. The task to reach the share of 20% on the global market of pulp must be set at the government level, and a series of measures must be adopted in order to implement this into practice. If we create conditions for raw materials security of projects and keep costs of forest resources under $25 per cubic meter, investors will come running and form a long line. If we fail to create these conditions, we will have no large projects,” Mikhail Shamolin, president of the Segezha Group of forest industry companies, said in conclusion of his remarks.

During the discussion, the moderator of the session, Alexey Chekunov (General Director of the Foundation for Development of the Far East and the Baikal Region), raised a problem topic for the forest industry: the problem of increasing “axle load.” A number of speakers asked to remove limitations of axle loads at least in the winter season so as to increase the intensity of transportation. However, the President of Segezha Group said that for single transport units the problem was not as significant as it would be for the total weight of the articulated truck. This important issue has been recently discussed in detail with the Government of the Republic of Karelia. The consolidated opinion is that trucks moving on the roads one after another, do not create excessive load on the roadway, unlike the loads that trains put on bridges. The company has agreed to cooperate with regional authorities in order to reinforce the bearing structures of bridges so that they could meet the required parameters.

Other speakers at the session included: Dmitry Valtfogel – General Director of RFP Group LLC, Maxim Duz – Deputy General Director of ANPO “Far-Eastern Agency for Investment Promotion and Export Support”, Mikhail Klinov – Acting Head of the Federal Forestry Agency, Alexander Osipov – Acting Governor of Zabaikalsky Krai, Igor Prutov – Partner of EY Company, Alexey Ryzhikov – Managing Director of the St. Petersburg International Commodity and Raw Materials Exchange, Vladimir Sitnov – Senior Vice President of Sberbank PJSC, and a number of other top managers.

For information, during the planned negotiations between the President of Segezha Group and leading banking institutions (Sberbank, Rosbank, MKB, and Societe Generale) regarding financing of the company's current investment projects, as well as during the negotiations with the Russian Export Center on provision of a range of state support measures, representatives of financial and foreign trade circles supported Mikhail Shamolin's position regarding the main direction of a probable breakthrough in the development of the wood industry of the Russian Federation, which he articulated at the session entitled “From Raw Materials to Deep Processing: How Will the Forest Industry of the Far East Develop.” Taking part in negotiations was Nikolay Ivanov, the company’s Managing Director for Implementation of State Development Programs and Forest Policy.