Implications of the Ukraine Conflict to Asia-Pacific Forest Products Trade

1.1. Background

Log trade in the Asia-Pacific region is dominated by imports to China. Over 20 years, log imports to China have increased four-fold and now account for 44% of total global log imports (Figure 1). Meanwhile sawn timber imports to China peaked at 22 million m³ in 2019, an increase of 17 times since the early 2000s (Figure 5). The Russia-Ukraine war could impact the forest products trade in several ways:

Pivot of Russian exports of logs and timber from Europe to China.
Place cost pressures on supply chains from Europe to China as European producers look to more attractive markets closer to home reducing their exposure to China.
Rising bunker fuel costs could side-line marginal log exporters (particularly south-east US, Brazil and Uruguay) to the Asia-Pacific.

Figure 1: Worldwide Log Imports

Source: FAOSTAT, Margules Groome

Before the onset of the global financial crisis (GFC), Russia was China’s primary softwood log supplier. The Russian industry has transitioned towards wood processing(Figure 2) and in 2020 Russia was the second largest exporter of sawn timber in the world (Figure 3). In 2020 Russia announced that export of unprocessed conifer and hardwood logswould be banned starting in 2022^[1]. New Zealand and Europe are the two largest suppliers of softwood logs to China (Figure 4) and Russia is the largest supplier of sawn timber (Figure 5). Despite some apparent cracks in the China real estate market, demand for log imports remains intact – at least for now. The Russia-Ukraine war may contribute to a reversal of some trends in the Chinese log supply, potentially bringing Russia back to the log export market, reorient sawn timber exports from Russia and further boost ocean freight costs.

Figure 2: Russian Softwood Log and Sawn Timber Exports

Source: IHS GTA, Margules Groome

Figure 3: Sawn Timber Exporters (2020)

Source: CommTrade, ISO

Figure 4: Softwood Log Imports to China

Source: IHS GTA, Margules Groome

1.2. Forest Products Industry Response to Russia-Ukraine War

Since the onset of the Russia-Ukraine war, forest products companies have taken steps to withdraw from Russia. Stora Enso announced that it would stop all production at their three packaging plants and two sawmills in Russia^[2]. UPM ceased deliveries and wood purchases in Russia and suspended operations at their plywood mill^[3]. Koskisen announced intent to exit operations in Russia; sawmill operations would be discontinued, and it would stop importing sawn timber and logs^[4]. Ikea has decided to pause all industrial production in Russia and suspended all import and export operations^[5]. International Paper, which, is a 50% owner of Ilim Group in Russia announced its intention to explore strategic options including sale of their stake^[6]. The two leading forest product certification organisations have also acted to establish their position regarding forest products trade and certification. The Forest Stewardship Council (FSC) has announced that no FSC-certified material or controlled wood from Russia or Belarus is permitted to be traded^[7]. The Program for the Endorsement of Forest Certification (PEFC) has been more explicit and labelled all timber originating from Russia and Belarus as “conflict timber” and not eligible for use in PEFC-certified products^[8].

Russia’s Ministry of Industry and Trade announced^[9] a ban on exports of wood and timber-related products to “unfriendly countries” while the European Union (EU) included wood in a new package of sanctions against Belarus^[10].

Sawn timber deliveries from Belarus and Russia to Europe will likely be significantly reduced (perhaps to zero) following the withdrawal by European industry, loss of certification and existing (and prospective) sanctions. With wood product trade severely restrained between Russia and Europe there is a significant surplus supply of logs and sawn timber in western Russia.

1.3. Could Russia and China Increase Log and Sawn Timber Trade?

China (and 34 other nations including India and South Africa) abstained from a UN vote demanding that Russia immediately end military operations in Ukraine and withdraw^[11]. Solidarity among the BRICS countries has increased in recent years including closer political, security, economic and cultural ties between the five countries^[12]. Meanwhile Russia is increasingly isolated from EU countries as sanctions have been broadened and reinforced^[13].

Demand for logs and sawn timber in China appears resilient despite broader concerns regarding the real estate market. With apparently tight relations between China and Russia, and changes in supply conditions, the situation might support greater forest products trade between the two nations. Use of the Cross Border Interbank Payments System (CIPS) may facilitate the trade, working around the exclusion of Russian banks from the SWIFT payment system^[14]. This leaves logistics challenges being the primary factor that will hamper any growth in trade as much of the log and sawn timber that has been orphaned from markets in Europe is in Western Russia. Long transport distances from Western Russia to China and high capacity-utilisation of the rail network may limit ability to redirect this volume^[15]. Additionally, many major shipping lines will not call at Russian ports, so ocean shipment from Western Russia to China is probably not viable.

Figure 5: Sawn Timber Imports to China

Source: IHS GTA, Margules Groome

1.4. Log and Lumber Supply from Europe To Asia-Pacific May Reduce

Europe accounted for more than 14 million m³ of softwood log imports to China in 2021 out of a total of nearly 52 million m³ or 28% (Figure 4). Harvesting in Europe may have reached peak levels and reductions in softwood logs from Europe due to lower harvest levels, more attractive markets nearby and disruptions from the Russia-Ukraine war are likely to create a significant supply challenge in China. The primary supply risk is a reduction in sanitary harvesting of beetle damaged trees. A study in 2021 determined that in the Czech Republic, the epicentre of the spruce bark beetle outbreak, trees killed by beetles represented 56-75% of salvage harvesting in 2018-2019 and salvage harvests represented 90-95% of total harvests^[16].

European and North African markets may struggle to meet demand for logs and sawn timber with supply from Belarus and Russia choked off. European producers of logs and sawn timber may be able to find an attractively priced home for all their production within Europe and North Africa.

The route from Europe to China is one of the busiest ocean freight corridors in the world^[17]. High freight costs arising from supply chain constraints and high fuel prices are likely to be exacerbated by the Russia-Ukraine war and may make the economics of supplying China with containerised or bulk log shipments increasingly unattractive. Operating costs remain high, bunker costs (very low sulphur fuel) in Rotterdam spiked to over USD 1 000 /Mt at the onset of the Russia-Ukraine war from an average of USD 500/ Mt during 2019 and 2020^[18].

1.5. Implications for Log and Sawn Timber Trade in Asia-Pacific

High freight costs are likely to impact marginal log exporters to the Asia-Pacific region, particularly south-east USA and Uruguay. Increases in log freight costs and attractive markets in North America where sawn timber prices have traded near all-time highs and more than double the price levels before the Covid-19 pandemic^[19] will likely see log volumes re-directed to local markets at China’s expense.

Australia is a net importer of sawn timber and while Russia and Belarus are relatively minor suppliers there are indirect impacts that are likely to be significant. Most sawn timber imports to Australia are sourced from Europe with Germany alone supplying more sawn timber than New Zealand in 2018 and 2021 (Figure 6). The potential supply gap developing in Europe and high freight costs will likely mean that Australian importers will need to significantly increase prices from already historically high levels to continue to secure supply. A more opaque but equally significant risk is regarding supply of plywood, more than half of which is sourced from China (Figure 7). The extent to which Russian logs and veneer make up the raw material for plywood produced in China is uncertain; however, this may create additional supply risks for the Australian market.

The situation appears to create challenges for importing nations, while some exporters may benefit. New Zealand seems well placed to be able to respond to shortfalls in log supply to China. If the demand in China holds, then prices may have to respond to maintain adequate supply. Elevated freight costs currently cloud the outlook for exports from Uruguay and Brazil. Adequate CIF pricing or reductions in freight costs could improve market opportunities to China, Australia and Europe.

Figure 6: Sawn Timber Imports to Australia