Does the wood market work in Central and Eastern European (CEE) Region? Analysis of New Forest Business Frontiers.
Tens of thousands of trees have been brought down by storms that wreaked havoc across northern and western Poland on August 11th in 2017. Storms brought down around 10 million cubic metres (Mm3) of lumber across 80 000 hectares of forest (total annual harvest in Poland is around 40 Mm3). The question is, how this massive windstorm has impacted the wood market in Poland during last quarters? Forest Business Analytics, a leading forest business analytic and consultancy company in Europe, looked closer at this case and reports its findings. Moreover, forest business frontiers, timberland investments in Central and Eastern European (CEE) region and wood market development in Poland are described.
Forestry and wood market in Poland
The total area of forests in Poland is around 9.1 million hectares what equals to 29.2 % of the country’s land area (Forests in Poland, 2011). Poland is regarded as a country with large forest area in the Europe. On the other hand the forest area per capita in Poland (0.24 ha) is very low. Most of the forests in Poland (81.5%) are publicly owned, of which 77.5% are forests under the management of the State Forests National Holding (henceforth State Forest) (Forests in Poland, 2011). In Poland, coniferous forest habitats predominate and they account for 52.1 % of the total forest area, while broadleaved forest habitats account for 47.9% (Forests in Poland, 2011). Around seventy-one percent of total forest area is covered by coniferous species (mostly Scots pine).
After World War II, strict control to forest economies in CEE countries, including Poland, was applied. Polish state was regulating timber prices and set out timber production goals in national economic plans. The result of this planning approach was related to concentration on the evaluation of forest policy and performance of the forest districts, with only little attention paid to associated costs and/or productive efficiency (Siry and Newman, 2001). The ownership structure of forests in the post-war period has remained almost unchanged.
In 1989, timber prices were released from state control, and the State Forest began to adjust to a freer market (Splawa-Neyman, 1993). Decisions of State Forests are based mostly on two big aspects: economical and ecological.
Storm of the Century in Poland
On August 11th in 2017, windsorm brought tens of thousands of trees down across northern and western Poland. During one night around 25% of total annual harvest in Poland has appeared on the ground.
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One of the State Forests directors, said after the storm that it will take up to two years to clear the fallen trees, and decades for the lost natural habitat to recover. He called it “undoubtedly the worst disaster in the history of Polish – and perhaps even European – forestry”.
Analysis of Polish wood market
In the Q4 2017, there was a significant increase of coniferous sawlogs and pulpwood volume harvested and sold at the market, reaching a quarterly record high since Q1 2012. There was sold 3.5 million m3 of coniferous sawlogs and 3.0 million m3 of pulpwood during Q4 2017. This increase was mostly driven by a storm that happened between 11th and 12th August 2017 in western Poland, which caused a damage of ca. 10 million thrown and broken wood on an area of 80,000 hectares.
Coniferous Sawlogs
Figure below presents prices and volumes sold for coniferous sawlogs.
Prices and volumes sold for coniferous sawlogs. W0 – logs, WK- logs in the cut-to-length system. Source: FBA 2018
After the storm (between Q3 and Q4 2017), weighted average price for all coniferous assortments (WK, W0 for spruce and pine) decreased by 0.7%. Sawlog prices for pine decreased by 0.9%, while spruce prices increased by 0.9%. Although a significant oversupply appeared on the coniferous Polish sawlogs market, the prices have not decreased rapidly, what could be explained by the time lag between the windstorm and harvesting activities, but also by reduction of planned harvest level in surrounding forest district and transport of damaged wood to final customers around Poland.
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First quarter of 2018 brough further sawlog prices decreases. Weighted average price for all assortments and species decreased by 1.4% between Q4’17 and Q1’18. This decrease was mostly dictated by the decrease of pine wood prices, i.e. by -2.4% since Q4’17, and -3.3% since Q3’17. The biggest decrease was observed for cut-to-length WK assortment, i.e. -4.1% since Q4’17 and -6.4% since Q3’17, what can be explained by excessive WK assortment amounts produced at damaged by windstorm sites. Contrary, in Q1’18 weighted average price for spruce sawlogs increased by 4.3% since Q4’17. In the Q1’18, there was also observed decrease in level of total coniferous volumes sold at the market. We can observe that, historicaly, volumes sold in first quarters of the past years were lower.
Coniferous pulpwood – volumes and prices
Figure below presents prices and volumes for coniferous pulpwood in Poland.
Prices and volumes sold for coniferous pulpwood. Source: FBA 2018
There is visible upward trend in harvested pulpwood volumes in Poland. Since Q1’12, the total pulpwood volume traded on the market increased by 61% (63% increase in pine pulpwood harvests). Prices of pulpwood were relatively stable around 146 PLN/m3 level, with clearly declining trend since Q1’17 (-3%). Forest Business Analytics, projects that pullpwood prices will continue to decline due to oversupply of pulpwood on the market.
Bielarusian new legislation
Before the wind storm in Poland, there were concerns that new legislation in Belarus, that has banned the export of all sawlogs, veneer, and pulpwood, could have impacted the wood market in Poland. Later the legislation has been changing and selected products were licenced for determined time period.
For instance, in August 1st 2017 the license for roundwood exports was introduced, but was in force only until January 31st 2018. During this time, two auctions were performed for the roundwood exports from Belarus, and totally around 200 000 m3 of Roundwood were exported from Belarus (Source 1, 2). Although, we have not noticed any significant effect of Belarusian saw-log export ban on Polish wood market, the increased export of softwood lumber from Belarus was noticed. For instance, in the third quarter Belarusian sawmills exported 594,082m³ of rough-sawn and planed softwood lumber at a value of US$68.9m. In terms of volume and value this corresponds to an increase of 54% and 65% respectively vis à vis the comparative quarter of the preceding year. Accumulated over the first nine months of 2017, exports increased by 56% to 1.62m m³, corresponding to an export value of US$181.4m. Deliveries to EU countries increased by 45% to 31.42m m³. Deliveries to the GIS states tripled to 168,100m³ (50,000m³) (Source: EUWID).
New Forest Business Frontiers?
Yet even if investors now have to tread more carefully in certain sectors and countries, the region’s underlying attractions remain broadly undimmed. By their nature, frontier countries tend to be the most war-torn and politically unstable, so finding ones on a path to tranquil government is rarely easy. However, this is not the case regarding forest investments frontiers in Central and Eastern European Countries (CEE).
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The former communist countries that have joined the EU since 2004 offer superior growth to western Europe and many other emerging markets, combined with the benefits and protections of EU membership. As Deloitte noted in a report in December 2016, “core” countries in the region such as Poland, Hungary, the Czech Republic, Slovakia and Romania are “growing faster than any region in the world with the exception of Asia Pacific”.
Source: FBA 2018
Summary
For investors with higher risk appetite, countries in CEE region are starting to recover from recession or weaker growth in recent years.
In the most developed countries of central and eastern Europe, wage levels have increased sharply since the fall of communism and EU accession. But with pay rates also rising in other emerging markets, central Europe’s wage costs are still competitive — and workforces are well-educated and skilled. It combines those advantages with a location close to the heart of the EU single market, improving infrastructure, and healthily growing economies and consumer spending.
Poland and the CEE region as a whole, undisputedly, are moving forward into a more market-based economy. It is important that the forest sector also should progress in this regard. This post showed that wood market development and exposure to new forest investments can be expected in coming years in this part of the word.
If you are interested in the comprehensive analysis of forest product markets in Europe, United States or any other targeted geographies, please contact: Karolina Chudy, CEO of Forest Business Analytics: karolina@forest-analytics.com
Karolina Chudy is the Chief Executive Officer for Forest Business Analytics Sp. z o.o. (FBA), focusing on the supervision of the projects related to European and US South timberland and forest products market analysis, portfolio optimization and wood prices analysis. Before the current position, Karolina was responsible for data analyses related, among others, to timberland investments, discount rates and exchange rates risk in foreign forest investments, forest sector market updates on target geographies and general overview of investment environment in Europe and United States. She holds a Bachelor Degree in Analysis and Business Administration from University of Lodz, Bachelor Degree in International Business from Østfold University College in Norway. Currently, Karolina is finishing her double International Master of Business Administration Degree (IMBA) at EAE Business School and University of Rey Juan Carlos in Madrid, Spain.
Sources:
Adamowicz K., Dyrcz A., 2008. An attempt to assess price elasticity of demand for pine wood on the primary wood market in the Bytnica Forest Division in the years 1997-2005. Acta Sci. Pol., Silv. Colendar. Rat. Ind. Lignar. 7(3), 5-13.
Adamowicz K., N. Cierniak. 2011. Elastyczność cenowa popytu na drewno sosnowe sprzedawane na rynku detalicznym surowca drzewnego na przykładzie RDLP w Zielonej Górze. Leśnie Prace Badawcze, 2011, Vol. 72 (2): 191-196.
Forests in Poland 2011. Centrum Informacyjne Lasów Państwowych.
Siry J.P, D.H. Newman. 2001. A Stochastic production frontier analysis of polish State Forests. Forest Science 47 (4) 2001.
Splawa-Neyman, A. 1993. Handel drewnem-obraz rynku drzewnego w dobie przemian polityczno-gospodarczych kraju. Sylwan 2:5-20, Poland.