THE OPERATING ENVIRONMENT OF THE FINNISH SAWMILL INDUSTRY HAS BEEN RUINED
18.05.2018 - 12:52
Globally, demand for sawn softwood is strong. The recyclable, renewable and certified material that binds carbon is hot stuff in a world of tightening environment policies and the circular economy. The customer-orientation, high quality and delivery reliability of Finnish sawn timber is well known on the markets. An independent buyer of timber, Junnikkala Oy, has, nevertheless, announced that it will cease its timber purchases. What is going on?
The international competitiveness of the Finnish sawmill industry has plummeted despite good sawn timber export demand and price hikes. In competing countries, sawmills are setting records. The entire forest industry is experiencing an economic boom. The three largest integrated forest companies made an operating profit of more than ten per cent in 2017. The excellent result was largely based on the dramatic surge in the price of pulp and the moderate price development of its raw material. The independent sawmill industry could barely scrape together a zero result.
Integrated companies benefit from minimised pulp wood prices because they use up practically all of the pulp wood entering the markets. Conversely, their share of logs is just half, with independent sawmills utilising the other half. Thus, integrated companies are stuck with the bill for any pulp wood price rise, but only with half of the price rise for logs. Integrated companies have tied the price of pulp chips created as a sawmill side-product to the price of pulp wood, which means that they are buying chips produced from high-quality, expensive logs at a 70% cost reduction compared to the price of the raw material. The integrated companies have hidden the results of their sawmills under larger headings.
In practice, there are three pulp wood buyers and dozens of log buyers. As demand for pulp wood grows, the price of logs has, illogically, begun a dramatic surge. The development of pulp wood prices has been practically non-existent. Forest owners are attempting to maximise their stumpage earnings. It is easier to put out to tender log prices on a market with dozens of buyers than pulp wood prices on a market of just three buyers. The independent sawmill industry is left to foot the bill. Pulp wood is also imported from abroad, mostly from the Baltics and Russia. Imported wood is significantly more expensive than domestic Finnish wood. In addition, even logs are cooked into pulp. This upholds the cheap price of domestic pulp wood. Simultaneously, forestry associations and the sawmill industry are exporting Finnish pulp wood because exports bring in a higher price.
The competitive position of sawmills is also affected by energy and climate policy. Subsidy policies aimed at increasing the share of renewable energy have distorted the market for sawmills’ sawdust and bark, and prices have fallen. Because these fractions are created as side-products of other production, the cash flow losses stemming from them are flowing straight out of the sawmills’ bottom line. Subsidy systems put in place to guarantee the international competitiveness of the forest industry are only targeted at major industry. The energy tax refund and emissions trading compensation are excellent examples of subsidies that benefit integrated forest companies almost exclusively, distorting competition in Finland, either indirectly or directly. Finland does not have an energy subsidy system that benefits sawmills, unlike significant competitor countries.
The operating environment of the Finnish sawmill industry has been ruined. The market structure for roundwood is distorted. The unequal subsidy policy further weakens the international competitiveness of the independent sawmill industry. The government highlights the significance of SMEs as economic instances, but at the same time, major companies are dictating their interests both to the markets and through political influence.
I offer my congratulations to the integrated forest companies for their excellent results. There is, however, reason to wonder whether the power of corporations within society has grown to be excessive and whether success has turned into greed. The distortion of the markets and the unnecessary subsidies paid by society must end immediately if Finland wishes to have independent timber buyers in the future to ensure fair competition and to guarantee the profitability of the forest economy.
Kai Merivuori, Managing Director, Finnish Sawmills Association, tel.+358 40 532 2868, email:kai.merivuori [ät] sahateollisuus.com
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