Recent years have seen a surge in both domestic and foreign investment in Latvian sawmilling capacity. Underlining the strength of that growth has been consistently rising demand for logs and, as a result, continously rising prices.
Both the private and public forestry sectors reaped the rewards of this competition for raw material. Imported logs from Russia did ease the pressure, but only until 2007 when it started to impose prohibitive roundwood export taxes.
Today, however, much of the foreign funded mill capacity has closed or been mothballed and many smaller Latvian plants have also shut up shop.
The UK market, Latvia’s largest, enjoyed a bumper year until the end of 2007 when terminal operators filled their quays to the brim. The oversupply through the winter saw sale prices falling when Latvian raw material and other costs, such as fuel and labour, were still rising. The Swedes, still benefiting from storm-blown timber, were better able to compete and Latvian margins were squeezed.
Economic downturn
Then came the economic downturn of 2008, poor demand and, latterly, a disastrous currency equation for Latvians selling in sterling but purchasing everything in Latvian lats, which are pegged to the euro. The 25% currency hit was a huge blow to any business, although it has improved slightly now. Swedish competitors benefited again as sterling weakened only 10% against the krona.
On the up side, less demand for logs has eased the situation and public log auction prices have fallen to more workable levels. But the oversupply of pulp logs throughout Scandinavia and Russia means that, for private forest owners, the value of each tree is far from what they want. As a result, they are sitting on their assets, so logs in Latvia are unlikely to become cheap.
The currency situation remains and UK demand is slow, putting sales prices under continued scrutiny, although there is hope the market has bottomed out.
Further blows have come from bankers and politicians. Liquidity is tight and getting tighter. The government is in political and financial trouble and Latvia was the second EC country to ask for an IMF bailout, which is now filtering through. Credit guarantees to assist exporters were promised from February 1, but seem slow to materialise.
Where does that leave the sawmilling industry in Latvia and other Baltic states? Those that do survive will undoubtedly be fitter and more resilient, but to get to that point they will need continued strong and loyal support from UK customers.
The Baltic states were once envied as the entrepreneurs and engine room of the former Soviet Union. Their sawmillers will need to call on all those characteristics and skills to meet this challenge, the biggest they have faced since independence.
