Production

In 2007, growth rates of the domestic production of cardboard and container board were +1.4% and +1.9% respectively as compared to 2006.

The increase in the 2006 output is explained by the fact that at the end of 2005 a conference of managers of pulp-and-paper enterprises with the participation of representatives of the Russian Government decided to reduce the export of rough timber from the country, which caused a substantial increase in the domestic production of pulp-and-paper wares.

Container cardboard production is concentrated in three federal districts: North-Western, Privolzhsky and Siberian. In 2007, the total output of container board by these three districts constituted 86.5% of its total production in Russia.

Within the framework of each federal district, there is a sufficiently high concentration of production in certain regions. In the Central Federal District, Kaluga Province accounted for about 58.6% of all container board produced in that District in 2007. The shares of other provinces were as follows: Moscow Province – 17.4%, Bryansk Province – 12.6%, and Tver Province – 11.1%.

In the North-Western Federal District 81.6% of production was concentrated in two regions: Arkhangelsk Province – 60% and the Republic of Komi – 21.6%.

In the Privolzhsky Federal District 43.7% of the total output of container board was produced in Tatarstan; 22.6% in the Perm Territory, and 18% in the Republic of Mary El.

In the Southern Federal District the leading positions in the production of container board belonged to the Republic of Adygei (72.7%) and Rostov Province (25.2%).

In the Siberian Federal District 2/3 of the volume of output (63.4%) came from Irkutsk Province. The second place belonged to the Republic of Buryatia (27.1%), and the share of other regions did not exceed 4%.

In the Urals and the Far Eastern federal districts no container board was produced in 2007.

Based on the reports of the Federal Statistical Service of the Russian Federation, five major areas can be singled out in the regional structure of container board production where the volume of output is more than 100,000 tons. In 2007, the aggregate share of such regions constituted in the order of 66.2% of the total output.

In 2007, the total output of container board in Russia stabilized, but some changes took place in the regional production structure. The largest production growth in kind was manifested in the Privolzhsky Territory (70,500 tons or 24.4%), and in terms of percentage – in the Central District (5,900 tons or 3%). In the Southern District the volume of output reduced by 34.1% or 18,700 tons (due to a considerable decrease in the volume of output in the Krasnodar Territory – 28,800 tons or 94.7%). Production growth in the Privolzhsky Federal District is associated with a 98.2% increase in the volume of output by the Alatyr Paper Factory, a 37.9% increase by the Perm Cardboard Factory and a 22.5% increase by the Maryisky Pulp-and-Paper Mills. Production decline in the Southern Federal District is connected with the 97.8% reduction in the volume of output by the Azovtara Factory and a 94.4% reduction by SCA Packaging Kuban. In the Siberian Federal District the Pulp-and-Paper Mills reduced its output by 62.1%.

In 2007, about 60.1% of container board was produced by six enterprises: the Arkhangelsk Pulp-and-Paper Mills, the Ilim Group in Koryazhma (Kotlas Pulp-and-Paper Mills), the Mondi Syktyvkar Timber-Processing Mills, the Naberezhnochelnsky Board-and-Paper Mills OJSC, the Ilim Group in Bratsk (Yeniseisky Pulp-and-Paper Mills) and the Pulp-and-Cardboard Mills.

Export

In 2007, the volume of liner export decreased by 266,900 tons as compared to 2006, and the total cost of export reduced by USD 106.3 million. The 2006 change in the volume of export of container board is explained by a considerable increase in the domestic production of Russian cardboard and restrictions on the export of rough timber, which had a negative impact on the European production of container board but increased Russian exports. In 2007, European companies found new sources of feedstock for their enterprises and increased their volume of output while Russian exports were reduced.

The following types of fluting liner are exported from Russia:

·         Unbleached kraft liner;

·         Kraft liner with one bleached external layer (the content of unbleached pine-wood pulp of 68.0% to 79.4%);

·         Top-liner KOMWHITE (liner for fluting with a beached external layer of sulfate pine-wood pulp);

·         Mottled board KOMIMOTTLED (mottled cardboard from sulfate pine-wood pulp);

·         Test-liner (regenerated cardboard for lining fluting).

In 2007, about 81% of export fell on unbleached kraft liner.

The second place in the volume of export (18.3%) belonged to the top-liner with one bleached layer.

The third place went to the top-liner KOMIWHITE (0.4%).

Source: Federal Customs Service; estimates: Abercade Research Company

In 2007, about 50% of export came from enterprises of the Ilim Pulp Timber Processing Corporation (Ilim in Koryazhma, Ilim in Bratsk, and the Pulp-and-Cardboard Mills). The second largest share of 23.6% of total exports in kind belonged to Svetogorsk Ltd. And the third largest share of 13.8% of total exports in kind came from Mondi Business Paper Syktyvkar Timber Processing Mills OJSC (MBP STPM).

Import

In 2007, more than 54.9% of container board was supplied from Ukraine. Finland and Hungary supplied 15.4% and 12.4% respectively, and the import from Moldavia and Slovakia accounted for 8.4% and 6.5% respectively. The share of other fluting or liner supplier countries did not exceed 2%.

The insignificant volume of import of container board into Russia is noteworthy. This is explained by the fact that Russia has its own major pulp-and-paper enterprises producing practically the entire range of the required kinds of paper and cardboard. Besides that, the export of rough timber was considerably reduced in the past few years, which encouraged the domestic production of all kinds of pulp-and-paper products.

In 2007, about 43.1% of the total volume of import came from the Kiev BPM, the recipient regions being Moscow and Kursk provinces.

The second largest share of import came from the Hungarian company Raabersped (12.4%), the recipient region being Kursk Province, Gotek CJSC.

The third largest share of the import of container board belonged to Caswell Partners Inc. (9.9%), the recipient region Moscow City, Imexgroup Ltd.

The fourth largest supplier was Moldkarton JV (8.4%), the recipient region being Rostov Province, Unipulp Ltd.

The fifth largest share equal to 8.3% of total imports in kind came from the Rubezhansky Board-and-Tare Mills OJSC, the recipient region being Rostov Province, Rostovvtorpererabotka CJSC.

2007 total:

·         51,2% of all fluting materials went to Kursk Province where Gotek CJSC, one of the largest enterprises of the packing industry, is situated;

·         22% was intended for Rostovvtorpererabotka CJSC, Rostov Province;

·         16,6% went to Moscow where there are a lot of small packing companies;

Trends in the development of the Russian market of materials used for fluting manufacture

In 2007, the Russian production of cardboard and pulp stabilized. In 2007, the cardboard output grew by 1.3% against the previous year and the container board output (including fluting paper) – by 1.8%.

The pulp-and-paper industry owed it to several factors, which had a strong impact on the entire industry.

Firstly, practically all of the main enterprises had reached their maximum production capacity.

Secondly, export growth caused by restrictions on the export of rough timber to Europe stopped because European manufacturers found new sources of rough timber, thereby intensifying competition with Russian container board and fluting paper.

Thirdly, state nature protection agencies, by their tough measures, forced pulp-and-paper enterprises to make substantial investments in purchasing equipment permitting to cut emissions of toxic substances into the environment.

In the past few years investment projects have been implemented by the Svetogorsk OJSC and Mondi Business Paper Syktyvkar TPM, in the course of which pulp was bleached without using elementary chlorine. The Syktyvkar TPM (Republic of Komi) started to bleach pulp without using chlorine. On the whole, Mondi Business Paper Corporation has announced major investment programs connected with investing funds in building wood roads, acquiring logging machinery, taking environmental protection measures and increasing the enterprise capacity.

Of all foreign companies operating in the North-Western Federal District, the most active ones are Mondi Business Paper and International Paper. A Finnish company Stora Enso implements fluting production projects in the Central Federal District. It has recently been announced that a new Western player may soon appear in the North-Western Federal District. A Norwegian company Larris Pulp has announced its plans of investing about 400 million euro in the construction of a pulp-processing factory in Pskov Province.

Major Russian holdings are also investing their funds actively in modernizing production, purchasing new equipment and introducing environmentally-friendly technologies. For instance, in the second quarter of 2007 the corporation Ilim Pulp Enterprise completed the construction of an evaporator station for pulp-and-paper production, which cost over 30 million euro, at the Kotlas PPM in Arkhangelsk Province. Ilim pulp is also actively pursuing nature-protection and resource-saving policies. It should be pointed out that after the latest acquisitions the corporation includes the following enterprises: Ilim Group OJSC in Bratsk, Ilim Group PJSC in Koryazhma, the Pulp-and-Board Mills OJSC and the Ust-Ilimsky TPM OJSC. These enterprises permit it to control approximately 1/5 of the Russian container board production.

Besides that, in 2007 Titan Group of Companies introduced environmentally friendly production technologies and is increasing the volume of output and improving the holding management system.

At the same time, there are also some negative aspects in the Russian pulp-and-paper industry.

Russia, which possesses one fourth of the world’s forest resources, accounts for less than 5% of the world pulp, paper and cardboard market. This is primarily connected with the fact that, despite the above positive changes and growth rates of the past few years, the volume of output of pulp, paper and other pulp-and-paper products in Russia is much less than in Western Europe, America and Asia. Per capita consumption of paper products in Russia is several times less than in Western countries.

Secondly, foreign investors make a lot of statements about investing millions in Russian enterprises of in-depth timber processing. However, many of them, after acquiring access to regional resources, start to export timber abroad without building anything in Russia, although such cases have become rarer in the past few years.

In their foreign economic activity, pulp-and-paper enterprises encounter such a negative trend as decreasing profitability of export operations despite growing export volumes. This is associated with the unsatisfactory dollar to ruble ratio.

On the whole, the Russian cardboard market is very promising for pulp-an-paper enterprises. A forecast foresees the further growth of the domestic market due to the following factors:

1.      Economic growth, especially that of the food industry, one of the main pulp-and-paper consumers;

2.      Increasing popularity of paper-based packing materials and cardboard tare;

3.      Rising prices on crude oil causing a considerable increase in prices on feedstock for manufacturing multiway plastic tare, which is the main rival of cardboard tare.

Due to the rise in world prices and the demand for pulp, pulp-and-paper mills also have a possibility of expanding their sales markets and increasing the export of marketable cellulose.

Among the negative factors, which may influence the sale of pulp-and-paper products, are:

1.      Decreasing consumption of PP products (due to the use of alternative materials);

2.      Rising energy tariffs;

3.      Rising transportation tariffs;

4.      Changes in the customs control rules and customs duties (increasing export and decreasing import duties).