• Metsäala

Recession decreases forest industry exports – energy gives Finland competitive advantage 

Economic uncertainty and reduced consumption are decreasing the demand for forest industry products. However, the exports of the Finnish chemical forest industry are supported by the high price and availability of energy, which improve Finland’s competitive position compared to Central Europe. This year, the exports of paper and pulp will decrease markedly, due to the industrial action at UPM’s mills at the beginning of the year, and the closure of Stora Enso’s Veitsiluoto mill. Decreasing construction volume will reduce the demand for sawnwood and plywood both this year and next. As a result, their export and production volumes will shrink. The export price of sawnwood will begin a sharp decline this year. This year the Finnish forest industry will use markedly less wood than the year before. This has reduced the pressure to increase wood harvesting in Finland to replace wood previously imported from Russia. The increased demand for wood in Finland will increase the amount of fellings next year. The wood sales in private forests continue at a brisk pace. Log prices will decrease, but the prices for pulpwood will continue to rise.

Export market		2022f %	2023f %	Timber trade	2022f %	2023f %
Paper	quantity	-31	19	Wood consumption of forest industry	-10	6
	hinta	37	-17
Paperboard	quantity	2	1	Roundwood removals	0	2
	hinta	20	-14
Pulp	quantity	-12	16	Wood sales, private forests	-15	3
	price	17	-14	Wood price, nominal (2)
Sawnwood	quantity	-8	-2	log	7	-2
	price	1	-30	pulpwood	5	3
Plywood	quantity	-5	-4	Stumpage earnings, private forests	3	-3
	price	20	-9

f=PTT forecast, 2=standing sales, yearly average price

Rising prices push the European economy into recession 

The sharp rise in prices erodes the purchasing power of households and reduces consumption around the world. In Europe, the high price of energy is also holding back production, and next winter we may see electricity rationing. Central banks are trying to curb inflation by raising interest rates, which also reduces consumption, housing sales and construction. 

This forecast is subject to great uncertainty. The forecast assumes that relations with Russia will remain frozen and the price of energy will remain high during the winter. However, the disconnection from Russia as a source of energy is progressing, and next spring energy prices will decrease from the current high level. However, the prices will remain higher than before. 

Finnish forest industry’s own electricity production gives it a competitive advantage  

The Finnish forest industry both benefits and suffers from expensive energy. The forest industry consumes a lot of electricity in its factories, but also produces electricity and heat from the by-products of its production processes. Forest industry companies use themselves a part of the electricity and heat they produce and sell the remainder on the energy market. In addition, forest industry concerns UPM, Stora Enso and Metsä Group directly or indirectly own shares in nuclear and hydropower plants situated in Finland. For example, they indirectly own more than two fifths of the brand-new nuclear reactor at the Olkiluoto nuclear plant, which increases the groups’ indirectly owned electricity production at a favorable moment. 

From the energy production plants they indirectly own, the above-mentioned three forest industry concerns receive electricity at the production cost price, which they can use themselves or sell at market price to the national electricity grid. Within the concern, they can sell the electricity they receive at production cost price from one company belonging to the concern to another at a price they determine themselves. The internal optimization of the concern dictates which part of the electricity it produces in the production facilities or of the electricity produced in the power plants it indirectly owns, and which part it consumes itself. 

The goal of the internal optimization of the concern is the best possible financial result. However, so that the concern can deliver the orders to its customers as promised. Optimization can mean shutting down certain machines or processes during high electricity prices and selling the saved electricity to the national grid. The forest industry’s own electricity production and the electricity received by forest industry concerns at cost price are significant competitive advantages at current electricity prices and especially during expected price spikes. 

The competitive position of the Finnish chemical forest industry compared to Central European competitors is also strengthened by the raw material used in production. Central European production relies heavily on the use of recycled fiber, while in the Nordic countries the raw material for production is virgin fiber, in other words pulpwood. The use of pulpwood enables the use of by-products generated in pulp production, such as bark and black liquor, for renewable energy production. In Finland, the share of fossil fuels represents only a tenth of the final energy use of the chemical forest industry, while the European average is more than a third. Some of the Finnish production facilities benefit from larger and more modern production lines than the European average. In addition, the Finnish facilities benefit from integrated production, where, for example, the heat generated in pulp production can be used in other production processes. 

The nominal value of the total exports of the Finnish forest industry will increase this year by four percent compared to last year. The export volume of paperboard increases, but the export volume of all other main products decreases. The reason behind the increase in the value of exports is the strong price development in the first half of this year. Next year, the nominal value of Finnish forest industry exports will drop by ten percent from this year. The value of exports will decrease next year due to the sharp drop in the export prices of the main products of the Finnish forest industry. In particular, the value of the export of sawnwood decreases with the sharp drop in its export prices.

Paper production and exports will decrease markedly from last year  

The strong demand for paper experienced in Europe during the first half of the year 2022 is declining. The demand for certain paper grades is already showing a weakening and the development will continue during the rest of the year. Demand is weakened by general economic uncertainty and high inflation, which reduce private consumption. 

At the same time, the European forest industry has faced sharply increased production costs. The rise in energy prices in particular poses challenges for production facilities. The significance of the challenges depends on the raw materials and energy sources used, the contracts in force and, for example, how the company is prepared for rising energy prices. Differences in profitability between production facilities have grown: while some are forced to raise their prices to cover costs, some make a profit with a good profit margin. It is likely that, especially in Central Europe, companies will be forced to halt production intermittenly during the rest of this year, due to both unprofitable production and declining availability of energy and natural gas. Production shutdowns are also possible. The production stoppages will reduce the supply of paper to some extent during the coming winter. 

The production and exports of Finnish paper decreased markedly during the first half of the year, due to the industrial action at UPM’s mills and the closure of the Veitsiluoto paper mill of Stora Enso. In the second half of this year, paper production and exports will recover, but on an annual basis, exports will still be clearly lower than last year. Production restrictions in Central Europe and the low dependence of Nordic paper production on natural gas, supports the exports of Finnish paper, even if the demand for paper weakens. Next year, production and exports will clearly grow compared to this year. 

Market prices for different paper grades have been historically high during the first half of the year, driven by good demand and increased production costs. When demand declines, the price trend turns downward. However, there will not be a significant price drop, as production costs remain high due to the high cost of energy. The imports of paper to Europe, especially from Asia, are increasing, as the challenges of international logistics are easing and the price level in Asia is currently markedly lower than in Europe. 

Demand for paperboard weakens 

The demand for paperboard will also fade during the autumn, because consumption and the need for packaging materials is decreasing. This affects especially containerboards, the stock levels of which have already increased in Europe. During the current year, new production capacity has been and is still being added to the production of containerboard. With this, there is a momentary danger of overcapacity in both the European and North American containerboard markets. There are also visible signs of weakening demand in cartonboard. 

However, in the longer term, the demand outlook for paperboard is still positive. In addition, the advantage of paperboard production based on virgin fiber is its versatility as an end product. It is suitable for various food and hygiene packaging. Nordic paperboard production also benefits from relatively modern, large production facilities, some of which can utilize the heat and steam generated in the pulp production processes. With these competitive advantages, Finnish paperboard exports will remain fairly stable both this year and next year. 

The market prices of various paperboard grades in Europe have risen to record highs, due to good demand and higher production costs. Prices are leveling off towards the end of the year, due to declining demand, although possible production stoppages due to the price and availability of energy will reduce the supply. Next year there will be a clear decrease in the average export price, when the price level recovers from this year’s peak. 

Stora Enso strengthens its market share in Europe by buying the Dutch De Jong Packaging Group, a major manufacturer of corrugated packaging, especially in the Benelux countries. The company is also conducting studies on the conversion of the Langerbrugge (Belgium) paper mill, and the second fine paper machine in Oulu (Finland) to the production of different board grades. Metsä Board has started preliminary planning for the construction of a folding carton factory located in Kaskinen (Finland). Metsä Board is expected to make the decisions in the year 2024. 

Pulp production benefits from high energy prices 

Demand for long-fiber softwood pulp in Europe has been strong for over a year. The demand and market prices for different pulp grades, have increased thanks to the good demand for end products and the challenges confronted in international logistics. These logistical challenges have emphasized the importance of local production. There have also been surprising restrictions on pulp production, e.g. due to the industrial action seen in UPM’s mills in Finland at the beginning of the year and the drought in Central Europe during the past summer. Pulp demand is still steady, but the decline in demand for end products will inevitably affect the pulp market at the end of the year. 

In Finland, the stoppage of imports of Russian wood and especially birch pulpwood have affected the pulp industry in particular. It is likely that the hardwood pulp production lines have been converted to some extent to softwood pulp production. In addition, domestically produced hardwood pulp is now being replaced by imports: the import of hardwood pulp has clearly increased in recent months. The import of hardwood pulp will probably continue to grow. 

Pulp exports from Finland decreased in the first half of the year, especially due to the previously mentioned industrial action. In the second half of the year, production and exports will increase, but overall will remain below last year’s figures. From the end of this year and the beginning of next year, the high utilization rates of the pulp mills, will be supported by the fact that the renewable energy generated along with the pulp production and the clear increase in electricity market prices will make it even more profitable. Next year, pulp production and export will increase from the current year, as the impact of this years industrial action will disappear, and Metsä Group’s Kemi bioproduct factory will start production in the third quarter of next year. 

Dollar prices of market pulp in Europe are currently at a record high, driven by good demand and production restrictions. It is expected that during the second half of the year the demand for pulp in Europe will first stabilize and then start to decline. This is also the case for pulp prices: at the end of the year the prices will decrease and the decrease will continue next year. Next year, the supply of pulp will increase, as there are significant increases in the production capacity of both short-fiber and long-fiber pulp. 

The Finnish export price of sawnwood will decrease by a third 

The decrease in do-it-yourself-construction that started at the beginning of the year is the result of people’s consumption habits returning to the time before the corona pandemic. On the other hand, the volume of construction in Finland and Europe will decline towards the end of the year, when construction starts will decrease. The decrease in construction starts is the result of the weakening of consumers’ purchasing power and increasing uncertainty. However, the volume of construction will not collapse, but rather declines towards the usual level. 

The outlook for construction is similar outside Finland and Europe as well. In China, construction starts began to decline already at the beginning of 2021, and the decline has only steepened as the year progresses. In the United States, construction starts declined in the summer. 

The export of sawnwood will decrease by eight percent this year. This is due to contracting demand, which is caused by the decrease in do-it-yourself construction and the decrease in the volume of overall construction volume. As a result of the decrease in demand, the production volume of sawnwood will decrease by eight percent this year. 

Next year, both sawnwood exports and production will decrease by two percent. The decrease will be more moderate next year because part of the weakening of demand is already realized in this year’s exports and imports. In addition, the stocks of Russian and Belarusian sawnwood imported to Europe in March-June of this year will be depleted by next year. This balances the market situation. In 2020, almost seven million cubic meters of sawnwood were imported from Russia and Belarus, which covered nine percent of the nominal consumption of sawnwood in EU countries (combined production and imports minus exports). 

In the second half of this year, the monthly export prices of sawnwood will drop sharply. However, thanks to the high export prices of sawnwood in January-June, the annual average export price of sawnwood will rise by one percent this year. The strong fall in the export price of sawnwood starting in the second half of the current year, will next year be reflected in a drop in the export price of almost a third. This decline is the result of a rapid decrease in demand. Despite the decline, the export price of sawnwood will remain somewhat higher than before the corona pandemic, as raw material and production costs are clearly higher than before. 

Sawmills made excellent financial results during the sawnwood boom experienced over the past year. This was especially necessary for Finnish sawmills that had had many bad years behind them. The excellent financial results made during the corona crisis enabled investments in many sawmills. In Finland investment are being carried out by e.g., Versowood, Koskisen, Kuhmo Oy, Junnikkala, Binderholz Nordic and Keitele Group, whose new or renovated sawing lines will start in during the years 2023–2024. The construction of Metsä Group’s large sawmill in Rauma (Finland), which was started even before the corona crisis, will be completed, and commissioned during the current quarter. At the same time, the group is closing the medium-sized sawmill in Kyrö (Finland). 

In January-June of this year, the exports of sawnwood fell by six percent. Spruce sawnwood exports decreased by one percent, and those of pine and planed sawnwood by nine percent each. In January-June, 4.5 million cubic meters of lumber were exported from Finland. Half of it was exported to Europe, a fifth to Asia, almost a fifth to North Africa and a little over a tenth to the Middle East. Before the corona pandemic, Europe’s share of exports was still two fifths, and North Africa and Asia both about a quarter. 

The demand for birch plywood will remain steady this year 

In addition to construction, the weakening of consumers’ purchasing power is reflected in the demand of the furniture, automotive, and wood packaging industries. In 2021, almost two-fifths of plywood was used in construction, a little over a quarter in furniture manufacturing, about a tenth in the automotive industry, and a bit less than a tenth for wooden packaging. This year, the decrease in demand is mainly due to the decrease in the volume of construction in the second half of the year. Next year, demand will also decrease in other end uses. Plywood exports will decrease by five percent this year and four percent next year. 

Thanks to the strong demand in spring and summer, the average export price of plywood will increase by 20 percent this year. The price remains high despite the drop in demand. The main reason for this is the absence of Russian plywood from the European market. Almost two million cubic meters of plywood were imported from Russia to EU countries in 2021, which covered 30 percent of imports from outside EU countries. The quantities imported from Russia were so large that it is not possible to completely replace them with imports from elsewhere. Replacing birch plywood is particularly difficult, as it is hardly available in other countries. Next year, the decrease in demand for plywood will balance the market, as a result of which the average export price of plywood will decrease by nine percent. 

This year, plywood production will decrease by two percent and next year by three percent. Plywood production will decrease less than exports both this year and next year. The smaller decrease in production is due to the fact that even though the domestic consumption of plywood is decreasing, the domestic consumption of Finnish plywood is increasing. The explanation is the end of imports from Russia, which cannot be easily replaced by imports from elsewhere.

Forest industry production

	Paper m. t.	Pulp m. t.	Paperboard m. t.	Sawnwood m. m3	Plywood m. m3
2018	6,7	11,7	3,8	11,8	1,2
2019	6,0	11,6	3,7	11,4	1,1
2020	4,5	10,5	3,7	10,9	1,0
2021	4,4	10,8e	4,2	11,9	1,1
	%	%	%	%	%
2022f	-31	-14	2	-8	2
2023f	19	12	1	-2	-3

Source: Finnish Forest Industries Federation, PTT forecast (f), PTT estimate (e) 

Wood use will decrease this year 

The decrease in wood use will ease the pressure caused by Russia’s absence from the market 

In January-June of this year, Finland’s wood imports decreased by 62 percent, i.e. to about a third of the amount imported at the same time last year. The background is of course in the effects of the Russian war of aggression. Russia’s share of imports in the first half of the year fell from last year’s 75 percent to about half of all imports. In January-February, the effects of the Russian war were not yet felt, and in March 164,000 cubic meters of wood were still imported from Russia. In April-June, Russian imports had already dropped to a few thousand cubic meters per month. Since April, Russia’s share of wood imports has only been around one percent, and after July it should be zero. 

In the spring, it was still speculated that imports from other countries could increase and partially replace Russian imports. However, this has not happened, but the import volumes from the Baltic countries and Sweden have clearly decreased compared to last year. Even in the early months of this year, the wood imports were clearly lower than last year, possibly due to the production stoppages caused by the industrial action at UPM’s mills. Since the outbreak of the war, slightly more wood has been imported from Sweden than before, but Baltic imports have continued to decline. There is also demand for Baltic pulpwood from other countries, and the price has started an astonishingly rapid rise. As there is no relief for the need for wood from abroad, imports from Russia will have to be replaced by wood from Finland itself. 

The industrial action at the beginning of the year reduced the use of wood in Finland, and in addition, the forest industry production capacity was closed last year. However, since the use of industrial wood is almost a tenth lower this year than last year, and wood was imported from Russia at the beginning of the year, replacing Russian wood with domestic wood this year is not as big a problem as in the coming years. 

Next year, the forest industry’s wood consumption will increase by nearly six percent, or four million cubic meters, as production increases in both the pulp, paper and paperboard industries and the wood product industry. However, the amount of wood used is still clearly lower than the figures for 2021. With Russia’s imports still frozen, the additional need for wood needs to come from domestic wood harvesting. 

In addition to Russia, the forestry sector, especially forest management and wood harvesting, is also subject to uncertainty from the EU, which has recently increased its proposals regarding forests. Many of the proposals leave much room for interpretation both in their content and terminology. However, the interactions are rather limiting than promoting the current activities of the forest sector. The predictability of the operating environment is deteriorating, which may affect the use of wood in the coming years.. 

Only minor fluctuations in wood harvests 

According to the Finnish Natural Resources Agency, the amount of wood harvested in Finland in January-August this year was four percent lower than the corresponding period of the previous year. The most significant change was in the harvesting volume of delivery price sales of private forests, the amount of harvesting of which has decreased by about 30 percent from the previous year. The combined amount of logging by the companies and Metsähallitus (the enterprise that administers the Finnish-owned forests) increased by a couple of percent from last year’s amount due to August logging. The harvesting volume of standing sales in private forests has remained at the level of the corresponding period last year. In contrast to other types of wood, the amount of pine pulpwood harvested in January-August was one percent higher than the corresponding period last year, due to the very large harvest amount in August. 

This year’s total fellings of industrial wood will remain at last year’s figures as the use of wood decreases, but as Russian imported wood is replaced by domestic wood. Next year, investments in the forest industry will especially increase the need for pulpwood, and market fellings will continue to increase by about two percent, rising to more than 66 million cubic meters. 

The wood market is becoming brisk 

This year’s January-August standing sales volume of private forests is a quarter lower than last year’s very busy equivalent period. However, compared to the average of the last five years’ accumulated January-August standing sales, the shortfall is only five percent. Trade volumes of birch logs and pulpwood have decreased by a tenth since last year, and the decrease from the five-year average is only one percent. However, replacing Russian imports with domestic birch is difficult, as birch mainly grows in Finland scattered among pine and spruce stands. 

The volume of standing sales for the whole year will be 14 percent lower than last year. The background is last year’s exceptionally lively wood market, so the volume of trade still remains high. Last year, stocks of standing sales not yet harvested were also accumulated, which has reduced this year’s demand. 

Next year’s growing need for wood in the forest industry and the complete absence of Russian wood from the market will increase pressure on the domestic wood market. The industry needs wood, and according to a survey conducted by MTK (The Central Union of Agricultural Producers and Forest Owners), the intention of forest owners to sell wood will remain at the level of previous years next year. The number of wood sales in private forests will increase by a few percent this year. However, according to the survey for many forest owners the price level of wood is a markedly more important reason for selling wood compared to previous years. 

Wood markets amidst change – pulpwood prices will increase due to higher demand 

In January-August of this year, the prices of softwood logs in standing sales rose by about six percent from the same period last year. The price of pine pulpwood has increased by about two percent and the price of birch pulpwood by almost four percent. The price development of logs has been the same in sales at delivery prices as in standing sales, but the prices of pulpwood have risen clearly more in sales at delivery prices. 

The average annual price of logs in standing sales will increase this year by about seven percent compared to last year. The real price will remain at last year’s level according to PTT’s inflation forecast of seven percent. Next year, the annual average prices of softwood logs will decrease slightly due to a clear decrease in sawnwood prices. 

The annual average price of pulpwood this year ends up being almost five percent higher than last year. The price of birch pulpwood will rise more than softwood pulpwood after the end of Russian imports. The demand for birch pulpwood is also increased by the use of wood as an energy source in private homes. The increase in the price of pulpwood will continue at the level of about three percent next year, as demand increases with the new production capacity of the forest industry. 

The nominal annual average price of wood in standing sales, calculated on the basis of the average prices weighted by the sales volumes of the different wood species, will rise by almost four percent this year. Next year, the average price of wood in standing sales will decrease slightly from this year’s average price, as log prices fall and sales focus more on pulpwood. 

The nominal gross income from private forests rose by almost a third last year thanks to the increase in felling and trading volume and the rise in wood prices. This year, the gross income from private forests will continue to grow as fellings remains at last year’s level and the average price of wood rises gently. This year there will be an increase of about three percent, which means that the gross income from private forests will increase to about 2.4 billion euros. Next year, the income from private forests will decrease slightly from the current year, as the average price of wood will decrease, even though the amount of fellings will increase. 

Heightened demand for wood chips increases the pressure on pulpwood prices 

The energy use of wood-based fuels and peat has faced changes since 2020, when the rise in the price of emission rights, combined with prime minister Marin’s government program’s goal of halving the energy use of peat, turned the use of peat into a sharp decline. Since 2020, peat began to be increasingly replaced by imported Russian wood chips. In 2021, 20 percent of the wood chips used by Finland’s heat and power plants were imported wood chips, of which almost 80 percent came from Russia. 

This year, the changes in the energy use of wood-based fuels and peat continued when the import of wood chips from Russia ended in March. The import of wood chips from Russia cannot be replaced by imports from elsewhere, as there is a strong demand for wood fuels throughout Europe. Therefore, the Russian imported wood chips will be replaced with domestic wood chips and peat this year and next year. In the current year, it is not possible to increase the use of by-product wood from the forest industry, which depends on the production quantity of the forest industry, because the production of the forest industry is decreasing. Next year, the production volume of the forest industry will increase, which will enable the use of by-product wood to be increased. This year and next year, the obstacle to increasing the use of peat is the smaller number of peat entrepreneurs and equipment, which limits the harvest of peat. In 2021, three-quarters less peat was harvested and more than a third less was used for energy than in 2019. 

The replacement of imported Russian wood chips increases the demand for domestic wood chips, which is reflected to some extent in the demand for pulpwood, as the forest industry and heat and power producers compete for partly the same wood. The tightening of competition increases the pressure on the price of pulpwood, at least regionally. 

At the beginning of the year, the price of softwood increased considerably in the foreign timber markets 

During the current year, the demand for timber in Europe has remained strong, which is reflected in price levels after the Russian import of timber stopped. In addition, pulpwood and energy wood demand will remain strong in the coming winter. However, in North America, an index following the value of timber has developed in the opposite direction. Since March, the index has declined to the pre-corona level because of rapidly weakened demand. 

The price development of logs and pulpwood has been strong in all European countries monitored by PTT (Germany, Austria, Czechia, Sweden, and Estonia). Softwood prices have risen the most in Estonia, Czechia, and Austria, where prices rose rapidly at the beginning of the year. During the spring, the increase in log prices levelled off as demand for sawn wood cooled, except in Estonia, where prices kept rising during the summer.  

Pulpwood prices rose in all previously mentioned countries, especially during the beginning of the year. In the second quarter, the price development was more stable, but spruce and pine pulpwood prices rose considerably in Estonia. Compared to the beginning of the year, the price of spruce pulpwood has increased in Estonia by more than 100 percent, and pine pulpwood slightly less. In Czechia, the price of pulpwood has risen sharply in recent years. Compared to the summer of a year ago, pulpwood prices were also explicitly higher at the end of the second quarter in other Central European countries. 

In European wood markets, demand for wood has been affected by stopped imports from Russia and the increase in energy prices. In Central Europe and especially Germany, demand for wood has increased substantially due to filling stocks for the coming winter. The decrease in Russian natural gas imports and the rise in natural gas prices have made the increased use of wood as energy one of the options for meeting energy demand. During the fall, pellets and firewood have started to be in short supply, even though their prices have risen sharply compared to a year ago, which has reflected in wood prices also. In addition, the dry and hot summer has kept up the bark beetle infestation in Central Europe and Sweden, which increases the wood supply. 

PTT-forecast – Forest sector 2022 autumn. Helsinki 2022. 

Authors: Matti Valonen, Marjo Maidell, Paula Horne, Maurizio Sajeva and Olli Korhonen 

Additional information: 

Paper, paperboard, and pulp industry: Forest economist Marjo Maidell, tel. +358 40 164 8169 

Wood products industry: Forest economist Matti Valonen, tel. +358 40 164 8151 

Harvesting and timber trade: Research director Paula Horne, tel. +358 40592 6820 

e-mail: forename.surname@ptt.fi