Latvia's wood-processing sector has weathered many market cycles over the past two decades, from the global financial crisis to the pandemic-era boom and the disruptions that followed Russia's invasion of Ukraine. Yet few issues have generated as much frustration among sawmill operators as the disconnect that emerged between lumber prices and log prices during the market downturn that began in 2022.<\/p>\n
For producers of softwood construction materials, the problem was straightforward. Demand for lumber weakened sharply in Europe and Asia, prices fell month after month, yet the cost of the raw material required to manufacture those products remained stubbornly high. Many producers argued that the situation left Latvian sawmills at a competitive disadvantage compared with rivals in Scandinavia and elsewhere in Northern Europe.<\/p>\n
The debate quickly evolved beyond the forestry sector itself. Concerns raised by sawmills were discussed not only within industry associations but also at broader business forums, including meetings involving the German-Baltic Chamber of Commerce. At stake was not merely the profitability of individual companies, but the competitiveness of one of Latvia's most important export industries.<\/p>\n
A construction downturn with few escape routes<\/strong><\/p>\n The difficulties facing sawmills began with a sharp deterioration in construction markets.<\/p>\n According to Sampsa Auvinen, chairman of the European Confederation of Woodworking Industries, the European construction sector entered a crisis comparable to, and in some respects more severe than, the downturn experienced during the financial crisis of 2008.<\/p>\n \"The European construction market is in crisis, as various countries are experiencing a 30-50% decline, similar to what was experienced in 2008,\" Auvinen said.<\/p>\n Inflation, higher borrowing costs and growing economic uncertainty all contributed to the slowdown. As central banks increased interest rates to combat inflation, financing new housing projects became significantly more expensive. Developers delayed investments, homebuyers became more cautious and many planned construction projects were postponed or cancelled altogether.<\/p>\n \"The increase in prices has made many people who want to own their own home very cautious,\" Auvinen explained, noting that higher interest rates had significantly increased the cost of borrowing.<\/p>\n While projects already under construction continued to move forward, the flow of new projects slowed dramatically. The consequences quickly spread through the timber supply chain.<\/p>\n Unfortunately for European producers, weakness was not confined to Europe.<\/p>\n Auvinen pointed to Asia as another increasingly difficult market. Following sanctions on Russian wood products, large volumes of Russian lumber that could no longer enter Europe were redirected elsewhere, particularly into Asian markets.<\/p>\n \"The Asian market has been a very important outlet for Latvian and all European sawn products,\" Auvinen said.<\/p>\n The additional supply increased competition and put pressure on prices at a time when demand was already weakening. As a result, sawmills across Europe encountered shrinking order books and falling selling prices. In many cases, producers reduced operating schedules and worked only three days per week.<\/p>\n When lumber prices fall but log prices do not<\/strong><\/p>\n Under normal market conditions, declining lumber prices would eventually be reflected in lower raw material costs.<\/p>\n According to many Latvian producers, that adjustment failed to occur.<\/p>\n The centre of the dispute was the pricing mechanism used by Latvian State Forests (LVM), the state-owned company that manages and sells timber from state forests.<\/p>\n \"It is paradoxical that the Latvian state-owned and in fact the most important supplier of wood resources in Latvia exists at such roundwood sales prices that are actually killing sawmills,\" Auvinen said.<\/p>\n He questioned why the price-monitoring and indexing system appeared unable to reflect the dramatic deterioration taking place in lumber markets.<\/p>\n \"Currently, the selling prices of softwood sawlogs from the Latvian state-owned forest manager are the highest in the world, and they are killing sawmills rather than promoting the development of this traditional industry for Latvia,\" he argued.<\/p>\n For sawmills, the issue was particularly serious because raw material costs typically account for around 70% of production expenses.<\/p>\n A producer can invest in technology, improve efficiency and optimize logistics, but if competitors have access to substantially cheaper logs, those efforts can only go so far.<\/p>\n The frustration was echoed by Voldem\u0101rs Cir\u0161s, chairman of Smiltene Impex.<\/p>\n According to Cir\u0161s, lumber prices had been declining for sixteen consecutive months while reductions in sawlog prices lagged far behind developments in finished-product markets.<\/p>\n \"Lumber prices have been falling for 16 months in a row,\" Cir\u0161s noted.<\/p>\n He argued that some lumber assortments were being sold at prices approaching the cost of the roundwood used to manufacture them.<\/p>\n The situation was particularly worrying because the downturn was global in nature.<\/p>\n \"It is important that the current stagnation of the softwood lumber market is observed worldwide,\" Cir\u0161s explained.<\/p>\n During the financial crisis of 2008, European producers could still redirect volumes to other regions. In the current market environment, however, weak demand was visible across multiple continents simultaneously, leaving far fewer alternatives.<\/p>\n Scandinavian competitors gain an advantage<\/strong><\/p>\n The consequences became increasingly visible as producers searched for ways to reduce costs.<\/p>\n Many companies increased purchases from private forest owners, where logs could sometimes be obtained more cheaply than through state supply contracts. Others attempted to blend high-cost logs from state forests with lower-cost timber sourced elsewhere.<\/p>\n Some companies went even further.<\/p>\n According to Andris Veide, chairman of Lameko Impex, importing semi-finished products from Scandinavia had become more economical than producing them in Latvia.<\/p>\n \"Currently, it is more economically advantageous \u2013 cheaper to purchase blanks in Scandinavia rather than produce them ourselves in Latvia,\" Veide said.<\/p>\n For a country whose economy has long relied on wood processing, such a situation appeared deeply contradictory.<\/p>\n Veide questioned how Latvia, one of Europe's most important softwood lumber exporters, had reached a point where local manufacturers struggled to compete with foreign suppliers using the same raw material.<\/p>\n He argued that Scandinavian producers were increasingly exploiting the situation and expanding their presence in markets traditionally served by Latvian companies.<\/p>\n \"This paradoxical situation is currently being successfully exploited by Scandinavian manufacturers, who are also entering Latvia and taking the market away from domestic manufacturers,\" Veide warned.<\/p>\n Beyond sawmills: a question for the wider economy<\/strong><\/p>\n The concerns expressed by producers extended beyond individual company results.<\/p>\n Auvinen argued that Latvia's reputation as a reliable supplier of lumber could eventually be affected if domestic producers continued losing competitiveness.<\/p>\n According to him, buyers closely monitor production costs and market conditions. If competing suppliers in Scandinavia can consistently offer more competitive pricing and stronger margins, customers may gradually shift purchasing decisions elsewhere.<\/p>\n \"This situation directly affects the Latvian economy, because Latvia's reputation as a reliable supplier of sawn products is being questioned,\" Auvinen said.<\/p>\n He also questioned whether the problem originated within LVM itself or reflected broader policy decisions.<\/p>\n \"Maybe the reason is that the management of the company has completely changed, maybe the cause of the problem is to be found in the ministry that oversees it,\" he remarked.<\/p>\n Regardless of where responsibility lay, Auvinen believed the issue required political attention.<\/p>\n \"If there is a political desire to preserve the timber industry in Latvia, then a solution will also have to be found at this level that would allow the producers of sawn softwood products operating here to regain competitiveness,\" he said.<\/p>\n A debate that remains relevant<\/strong><\/p>\n Although the most intense phase of the dispute occurred in 2023, many of the underlying issues remain relevant today.<\/p>\n In a recent interview, Auvinen again emphasized that raw material costs remain the decisive factor in sawmill profitability and recalled that intervention in the Latvian market had been necessary because timber prices had become detached from economic realities. He argued that even the most technologically advanced sawmill cannot remain profitable if competitors have access to significantly cheaper raw material.<\/p>\n He also painted a bleak picture of the broader European environment. Construction activity remains weak, logistics costs have increased, uncertainty surrounding trade policy persists and many companies across the forest sector continue to operate under significant financial pressure. According to Auvinen, the current downturn is even more severe than the one that followed the 2008 financial crisis.<\/p>\n For Latvia's sawmills, however, the central issue remains unchanged.<\/p>\n Forest owners naturally benefit from higher log prices. Processors benefit from lower ones. The challenge lies in maintaining a balance that allows both parts of the value chain to remain healthy.<\/p>\n As long as lumber prices remain under pressure and competitors in neighbouring countries continue to enjoy lower raw material costs, the debate over log pricing is unlikely to disappear. For an industry that remains one of Latvia's largest manufacturing exporters, the outcome will influence not only sawmill profitability but also future investment, employment and the country's position in international lumber markets.<\/p>","protected":false},"excerpt":{"rendered":" Latvia’s wood-processing sector has weathered many market cycles over the past two decades, from the global financial crisis to the pandemic-era boom and the disruptions that followed Russia’s invasion of Ukraine. Yet few issues have generated as much frustration among … Continue reading