Latvian logging companies : present state and development needs

University essay from SLU/Dept. of Forest Products and Markets

Author: Daniel Norström; Kristin Gustafsson; [2005]

Keywords: Logging; Latvia;

Abstract: Several Swedish forestry research institutions, the Nordic Council of Forest Operations Research (NSR), the Nordic Forest Research Co-operation Committee (SNS) and the Royal Swedish Academy of Forestry and Agriculture (KSLA) in co-operation with the Nordic-Baltic Forest-Operations Network has concluded that further discussions and activities concerning Baltic forest operations need more facts regarding the present state and development needs in the Baltic forestry. This study was undertaken to begin bridging this gap by a mission given by the Swedish Institute of Forestry Research. The paper presents the findings of two B.Sc. students writing their C thesis in business economics at the Forest Engineering program at the Swedish University of Agricultural Sciences (SLU), supported by two B.Sc. students at the Forestry Engineering program in Jelgava, Latvia. Fourteen interviews were made in order to collect enough information about the logging companies and their situation in the Latvian forestry sector. The interviews have then been analysed to arrive at general conclusions. The selection of logging companies, performed by the Latvian B.Sc. students and their supervisor, were based on prominent logging companies using relatively modern equipment such as modern harvesters and forwarders. The intention was also to have a wide geographical spread in order to see if any local differences could be distinguished. In addition to the interviews the report also contains a literature study, mostly based on Internet documents. The overall aim of this study is to provide baseline information about logging performance and logging companies in Latvia. The main objective is to make a survey of the present state regarding business, organisation and the conditions the logging companies are working under. The aim of this study is also to ascertain the logging companies’ development needs and possibilities in the Latvian forestry sector. Fourteen qualitative interviews have been made with Latvian logging companies performing logging operations in final felling and in thinning as core business mostly by using their own logging machines. The logging companies also perform their own timber transports mainly by means of their own timber trucks. The logging operations in thinning are exclusively performed manually while the operations in final felling are fulfilled mainly by logging machines, but also manually, where width of stems and division of tree species decides which procedure of logging, manually or by machines, to be the most profitable. The use of subcontractors is common with main focus on thinning where motor manual labour and private machine owners with tractors and carts are used. A few logging companies use subcontractors with harvesters and forwarders in final felling and in timber transports either because of the lack of own logging machines and timber trucks or in cases of over employment, when more machines are needed. The motor manual subcontractors also perform other silvicultural activities such as planting and pre-commercial thinning. The logging companies are characterised by a diversity of activities besides the core business where the ownership of sawmills is most frequent. Examples of other side activities are purchase of forestland, wood trading, fabrication of log houses and manufacturing of fence poles. Most companies were founded in the immediate period after the Latvian independence in 1991 while some companies originate from the state forestry during the Soviet occupation. Foreign forestry companies own three logging companies. The logging companies’ acquisition of timber is mainly performed through contracts that imply a priority to purchases of felling-rights in the forests owned by the Latvian State. The types of state-contracts are long-term- and assortment-contracts. In the interviews, the logging companies have stated that the long-term contracts are more advantageous than the assortment-contracts, because of the contracts length of several years and the fact that the companies become the owner of the timber, which they can sell to a customer of their own choice. The assortment-contracts last for one year at the time and imply that the logging companies are just performing a service for compensation as a subcontractor to the state. With the exception for the one-year long period of contract the assortment-contracts are undeniably influenced by the contracts occurring between forest companies and logging contractors in the Swedish forestry. A part of the compensation to the logging companies are paid as estimated output from the production before logging, which after the logging is adjusted to the actual volume of produced timber received from the harvester computer. The Latvian State decides which assortments to be crosscut within the assortment-contracts in difference to the long-term contracts where the logging companies themselves decides what assortments to be crosscut, depending on demand from the customers. The state does not renew the long-term contracts any longer but favour instead the assortment-contracts. Besides the contracts the state sells single felling-rights through bidding procedures at auctions. Private forest owners sell either single felling-rights or whole forest properties through bidding procedures advertised in Latvian newspapers. Apart from the competition between the logging companies themselves the companies also meet competition from unregistered illegal logging enterprises that afford purchases of felling-rights at a higher price than the legal logging companies, since they do not pay any taxes. The illegal enterprises buy felling-rights both from the state and private forest owners, which is why the legal logging companies demand more supervision and control from the state in this particular case. Such supervision would decrease the prices of the felling-rights. Through the land reform many private former landowners has got their land properties back, and has by lack of interest or other reasons often chosen to sell their properties. A great part of the logging companies felling-rights are bought from private landowners, and when the price of the felling-rights sometimes do not to any appreciable extent differ from including the land, several of the logging companies have become considerable landowners. Another procedure in the acquisition of land, especially among the smaller logging companies, is to buy already final felled forestland without any standing forest on, as the price of the land is low. The reason why the companies intentionally purchase forestland has been mentioned as a step to be more self-supported with raw materials in the future; as several logging companies claim that the high rate of logging will result in a shortage of lumberable forests in the private forests within a few years time. The logging companies’ pulpwood customers are mainly Scandinavian pulpmills, saw logs are sold to domestic sawmills. The types of contracts that exist in the business relationships between the logging companies and their customers are in first hand long-term contracts and spot-contracts in second hand. Most logging companies say they are profitable due to either incomes from the logging or the side activities. The most restraining facts regarding profitability are considered as the high prices of felling-rights and burdensome taxes of incomes from logging and taxes on fuel to the logging machines. Several logging companies are certified in accordance to the FSC-standard while many uncertified logging companies consider the incentives to be certified as inadequate, as the certified companies do not obey the certification. One reason of the lack of incentives to be certified are the wood trading between the companies with timber from both certified and uncertified forests, which then are mixed in the certified companies’ sawmills, and are sold as certified wood products. Another reason is the scarcity of demand of certified wood products from the logging companies’ customers. The competence of the personnel within the logging companies includes university degrees in economics and forestry among others within the companies’ office staff and operative logging functions. The machine operators have all received courses and certificates in operating the logging machines and have an upper secondary school degree in forestry as highest education. A majority of the logging companies own their own machinery that are of a relatively late year model and consists of harvesters, forwarders and in some cases scarifiers. Most logging companies also own trucks for timber logistics and to transport their machines. The most common incentive to make investments in new logging machines is reinvestments when the existing machines are old and often broken. The purchase occasions are often chosen when the companies’ logging situation is convenient as when high production of timber occur. The forest sector in Latvia has developed, and is still developing, from an institutional to a market adjusted system. Since the independence in 1991 lots of forest companies, of different sizes, have appeared as a result of free market forces and the land reform. Great changes in the forestry sector may appear in future. Some changes have already appeared as the state reorganises their contract-systems, which will force many companies to change their business concept in order to survive. Fewer companies will be given opportunities to get the state’s assortment-contracts than has been given before as long-term contracts. Many more companies will try to buy felling-rights from private forest owners where the competition will force many companies to either close their logging enterprise or close the entire company due to the high prices of felling-rights. A potential positive result of the state’s reorganisation of the contract-system concerning the logging companies, would be the disappearing of the illegal logging companies acting on the market. Except for the reorganisation of the contract-system is the future shortage of lumberable forests in the private forests threatening the logging companies due to the present high rate of logging. A future possibility to the logging companies in the Latvian forestry is a greater use of the FSC-certification on timber, which today has low demand from the companies’ customers. A greater demand of certified Latvian wood products from foreign customers would, apart from just implying better environmental profits also lead to a higher value in itself are put on the Latvian forests and its timber. Finally, a higher value could involve an improved economical situation to the Latvian logging companies.

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