By Ben Aris in Moscow -
Russia is famous for its raw materials probably the most prolific is one of the last people would list – Russia is one giant forest. And that makes Russia the seventh largest producer of pulp and paper in the world. Ilim Group is the largest forest products company in Russia, a straight 50/50 joint venture between a group of private Russian investors and the US-based International Paper Inc, the largest pulp and paper company in the world. About 70% of the company's production goes for export – largely to Asia. The company has been actively expanding its supply of value-added products to the Russian domestic market to substitute imports and for the last year has already cut import of paper to a quarter ; one of the quirks of the Russian market is until the devaluation of the ruble in December it was cheaper and easier to export Russian pulp to Finland where it was turned into paper and then reimport the finished product to Russia.
"Asia is our most important market. We have been exporting pulp and board to China, Japan, and South Korea for the last 20 years," says Franz Josef Marx, a German national and CEO of Ilim Group. "We are now investing about $250mn a year after we finished a $2bn program to build the biggest and highest international standard facilities in Russia."
The growth of the company has not been smooth. In the first half of the noughties the facilities became the object of a vicious takeover battle between the existing owners led by Russian investor Zahar Smushkin and oligarch Oleg Deripaska. After Smushkin successfully sued Deripaska in the UK, the two sides came to an agreement and Smushkin retained control of the company.
For the next several years the business was run largely to generate cash. The next development steps required large investments, but such experience in Russian pulp and paper industry was lost after collapse of the Soviet Union. So in 2006 Ilim decided to go into a joint venture with the global paper giant International Paper, experienced in implementation of largescale projects all over the world and very unusually contributed exactly half of the company to the joint venture. An exactly 50-50 split is unusual as neither side has control of the enterprise and assumes excellent working relations between the two sides, but often ends with very nasty corporate disputes; the Russian-British oil joint venture TNK-BP between the Alfa-Access-Renova holding of a group of leading Russian oligarchs with British Petroleum was also an exact 50-50 split and Moscow legend has it that the principles of the companies ended up throwing things like phones at each other during board meetings towards the end. However Marx explains that the working relationships between the Russian owners and International Paper remain excellent.
"There is an alignment of interests and each side plays to its strengths," says Marx. "The Russian owners take care of things like construction and maintenance of the facilities. International Paper provides the technological inputs and an international marketing back up."
Like all producers with significant export volumes, the devaluation of the ruble has benefited the company, as its costs are mainly in rubles but its revenue is mostly in foreign currency.
Sanctions has had little or no impact on the operation of the company. None of the technology it imports is on sanctions list and Marx says that, including through their American partner the company has not been cut off from international capital markets. Moreover Ilim is increasingly turning to Asia in order to finance his business, and it’s a natural decision given that the bulk of its exports go to Asia.
Indeed unlike most other Russian companies the sanctions are an excuse to continue the company's expansion; import substitution is a high priority for the Russian government and Ilim is in an ideal situation to do exactly that.
"We don’t want to miss this crisis. It's a good time to think about strategy and we can do a lot while others struggle… We are thinking about the opportunities to expand maybe through M&A or perhaps building additional capacity," says Marx. "We have been looking to Asia to finance our expansion and not because of sanctions on the financial markets for Russian companies but simply because the funds are cheaper."
However sales have been affected by the economic slowdown both in Russia and Asia. While the company is looking to expand it has for the moment been investing heavily in improving productivity, efficiency and quality as well as spending more on the training of its staff. Marx says the company already "debottlenecked" three of its mills and boosted production by 20% as a result.
The next step is going to be boosting the supply to the Russian market. As bne IntelliNews report on the toilet paper sector highlighted the demand for quality paper products will more than double in the future and Ilim Group is in an ideal position to be the biggest winner. Currently Russians consume about 56kg of paper and cardboard a year, against the international consumption of 100-250kg/year depending on the country, says Marx. Tissue and packaging are the two biggest subcategories.
The company already produces some 3 million tons of pulp and paper per year and has invested over $2bn on increasing the output and improving its quality. Recent investment has gone into construction in Siberia one of the world’s largest softwood pulp line to supply Asia and the plant in Arkhangelsk region in western Russia which makes quality coated and office paper remaining in short supply in the Russian market.
And Ilim has already had a big impact on the paper trade business: in 2014 Russia imported some 120,000 tones of office paper, but after Ilim fired up its new $300mn production line for the same paper in Arkhangelsk region last year the volume of imports of office paper will fall to about 50,000 tones this year and drop again next year to between 20,000 and 30,000 in 2016, says Marx.
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