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					                                     FEST-FOREST NEWS

  Heki 21, Tartu, 50115 Estonia - Tel: +372 7303535 - Fax: +372 7366862 -
  Muldavas 16 – 14, Dobele, Latvia – Tel: +371 3781852 – Fax: +371 378 1853 –
   UK office: Woodland place, West street, Belford, Northumberland NE70 7QA Tel :+44 1668 213555

Issue 21 - November 2003


Email form Guntars Liepins, our Latvian forester to Toomas Kams, the MD.

“The question is: do you think that we should start harvesting intensively because since the previous
year prices have risen so much that I do not know what to do. If we waited a bit more what would
happen then?”


The new Stora Enso mill in Laukalne, Latvia has recently raised its price by 3 Lats per cubic
metre (1 Lat = 1.54 €). This is an increase of about 15% to the grower.

With the main harvesting season coming up, it is excellent news for our clients.

Market Summary by Margus Kuusk, production distribution manager StoraEnso,
Tallinn, Estonia

Estonia is suffering a severe log-shortage, partly through the change in law, which states that
pine cannot be felled until it is 100 years old and spruce is 80 years old, whereas previously it
was alternatively based on diameter. Ed: I don’t entirely regret this change. Diameters in
Estonia were quite low, but I think it would have been better to raise the diameter rather than
go for age, which is difficult to prove and does not relate to rate of growth.

Additionally there is simply an over capacity, in spite of the fact that two sawmills (Barrus
and Viiratsi) have burned down and Purila has been closed down, which has taken some
350,000m3 of capacity out of the market. As Viiratsi is being rebuilt,120,000m3 should be
back in production in the near future. The total sawmilling capacity in Estonia is exceeds
timber felling considerable. Sawmills have to compete with an increasing demand for timber
for log-houses (100,000m3), however, this is compensated for by a decrease in exports (50%
down to 200,000m3). A large source of sawlogs is from imports, especially from Russia,
reaching 700,000m3 this year. However, this is not a cheap option, they are a little more
expensive than local logs.

At present there is also a net import of logs from Latvia, but this is likely to change over the
next few years as several new mills, mainly from StoraEnso, are coming on stream in Latvia
and Lithuania over the next few months.

      Also: Border Consultants (Forestry) Ltd, Woodland place, Belford, Northumberland UK, NE70 7QA Tel: +44 1668 213693
Generally about 33-40% of all harvesting ends up as conifer sawlogs in Estonia. This is
thought to be 3million m3 this year, confirming a total cut of some 8million m3 and suggest
that only about half the timber from conifer crops ends up as sawlogs.

Ed: I am surprised that it is not higher. The UK, with a similar size cut (8.8m m3 of softwood
in 2002 ) achieved 4m m3 of sawlogs or 45%. It would seem it
is similar to Estonia, although sawlogs in Estonia can start at 9cm top diameter whereas
14cm is generally the starting point in the UK and in my area, the North East it is 16cm. One
difference may be that there is much thinning and selective felling in Estonia, whereas I
suspect much of that has stopped in the UK because of the collapse in markets for small

The market for sawmill chips and sawdust is strong. The former are used for pulp production,
mostly in Sweden and Finland and the latter for fuel pellets, both abroad and locally.

The increasing bureaucracy of forestry is concerning timber users like StoraEnso. The
“green” campaign is quite strong and the Environment minister, Villu Reiljan is proposing to
strengthen considerably the control of felling. “Black” timber appearing on the market has
virtually ceased and timber theft is well under control. This is partly due to increased
policing, but largely because most harvesting is now carried out by the big companies, which
are well regulated. However, the minister is additionally proposing that harvesting must be
subject to a 10 year plan approved by a government official. The forest service will draw up
plans for free and aims to have achieved this by 2009. However, that means that most people
do not have felling permission at present. It is possible to have the plan drawn up by a
licensed private forester and have it approved by the government, but that is an expense many
shall not want to incur. At present approval for felling has to be granted within a fortnight,
but that is proposed to double to a month.

Ed: It may seem a lot of additional bureaucracy to Estonians, however, compared to UK it
still seems a walk over. The main advantage in Estonia is, that there is no landscape issue.
The only issue in Estonia and Latvia is: is it good forestry! What more can a forester wish

Restocking is a genuine concern. The minister proposes to impose a deposit and, if after 7
years the felling site is not established, either through natural regeneration or planting, the
deposit is forfeited. Whatever my criticism of UK forest bureaucracy may be, it has always
been based on incentive, rather than penalties. Apparently a similar threat is made in
Sweden for pre-commercial thinning. If you do not carry it out, the state may take the powers
to do it and send you the bill.

Anything which makes forestry more expensive may affect property prices. However, we
think that is unlikely to be significant. Some recent forest sales by Estkinnisvara, our
associated property company, suggests that the change in felling permission from diameter to
age did not affect prices at all.

From Timber Trades Journal
The EU's new action plan against illegal logging is flawed unless it also includes the Baltic
states, WWF claims. The conservation group claims extensive illegal logging is taking place
in Estonia, Latvia and Lithuania. It estimates 15-25% of all logging in Latvia is illegal along
with 40-50% in Estonia, while Sweden and Finland are major purchasers of the wood.

Editor comments: As 50% of the harvesting in Estonian is carried out by the state forest
service, presumably legally, the whole of the private sector must be cutting illegally. This is
entirely at odds with our experience.

Forestry and Timber News, the magazine of the UK Forestry and Timber Association, has
followed this up and Professor Kalev Jõgiste from Tartu university comments:

“The 40-50% of illegal felling in Estonia is an exaggeration. If the meaning of "illegal" is
very broad, we could consider all 100% of cuttings to be illegal in many countries. The
official statistics provides numbers of 1-2%. It can be somewhat bigger but not exceeding

Estonian Landowners Union
The Estonian Landowners Union has been created to represent landowners’ interests to
government and society, ensure a high standard of practice and exchange information with
similar organisations in other countries. We are recommending our clients to join and some
have already done so. The annual membership fee is 300kr. For more information contact:

From The Baltic Times
The leading trio in Latvia’s wood industry remains unchanged with Latvijas Finieris, Nelss
and Stora Enzo Mets remaining at the top.

Only 16 companies have a turnover exceeding 10m lats and only one exceeds 50m lats (1 lat
= 1.56 €). More than 1,000 companies work in the wood industry in Latvia, and it is the main
export industry.

Many companies experienced difficulties in 2002 due to the fact that timber prices in foreign
markets did not increase, whereas in Latvia prices of round timber rose considerably.

Pondering effective international tax structures – Balic Times
If we look at North European countries, including the Baltic states, we find that the Baltics
have adopted particularly low tax rates for corporate income. Estonia has a unique and
interesting tax system. It imposes a 26% profit tax on the distribution company, i.e. when
profit is distributed. There is no tax on company profits if they are not distributed. Latvia and
Lithuania have more conventional tax systems. In Latvia the corporation tax rate is 19
percent, but will be further reduced to 15 percent. The Nordic countries, by contrast, have
higher tax rates of around 30 percent.

UK and Ireland
UK forestry remains depressed. The Shotton papermill will shut the door to small round-
wood this week. In spite of weak Sterling there is no improvement in log prices. Sterling has
long been blamed for the weak market, even recently in a Jaakko Pöyry report commission by

the UK Forestry Commission. Forest Machinery Journal (FMJ) reports David Bills, the
Director General of FC UK saying: “Also the Commission (Forest Enterprise) was perceived
as having played an unwelcome role in dragging down the price of timber, and there had even
been suggestions of collusion” Mr Bills went on to say that it was getting a bit hot in the
kitchen, so he decided to organise an independent look at what was going on. This task was
given to Jaakko Pöyry.

He continued by saying the FC provided security of tenure. It was important to recognise the
insdustry’s investments in big tangible assets. “The industry needs a continuous supply of
wood of predictable cost and quality.”

Ed: There is no doubt that in the early days the Forestry Commission’s long-term contracts
brought industries to the UK. However, the case for that must now be very weak with the
large volumes coming on the market. There must be a strong case to privatise the marketing
of state forest timber in a diverse and competitive way.

Ironically, in the Baltic states, forest industries are frustrated by state forest services because
they totally ignore the industries´requirements as to how and when timber is presented to the
market. Maybe we can swap management of state forests for a while.

FMJ reports: Robert Scott, Chairman of Forestry and Timber Association (FTA), which
represents those who own, manage and work in forests, pointed out considerable areas in the
Jaakko pöyry report that had either been addressed selectively, or not at all.

FTA recognises the problems and frictions in the industry and has produced a discussion
document “a level playing field for forestry” and is holding discussion meetings all over the
UK. Let us hope this results in a fresh look at UK forestry.

The Macdonald report, initiated by members of the industry (FIDC) recommends that a single
body be created to represent forestry and the forest industry. A good idea, if there is a chance
all sections would be fairly represented. However, the unilateral actions by the panelboard
manufacturers to try and prevent new industries being developed to use wood for energy, does
not fill one with confidence it would be equally balanced. Industry puts a lot more money in
its representative bodies then the timber grower, which would make it difficult to imagine the
grower would manage to get its voice heard. The Macdonald report is posted on the internet
and FMJ discovered that, if it is copied and pasted into a word document, the editing and their
source can be seen. Just shows how easy it is to get unforeseen results. (this is the website if
you want to try )

Margeret Becket, the environment minister is going to amalgamate the various quangos in
England such as English Nature etc. into one organisation. I imagine it will become like SNH
in Scotland. SNH rules the Scottish country side, which is excellent news if you get on with
them, but very bad if they take a dislike to you. Fortunately, it seems too complicated to
include the Forestry Commission and it will remain separate.

Irish forestry, in contrast to the UK, seems to be defying gravity. Irish Timber and Forestry
reports that standing timber prices in Ireland were on average 140% higher than in Britain. At
the same time sawmills have doubled their exports to Britain (361,000m3). How is that
possible? They have 34% of their construction market and 45% of their total market.
I have been trying to find out what percentage of the construction market UK millers have. If
any readers have this information, I would welcome an email.

ESTKinnisvara purchases large office building in Tartu for Irish clients

Erinmets, our Irish investors and pioneer Baltic forest investors for Fest-Forest, are now the
proud owners of this historic building in Tartu. It was bought for about twice the price of my
sons 2 bedroom flat in London and largely financed with income from timber sales.

Erinmets will spend 1.5m kroons (€100,000) restoring it to prime condition. With only two
floors occupied by tenants, the investment already shows an acceptable return. When all five
floors are let (there is one below ground floor and one under the roof), the investment will be
very attractive in every way.

For further information please contact Felix Karthaus Tel: +44 1668 213693
                                                        Fax: +44 1668 213555


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