The entire Czech wood industry is experiencing difficult times. State-owned forest man-agement company Lesy České Republiky (Lesy ČR) last week announced an 83 percent decline in their year-on-year profit, to Kč 284 million (€11.6 million) for 2007. Lesy ČR attributes this mostly to a lower volume of production. The Ministry of Agriculture is preparing a new law on state forestry, in part to get access to Lesy ČR’s profit.
The profit results were very disappointing for Lesy ČR, as in 2006 they ended up with a profit of more than Kč 1.65 billion. The Czech News Agency (ČTK) reported that they expected Lesy ČR to post a profit of about Kč 630 million, more than was originally planned. Several factors influenced the fall in profit. Lesy ČR commented that in addition to the downgrade of production by 8.9 percent to 8.88 million cubic meters of wood, the other reason concerned windstorm Kyrill. The natural catastrophe forced the company to speed up closing contracts because they had to clean up the wood after the storm. That, according to Lesy ČR, increased production costs and decreased wood prices because of the surplus in wood production caused by Kyrill.
Ondřej Veselý, deputy spokesman of the Ministry of Agriculture, offers another explanation for the Lesy ČR’s worse performance. “The reasons for the profit decline were mostly caused by outer factors. In the U.S. the mortgage crisis started, and the wood business declined significantly. ... After the calamity, the wood is difficult to sell considering its quality [and] the wood market [being] saturated,” he said, adding that the 2007 profits cannot be compared with the exceptional Kč 1.65 billion in 2006, and it should rather be compared to previous years. But still, compared to 2005 or 2004, the profit significantly declined.
New law being prepared
According to information gained by CBW, Lesy ČR has more than Kč 5 billion in various accounts. However, the state-owned company, which owns almost 60 percent of all forest area in the Czech Republic, does not transfer this money to the state because it is not required by current law. That is precisely what Ministry of Agriculture (MZe) wants to change.
Agriculture Minister Petr Gandalovič said he wants to prepare a new law concerning state forests. “[In the case of Lesy ČR] we are following a law on state enterprises that is quite old. While community forests bring profits to cities or villages, Lesy ČR does not bring any share on its profit to the state. The profit is being culminated in this state-own company,” Gandalovič said.
Currently, Lesy ČR utilizes the profits for investment activities, such as renewing forests, improving the woods’ paths and so on. The rest is accumulated in the company. “It is a strategic decision,” said Radek Drahný, spokesman of Lesy ČR, adding that the responsible people have to decide how the new law will be drafted and what Lesy ČR will do with its profits. Then the company will conform to the new law.
The basis of the law should be prepared this autumn, according to Gandalovič. However, it is not yet known when the law will be discussed in the Parliament. “We are doing all we can to prepare the law as soon as possible, however the MZe has to prepare many analyses [of the issue], considering the importance of this law,” Veselý said.
Problematic tenders
During the privatization process in the early 1990s, Lesy ČR was created to administer state-owned forests. However, all the facilities for wood production and processing were privatized. This is the reason why Lesy ČR has to issue public tenders for most work connected with wood production and forest administration. The tenders are often attacked by unsuccessful companies that usually state the tenders are unclear or corrupt. A recent case that is being followed by the Office for Protection of Economic Competition (ÚOHS) was a contract giving control of timber sales to company Hradecká lesní a dřevařská společnost (see “Lesy ČR may lose millions due to contract,” CBW, Aug. 18, 2008). Lesy ČR now has about five ways to sell their production; two of them are by direct sale of stumpwood or by sales via Hradecká lesní a dřevařská společnost, in which the company holds a 50 percent share.
Other problems were connected to tenders for work on liquidation of the results of windstorm Emma. “ÚOHS has got a legal report that shows the tenders … were OK from a legal point of view,” Gandalovič said. He added that many of the accusations are not solidly based, because many wood companies have economic problems.
“I don’t want to speculate whether the leaks of some cases into the media are the work of unsuccessful wood companies or [due to] the background of political games,” Drahný said, however he personally sees this as an attempt to discredit Lesy ČR.
Therefore, he also wants the new law to solve the issue of public tenders in the forest industry, to make them more transparent. “It is clear that the law on public tenders is not appropriate for the wood industry,” he said. According to Gandalovič, the law allows companies to file objections, which can result in Lesy ČR not being able to take care of the forests properly.
However, the MZe is not only waiting for the new law. According to Veselý, some steps are already being taken. “We are trying to make general management slimmer, to transfer more authority and decisions to the regional level,” he said.
Last week Lesy ČR filed a suit against private forestry company CE Wood. Lesy ČR said CE Wood owes them around Kč 100 million. On the other hand, CE Wood recently filed a suit against Lesy ČR for Kč 4.8 billion as an indemnity for damages caused to CE Wood during public tenders on wood contracts.
Privatization not so soon
Lesy ČR owns around 60 percent of all forests in the Czech Republic, which many consider harmful to a competitive environment in the Czech wood industry. “The market is definitely influenced by the fact that the state owns almost 60 percent of forests. However, it depends on the amount of wood traded by [Lesy ČR], so I assume the influence could be from 20 to 25 percent,” said Jan Příhoda, editor-in-chief of wood industry magazine Lesnická práce. Gandalovič, therefore, plans to include a plan for privatization in the new bill. He said he does not expect privatization to begin during this election period. “I would even doubt the next government will manage to do so. But the homework has to be done, we need to prepare the conditions,” he said.
Prices of wood declining?
Many wood industry experts have recently said that the industry is now in a deep crisis. “We speak about a crisis because a temporarily high supply of wood is accompanied by a deep crisis of the sawn timber market and the market of agglomerated materials basedon wood. It is a crisis many Central European producers have not seen for decades,” Ivo Klimša, president of Confederation of Forest and Wood Unions (KLDS) told Lesnická práce earlier this year. He and other experts attribute the reasons for the crisis to the mortgage crisis in the U.S., the strong crown harming wood exporters, the weak U.S. dollar and the slowing down of many economies.
The crisis, as well as the high supply of wood, has resulted in lower prices of wood on the Czech market. For example, according to the Czech Statistical Office (ČSÚ), which tallies statistics of wood prices in the country for every quarter of the year, the price for one cubic meter of oak wood slices of the first quality has declined in the second quarter of 2008 to Kč 9,925 compared to 2008’s total average price of Kč 10,919. Higher or lower declines in the price for the second quarter of 2008, compared to the average price of this year, can be observed in every category tabulated by ČSÚ. For example, the declines also apply to wood for further processing and to wood serving as fuel in the energy industry.
