Janis Osis: The advantage of cheap timber is an illusion that threatens development
The situation in the forest sector and timber processing industry has changed. Not because there is less forest, but because the world has become more demanding. Uncertainty has made capital more expensive, labor harder to access, while resource and energy prices are both higher and more volatile. What we long considered our advantage is gradually turning into a challenge. Raw material is no longer cheap and self-evident. Timber processing must learn to generate profit not from cheap timber, but from the ability to create value from it. Therefore, the driving force of Latvia’s timber industry is no longer more cubic meters, but the ability to generate more worth from each cubic meter – added value.
Added value is the value a company adds to raw materials, energy, and outsourced services. It is the portion of revenue that remains within the company for salaries, capital depreciation, profit, and taxes. If added value is low, a company may have high turnover, but only a small share remains for people and the state.
Productivity, measured as added value per employee, shows how much value one person can create. Meanwhile, the depth of added value – added value per euro of turnover – reveals how valuable each euro earned actually is: whether it stays within the company or simply flows through as the cost of raw materials, energy, and outsourced services.
Return on capital is a simple but essential indicator showing whether invested capital generates sufficient returns. If return on capital remains below the cost of capital for a prolonged period, the company is not creating value but slowly consuming it – even if accounting still shows profit. Debt burden and interest coverage ratios are indicators banks use to assess how large a company’s debt is relative to its earnings and how safely it can service interest payments, especially during economic downturns.
There are champions and there are laggards
When these concepts are applied to the sector’s 2024 data and compared with the median of European Union countries, the picture becomes clearer. An analysis of the 35 most visible Latvian timber product manufacturers, with total turnover of approximately 2.21 billion euros, shows that the sector is diverse. It resembles a mosaic, where different business models and very different levels of performance coexist. Based on productivity and added value depth, companies can be divided into four groups.
The first group is strategically the most important. It consists of companies that are both efficient and capable of retaining value within the business. There are 8 such companies, with combined turnover of about 845 million euros. On average, they generate around 73,000 euros of added value per employee, and their added value depth is about 0.37 euros per euro of turnover. These are companies that, in times of crisis, typically act rather than seek help. They invest, automate, and sometimes even consolidate.
The second group is the most interesting from a growth perspective. It also includes 8 companies, but with much smaller total turnover – around 73 million euros. Added value depth here is high, approximately 0.37 euros per euro of turnover, meaning that value already exists in the product or market position. However, productivity still lags behind, averaging about 31,000 euros of added value per employee. Simply put, these companies know how to create value but have not yet developed sufficient operational scale and efficiency. This group holds the greatest potential for rapid breakthrough if investments are targeted correctly.
The third group is paradoxical. It consists of 9 companies with turnover of about 778 million euros that are highly productive. Added value per employee exceeds 90,000 euros, but added value depth is low – about 0.15 euros per euro of turnover. They manufacture extremely efficiently but operate in segments with limited pricing power. These companies are often very strong operators, yet their profits depend heavily on global price fluctuations. If they wish to break out of the cycle, they must increase added value depth. Their current business success is exposed to market volatility.
The fourth group is the largest and the most problematic. It also explains why volume-based thinking is becoming a risk today. It includes 10 companies with turnover of about 512 million euros. Productivity is low – around 26,700 euros of added value per employee – and added value depth is approximately 0.15 euros per euro of turnover. This is commodity economics: turnover exists, but little value remains within the company because pricing is determined by the market, not the producer. This is precisely where rising timber prices are most dangerous. If raw material becomes more expensive but the final price cannot be freely increased, margins are squeezed. This is not theory – it is mathematics. This is the group where the dominant impulse is to smooth out bad years at society’s expense. Let us recall the late-2023 decision to “rescue” some companies at the expense of LVM, although in reality they did not need to be rescued at that moment. However, the risk of a serious raw material price shock for this group unquestionably remains. And they themselves are partly responsible.
When a layer of financial resilience is added to this structure, it becomes clear why development is limited for some companies. Roughly one-third of companies are in a zone where financial security allows them to invest, but more than half are in a situation where risk and balance sheet tension significantly restrict freedom of action. In other words, the sector’s challenge is not only understanding what to do – it is being capable of doing it.
Increase added value or give up your place
Amid uncertainty about the area of commercial forests and timber availability, companies lose the ability to plan raw material supply and long-term investments with confidence. Capital simply prices such uncertainty with a higher risk premium, which means more expensive financing or a refusal to invest. Therefore, stability of commercial forest areas and a clearly defined scope of protected natural areas are just as important as the goal of generating more value per cubic meter. Growth in added value is only possible if raw material availability remains predictable five and ten years ahead. This need is further reinforced by requirements already at companies’ doorstep, including the implementation of the European Union Deforestation Regulation and climate targets.
Why does this matter not only for the industry, but for anyone thinking about Latvia’s economy? If we remain trapped in volume-based thinking, more expensive raw materials, labor shortages, energy volatility, and higher capital costs will make the sector increasingly fragile. We will export volume, while a growing share of value will remain where deeper processing, stronger pricing power, and higher productivity exist. Along the way, there is a risk of losing many primary processing companies that depend heavily on resource prices.
If we consciously reorient toward value creation, Latvia can make its exports more resilient to economic cycles. This is not a romantic dream of high technology. It is a rational choice to earn more from the same resource.
Therefore, the message is simple: companies must build production and products capable of withstanding more expensive timber, energy, and capital – while increasing added value depth and productivity. The state, in turn, must ensure predictable rules of the game regarding resource availability and nature protection policy by clearly defining protected areas and ensuring the stability of commercial forests. State support programs for investment should be targeted toward productivity and strengthening the value chain.
Latvia’s task is not to sell more timber. Latvia’s task is to sell more value from the same timber. If we implement this transition consciously, Latvia can be a country of timber products whose exports ensure not only turnover, but long-term prosperity.