A handful of wood industry companies received more than 40 million as a «gift»

The State Forest Management Centre (RMK) has sold pulpwood and firewood to nine companies for more than 40 million euros below the market price over a period of ten years. RMK denies this, claiming that it has always sold wood at the market price.

An investigation is underway to determine whether RMK gave illegal state aid to Graanul Invest's pellet mills and Estonian Cell by selling them wood cheaper than other companies through secret agreements. According to the sales data provided by RMK, these companies received a total of more than €23 million from pulpwood and firewood deals with RMK in the years 2011-2024, compared to the market prices at the same time.

In addition, the Horizon pulp and paper mill in Kehra received more than eight million euros, some companies received smaller amounts and two foreign companies paid RMK more than the market price.

This article has analysed only one fifth of RMK's timber sales. How much the companies that bought expensive logs pocketed as a result of the discount deals will be revealed in the future. An analysis by the newspaper Postimees in 2022 showed that in just five years RMK had sold timber with permanent contracts at a mathematical discount of 52 million compared to the auction prices of the same period. Postimees' analysis triggered a state audit that revealed secret contracts and prices that varied by up to 40 per cent for different companies. Postimees fought in court for all RMK's timber sales information to be made public. As a result, we obtained from RMK the previously secret information about the price at which RMK sold timber to certain companies.

RMK: We have always sold timber at market price!

RMK insists that it has always sold timber at the market price and that it has not engaged in illegal price-fixing. However, an audit published by the National Audit Office in July shows the opposite. According to State Auditor Janar Holm, RMK has broken the law. RMK's sales of timber to different companies with large price differences are not in line with market logic.

The publication of the prices of RMK's long-term contracts this year proved two things: the price difference between the companies disappeared, and the convergence of the price of firewood to a level slightly higher than the private forest and auction prices showed that when demand is greater than supply, the so-called wholesale price is more expensive than the so-called retail price, not cheaper. Among other things, transport costs increase the price - the more wood the factory wants, the further it has to be transported. Heiki Hepner (Isamaa Party), head of OÜ Tark Mets, which analyses large private timber transactions, confirmed this to Postimees (see separate story).

At the same time, RMK, for example, continues to sell pulpwood at below-market prices with long-term contracts, claiming that the hypothetical cost of transporting the wood to ports can be deducted when selling it to mills (pulpwood is often bought for export).

In order to determine the exact impact of transport costs, calculations would have to be made using data from RMK's thousands of intermediate warehouses by forest, transport prices and destination, which would be an analysis for a PhD thesis. Therefore, the calculations here are based only on the market price of wood.

Graanul Invest's windfall only the tip of the iceberg

Among RMK's timber sales agreements highlighted in this year's audit by the National Audit Office, the two secret agreements with Graanul Invest have received the most attention, the conclusion of which, according to the National Audit Office, even contradicted RMK's own timber sales procedure, let alone the law. According to RMK, all timber transactions were legal. «The independent audit is currently underway, so we cannot comment on this issue,» replied Jaano Haidla, CEO of Graanul Invest.

In the years 2013-2024, the four companies of the Graanul Invest group received timber from RMK for a total of more than five million euros below the market price. The effect of the two secret agreements will be most visible in 2017-2018, when other companies will have to pay more for wood, but RMK will have fixed the prices for Graanul Invest and Osula Graanul (see graph).

But this is just the tip of the iceberg. An important part of the secret agreements was RMK's obligation to supply Graanul Invest and Osula Graanul with a large quantity of wood, certainly in the form of firewood, which is the cheapest type of round wood. Whether and to what extent RMK could have sold more expensive pulpwood under the label of firewood in order to fill the permitted volume is impossible to determine with the benefit of hindsight.

RMK's wood sales manager and Graanul Invest spinning

When asked why RMK had previously sold timber below market price to both Graanul Invest and several other companies, RMK's timber sales manager Ulvar Kaubi described the current situation: «RMK sells wood at the prices offered under conditions of free competition. Companies that buy wood on the basis of sustainability contracts account for about 90 per cent of the total volume of the Estonian forest industry. When these companies compete with each other, they adapt to the price level they are willing to pay to secure the volume of wood.» Commenting on the previous preferential contracts, he said: «These long-term contracts, which are different from the others, were also concluded under market conditions with a price mechanism (correlation with consumer prices). Naturally, during the term of the contract, there were periods when the price was more or less different from the price corridor that subsequently emerged on the market.»

It was not possible to get answers from the former owner of Graanul Invest, Raul Kirjanen, about the purchase of wood. «We don't have any information to compare our prices with,» replied the company's CEO Haidla, although the question included references to both private forest prices and RMK's auction prices.

A good friend of the RMK manager also got a good price – a coincidence?

Horizon, part of Singapore's Tolaram Group, which produces packaging paper and pulp in Kehra, has benefited from RMK's wood discounts to the tune of more than eight million euros over a 12-year period. In addition, Horizon received one million cubic metres of waste wood from RMK at half or even a third of the price.

After disclosure of the long-term contracts, Horizon pays RMK about four euros more than the market price for a solid metre of spruce and pine pulpwood. As the quantities are large, this is likely to be due to transport costs. In other words, the earlier win was probably much bigger.

Kaubi acknowledges that Horizon's previous contracts have been damaging to the state: «There have been losses in the past, especially with the contracts of two local pulp mills (Kehra and Kunda)» (RMK Council Meeting Minutes 20/09/2018).

Tolaram's long-time manager Sonny Aswani and RMK's former manager Aigar Kallas are good friends and often pose for pictures together. On the 75th anniversary of the Kehra paper mill (2013), the then Minister of Economic Affairs and Communications Juhan Parts (Isamaa) joined them.

In the middle of the photo, Sonny Aswani, the representative of the owner of Horizon Cellulose and Paper AS, on the right, the former head of RMK, Aigar Kallas, and the then Minister of Economy, Juhan Parts, can also be seen in the photo (2013). Photo: Veiko Tõkman / Äripäev / Scanpix

When asked whether the fact that Aswani and Kallas are good friends played any role in getting a favorable price from RMK, both did not answer.

Aswani commented: «Each and every company negotiates the business agreements on its own. Horizon Tselluloosi ja Paberi AS (Horizon)'s field of activity and raw material needs are unique in the Baltics, as we are the only sack kraft paper producer in the region, exporting our products to more than 70 countries. Horizon, which employs about 330 people, exports only finished products, i.e. sack kraft paper, and in addition paper bags made from it, thus adding considerable value to Estonian timber. The contracts that Horizon has negotiated and concluded for the supply of raw materials have met the needs of our company.»

Even discounted wood did not help Estonian Cell's bottom line

In contrast to the five-year contracts of other companies, Estonian Cell, which produces wound wood pulp, had a 15-year contract with RMK (2006-2021). The company received aspen pulpwood from RMK at a price lower than the already agreed market price: initially half the average price of spruce pulpwood sold by RMK in the previous calendar year, plus transport costs. This was almost a quarter less than the market price.

According to the average delivery point prices recorded in the National Audit Office's audit, Estonian Cell gained a total of more than 18 million euros compared to the market price in the years 2011-2021.

Company director Siiri Lahe did not comment on the price agreement. «In 2023, the annual loss of the factory at the end of the year was more than 12 million euros, so there is no reason to talk about unjustified profit,» she assessed. «Estonian Cell's high cost base has been a problem since the plant's inception. Before the energy crisis, we made a profit within a few years.»

The main reason for Estonian Cell's difficulties is the high price of electricity, not wood.

Among the companies that ordered wood for export to the ports, Billerud Korsnäs Eesti and Holmen Mets received the wood slightly cheaper than the market price, for 0.3-0.4 million euros over the years. Lignator Logistika pocketed EUR 3.7 million and Metsä Forest Eesti EUR 3.2 million. However, SCA Metsad paid RMK 0.6 million more than the market price and Stora Enso Eesti 0.7 million.

For example, at the same time RMK delivered birch pulpwood to Billerud Korsnäs and Stora Enso at the same port with a price difference of 12 euros (97.28-109.40 euros per dense metre). Kaubi did not recognise the unequal treatment of the companies: «If there are several buyers at the same place of delivery, the classic auction principle applies, in which case, when the quantity with the higher price is filled, the bidder who has made the next best bid for the next quantity wins.»

The companies themselves did not respond to a request for comment.

Postimees analysed the prices of paper and firewood sold to 11 companies, representing about a fifth of RMK's wood sales revenue. About 90 RMK more expensive wood sold to the sustainability contract partner has not yet been analysed.

Heiki Hepner. Photo: Urmas Luik/Pärnu Postimees

Similar timber purchase transactions indicate market price

As described by Heiki Hepner, the manager of OÜ Tark Mets, which conducts timber market assessments for the Estonian Private Forestry Association, the timber purchase transactions on which the assessments are based are relatively similar to RMK's public long-term contracts and timber sales auctions. RMK does not recognise this.

«Larger companies - sawmills, pellet mills, companies that export pulpwood from the port, etc. - set very specific prices at which they buy wood from private owners through the central cooperative Eramets or the Estonian Timber Sales Centre,» says Hepner, referring to larger quantities at agreed delivery times. «In the case of RMK, the price is based on very specific transactions. Our weighted average price cannot be calculated as a percentage, but it is close. The offers are real and are followed by purchase transactions.»

According to Hepner, the price of wood is usually higher for large volumes that are agreed in advance, as this ensures efficiency for the processor.

RMK claims that it is natural to have lower prices for permanent contracts, although they are currently higher than private forest prices for certain assortments, such as firewood.

During the period of secrecy, until the end of 2023, companies bought wood from RMK with duration contracts at a price difference of up to 40 per cent. According to Ulvar Kaubi, head of RMK's wood distribution department, the instability of the economic environment and the search for new supply chains caused the large price fluctuations in 2022, for example. «In 2024, on the other hand, prices have leveled off again and remained largely stable,» he said. «The trade secrets that companies used to keep are no longer relevant.»

Unfortunately, the price shears were also continuous before 2022 (see graph).

Jaano Haidla, CEO of Graanul Invest, said that the price of term contracts cannot be compared with the price of spot sales. «There are periods when the price of the duration contract can be more favourable than the market price at a certain point in time, but also the opposite, when the price of the duration contract is higher than the market price at a certain point in time,» he noted. «The market price should be considered as the price next to the so-called low price (such data is only available for RMK Wood - Ü.H.). Other prices include transport costs, which makes the prices incomparable.»

As larger companies buy wood from both RMK and private forest centres, the purchase prices are broadly comparable. Since waste wood has been excluded from Targa Metsa's prices, the same has been done for RMK's long-term contract prices to improve comparability.

Taking all the above into account, this article has compared RMK's permanent contract prices with the market price (the mathematical average of the private forest price and RMK auctions (if there were auctions during the period), otherwise only with the private forest price). Instead of the current price, the average price of the first half, third and fourth quarter is used. The price gain is calculated for 12 years, in the case of the Estonian cell for 14 years.

 

Mikk Marran Photo: Sander Ilvest

Comment

CEO of the RMK Mikk Marran:

RMK sells wood in stages, taking the maximum the market is willing to offer at any given time. I do not agree with the premise that the price thus obtained is not the market price, nor with the conclusions that have already been drawn.

RMK is always open to good suggestions. We have continuously updated the sales guide and the methodology for term contracts. The new RMK Board's policy is to make the relationship with duration contracts as transparent and comprehensible as possible, and to treat entrepreneurs equally. Last month, for example, changes were made to the organisation of permanent contract sales in line with the recommendations of the National Audit Office.

RMK accounts for about a third of the local timber market, and we have a very precise overview of our own transactions - who has received goods, how much and at what price. Every sales decision at every stage of the contract is preceded by a cold calculation and decision by an IT application developed with the help of TalTech.

National Audit Office audit reveals RMK's secret timber discount deals

The audit published by the National Audit Office in July confirmed Postimees' research that the State Forest Management Centre (RMK) has been selling timber with duration contracts below the market price in violation of the law and has favoured certain companies with secret agreements, causing large financial losses to the state.

According to the analysis of the State Audit for 2017-2022, RMK sold timber with permanent contracts at prices up to 30 per cent lower than public auction prices on an annual basis.

The analysis showed that, in general, a customer who bought a larger amount of wood did not get a lower price from RMK, nor did a customer who bought a smaller amount of wood get a higher price, as is common in wholesale sales by private companies.

The National Audit Office found that the same assortment of timber (e.g. pine logs or pulpwood) was sometimes purchased more than twice at different prices by customers with different duration contracts.

RMK claims that long-term contracts are necessary to support the Estonian timber industry. However, the price reductions also apply to wood sold to Estonian companies, i.e. RMK has favoured some Estonian companies over other Estonian companies buying the same wood.

In the opinion of the State Audit Office, RMK has unjustifiably and unequally treated its long-term contract partners and, in addition, has concluded secret preliminary agreements for the sale of forest material with at least three unknown companies, for which there was no legal basis.

RMK explained during the audit that RMK was orally instructed by the management of the Ministry of the Environment to conclude a cooperation agreement with AS Graanul Invest and OÜ Osula Graanul, which was not documented.

«After reviewing the report, RMK stated that it is still unknown how the communication with the Ministry and politicians took place and how information was exchanged to support the construction of AS Graanul Invest's factories,» the National Audit Office said. «There is not a single decision or other document from the management of RMK. The only document is an agreement signed by the head of the timber distribution department [Ulvar Kaubi].»

The Forestry Act explicitly prohibits the sale of state forest timber below market price. The head of RMK, Mikk Marran, replied to the National Audit Office that the National Audit Office's opinion that the prices of permanent contracts did not correspond to normal value was incorrect. RMK also felt that the audit should have analysed more thoroughly how the duration contracts had affected the stability of the timber market.

When the National Audit Office asked for analyses that would confirm that the sale of timber with an agreed price and duration contracts had made the timber market more stable, RMK did not provide them. Instead, Marran replied that the National Audit Office should have analysed and demonstrated whether RMK's chosen method of entering into fixed-price, permanent contracts was the best way to stabilise the timber market.

What is a long-term contract?

RMK signs a five-year long-term contract with a company that meets the requirements of the manual (no debt, employee salary at least 70% of the sector average, etc.).

70 per cent of the forest material is made available to the holders of the sustainability contracts as a conditional quantity.

The conditional guaranteed quantity is calculated by RMK using a formula.

RMK concludes price agreements three times a year (for 6 + 3 + 3 months).

At the beginning of 2024, 85 companies are buying wood with sustainability contracts.

RMK sells 85 per cent of its roundwood assortment, 65 per cent of fuelwood and paper pulp under long-term contracts.

Source: RMK