Steadily Moving Forward

11 may 2021
Vladimir Krupchak: “Our goal is to increase the business’s worth for good of our employees, customers, and areas where we operate. We can add some changes to a concept or a process, we can push deadlines, but aside from that, you will certainly read in the news that we have launched yet another facility.”

Wood industry is one of the staple industries of Arkhangelsk Oblast. Its thorough development has a major effect on stability of economic situation in the region. The member of Board of Directors of Arkhangelsk PPM, Chief Investment Officer of Pulp Mill Holding, Vladimir Krupchak, talked with the “Expert” about main issues of Pomorie’s wood industry and the necessary support efforts.

— We hear polar opinions about the effect of the new economic reality on development of business. Some argue it’s a time of opportunity, others say it’s a troublesome and a very difficult time. What do you say think?

— It’s a time of opportunity, time for new challenges. The pandemic forced us to fundamentally reconsider all business processes. We all had to adapt to a new economic reality. The world has moved forward to using digital products. We learned to work remotely and perfected crisis management. “The black swans”, such as COVID-19, will continue to influence the global supply and demand. That’s why today we have to make weighted investment decisions and be flexible about our strategy.

Broadly speaking, the pandemic changed how we think, work, and live in the long run. This crisis paved the way for further changes. There are three distinct trends: climate change and low-carbon economy, responsible consumption, and the need for technological innovations. All businesses of Pulp Mill Holding proved not only to be well prepared for that, but, in fact, were able to keep up with the trends.

— What do you mean?

— Arkhangelsk PPM is the anchor company of the Holding. It is an example of investing in an enterprise, which most effectively contributes to transition to low-carbon economy. (APPM is the national leader of the international climate ranking CDP, The Carbon Disclosure Project — an international project for disclosure of greenhouse gas emissions — “The Expert”). This is also true for responsible consumption trend. Today, a company’s success is measured not only by its profits, but also by its compliance with ESG standards, meaning that social responsibilities and sustainable development are emerging as the major components of a business. (In April, the independent credit rating agency RAEX-Europe included JSC Arkhangelsk PPM in a updated version of aggregated ESG-ranking list and put it on the 59th place among 110 Russian companies representing 20 industries. — “The Expert”). We tailor our investment goals to meet the needs of a large number of consumers for a healthy and eco-friendly lifestyle. That’s why Pulp Mill Holding decided to go green in development of the consumer packaging sector.

Here we talk about construction of two plants in Moscow Oblast. The first, Arkhbum Liner, will produce chipboard and the second, Arkhbum Upak, will make consumer packaging (paper bags). Introduction of innovations and digital and information technologies is not just some fashionable trend for Arkhangelsk PPM, but rather a principle of work. We were first in Russia to purposefully invest in these areas. For the first time in the region, we created a brand new innovation management system — Wood Industry Innovation Cluster of Arkhangelsk Oblast “PomorInnovaLes”, which serves as a platform for partnership and cooperation between research and production companies, as well as for creation and transfer of innovations to a production process.

— You coordinate the strategic development of Pulp Mill Holding. What are your priorities for the mid-term?

— Still, packaging business, but this time we go with recycled fiber, i.e. manufacture of testliner with our own company for reclamation and recycling of waste paper. And, of course, further development of hygienic tissue products business. At the same time, we will continue to invest in our marginal businesses, which proved to remain strong and competitive over time — containerboard and pulp. In other words, we will commercialize products with high market potential.

— In other words, notwithstanding the difficult situation in the market, you are not going to reconsider any of the earlier scheduled projects?

— No. No. We at Pulp Mill Holding do not make projects just to make projects. Our unfailing development strategy relies on investments in existing and new production facilities in Russia. And our goal is to increase the business’s worth for good of our employees, customers, and areas where we operate. We can add some changes to a concept or a process, we can push deadlines, but aside from that, you will certainly read in the news that we have launched yet another facility. The holding opens new facilities and plants almost every three years. Nowadays the geography of our businesses extends from North-West to Volga Federal District. And if we take our B&C business — hygienic tissue products under our own brand Soffione, it spans not only the whole of Russia and former Soviet Union countries, but also Europe.

There is a firm law in this market: no investments means no development. Only if we abide by it, can the business remain profitable.

— Can you point out the main projects?

— Pulp Mill Holding intends to invest over 100 billion Rubles in modernization of APPM facilities and construction of a new sulphate-cardboard plant on its premises, about 30 billion Rubles will be allocated to consumer packaging business, and another 30 billion Rubles will go to the two additional tissue production lines. All these projects are either being implemented or in active development.

— The core asset of Pulp Mill Holding is based in Arkhangelsk Oblast. How does APPM contribute to the wood industry of Russia?

— Today, the mill is the centerpiece of the vertically integrated structure of Pulp Mill Holding. It specializes in manufacture of corrugated fiberboard and tissue. We use our own raw materials — containerboard and pulp, to produce high added value products. As the anchor company of the holding, APPM not only manufactures high-quality products for the Russian market (containerboard and pulp), but also contributes significantly to the increase of exports thus increasing the industry GDP.

Through synergy of all business processes in a vertically integrated structure, Arkhangelsk PPM achieved the best ratio of tax proceeds to the budget of the Russian Federation per one cubic meter of harvested wood.

As you can see, we at Arkhangelsk PPM base our strategy with due regard to the objectives set by the president and the government of the Russian Federation. They asked for import substitution, we actively got involved; they asked to increase non-resource exports, we began producing high-tech and high added value wood products, which are in high demand in the international markets.

— What is your overall assessment of the situation in the wood industry, keeping in mind the new economic reality?

— Early 2020 was marked by uncertainty of demand, supply, and prices. But at some point, considerable weakening of Ruble helped the industry.

Generally speaking, global problems of wood processing and pulp & paper industries, which emerged long ago, were made even worse during the lockdown. However, a feverish demand for tissue products supported the industry: in FMCG segment, the share of towels of each Russian manufacturer in this market sprang to about 20  % on average. This growth was driven by the new trend when people started to spend more and more time at home while also favoring paper towels over textile ones.

The global trend towards continuous reduction of the relative share of writing and printing paper continues.

2020 brought a new reality to the corrugated fiberboard market due to the onslaught of the pandemic. New consumption trends emerged. Eating at home gained more significance, as people were forced to stay at home, work and study remotely, which gave rise to the number of groceries and food delivery orders. E-commerce grew massively (almost twice). According to analysts, this growth will continue. But it is pertinent to mention that cardboard prices remained the same, so the costs were compensated only through increase in production output.

— Last year, Arkhangelsk PPM celebrated its 80th anniversary. Which key words best describe today’s mill? How do you keep up with competitors and retain leadership in the industry?

— Clear development strategy, highly efficient vertically integrated business model, dedicated management and personnel, support from financial institutions and government.

For us, leadership is an important prerequisite for stable development of business. Pulp Mill Holding continuously invests in efforts to boost competitive strength through further reduction of expenses and cost prices while at the same time increasing the output, through economical consumption of raw materials, energy self-sufficiency, etc. We enhance our production capabilities through modernization and reconstruction of the existing facilities and construction of new production sites, which gives us both a safety net and future development possibilities for decades to come, let alone the stability of our business model.

— For several years APPM has been carrying out full-scale modernization of its production facilities. Which innovative solutions found their way into reality? How did it affect the environment?

— APPM first started its environmentally-oriented modernization as far back as twenty years ago. The idea was to reduce harmful discharges and emissions through a more complete and efficient utilization of resources (raw materials, chemicals, fuel, and energy), rather than spending money and going through the effort of purification and detoxification. The first “dual-purpose” project for reconstruction of cardboard process to reduce fuel consumption was designed in 1995 and brought to life in 1997–1998 through the “green loan” from the World Bank. It was a successful experience. It turned out, such investments return a double or sometimes even a triple effect. So these days, we scrutinize each new project in terms of both economy and environment.

Over the last decade, Arkhangelsk PPM spent almost 15 billion Rubles on BAT driven initiatives (BAT — best available technologies).

We have implemented quite a number of innovative projects, which largely affected the technological development of the mill. In the field of biotechnology, we switched to ECF process (Elemental Chlorine Free) for production of all bleached kraft pulp. Starting from 2015, as part of the mill’s retrofitting program, we’ve been taking some large-scale action in keeping with high level of environmental performance, among which: construction and commissioning of a new multi-fuel high pressure boiler fired with biofuel (a mixture of bark waste and wastewater sludge); commissioning of decanters in the biological treatment process, which replaced press filters for dewatering a mixture of wastewater sludge and excess activated sludge; construction and commissioning of a new semi-chemical pulp plant incorporating the state-of-the-art technology and installation of high efficiency gas treatment equipment (the newly commissioned plant replaced the similar obsolete one); reconstruction of board machines; construction of a new evaporator for cardboard process and decommissioning of the old one; installation of a new power-generating boiler featuring low-emission burners and high efficiency gas treatment equipment and decommissioning of the obsolete boiler unit; modernization of the ash disposal site, and so on.

Post modernization of production facilities we clearly observe the decoupling effect, which confirms a simultaneous decrease of environmental pressure and increase in productivity, which, in turn, is an ultimate goal of Arkhangelsk PPM. In particular, during the last five years, by 2021 the productivity increased by 17  % on average, while at the same time raw (river) water intake decreased by 8  %, specific pollutant discharge to water bodies decreased by 6  %, and specific pollutant emissions to atmosphere dropped by almost 30  %.

There are three distinct trends: climate change and low-carbon economy, responsible consumption, and the need for technological innovations. All businesses of Pulp Mill Holding proved not only to be well prepared for that, but, in fact, were able to keep up with the trends.

— What are the main instruments of government regulation of the wood industry? How efficient are they, in your opinion?

— We think the government makes sufficient effort in supporting the development of the wood industry. It includes support of priority investment projects, corporate programs for improved competitive performance, loans from Industrial Development Fund, special investment contracts, subsidized carriage of export goods, etc. The existing procedures are well administered, but we would also like to streamline the decision making processes and be able to get bigger loans.

The actions of the government aimed at development of advanced domestic processing shall be comprehensive. It would also do good to define the short term governmental pricing policy for raw wood — however archaic the system of payment rates for timber may be, it should be preserved, at least until new wood processing facilities are built. The higher the product’s added value, the higher are the tax proceeds per each cubic meter of processed wood.

Generally speaking, we need to reach for comprehensive usage of raw wood. Arkhangelsk PPM and the “Titan” Group make the running when it comes to comprehensive usage of raw materials: softwood and hardwood pulpwood and woodchips are used in the pulp and paper process, softwood sawlogs are used in manufacture of kiln-dried timber, including those subject to stress grading, which allows to use them in manufacture of complex building structures. Sawmill waste is used in production of pellets, generation of heat and power for process needs; households use logging waste as firewood. For example, at Arkhangelsk PPM we have implemented a state-of-the-art wood ash production process, whereby ash is generated by burning a mixture of bark and sludge from wastewater biological treatment facilities.

— There is a constant talk of possible amendments to the sectoral legislation, particularly to the Forest Code. What do you think should be done first and foremost in order to support the Russian wood industry?

— First, we need to deal with the issues of forest management and national forest inventory — it’s impossible to plan for the long term, when we don’t know for sure what resources we have today. Second, we need to include a clause in Article 13 of the Forest Code stating that development of forest infrastructure in forest lands shall be carried out on the basis of public-private partnership (PPP). You see, if a forest land is owned by the federal government, the required infrastructure in such land can be built either solely by the owner of the forest or jointly by the owner and the lessee. The PPP principles are yet to be implemented in the wood industry.

Third, we need breakthrough solutions in the field of reforestation. We are faced with a daunting task of reversing the trend and correcting grim consequences of forest exploitation of the second half of the 20th century. There is an ongoing national project titled “Ecology” with its regional offshoot project “Forest Conservation”, which aims at reaching a 100  % ratio of reforestation and afforestation areas to the area of cut and dead trees by 2024. That said, the lion’s share of this regional project is formed by extra-budgetary funds of the wood industry and other forest users. But, I must say, our today’s efforts will bring tangible effects in the next 50–70 years. However, our lease contracts for woodlots have a limited term of 49 years. Hence, we suggest amending Article 72 of the Forest Code as it pertains to increasing the max. term of a woodlot lease contracts to 99 years. This will help in planning of extensive forestry activities throughout the whole reproduction cycle of commercially valuable forest stands and will ensure logging of trees of the required quality and composition. By the way, this term was specified in 1997 edition of the Forest Code.

Further, we need to include a clause in Article 74 of the Forest Code, that will establish a woodlot lessee’s right to extend a lease contract to up to 99 years (without executing a new lease contract), provided the obligations under the existing contract were properly fulfilled — for woodlots allotted as part of priority investment project for forest exploitation.

The actions of the government aimed at development of advanced domestic processing shall be comprehensive. It would also do good to define the short term governmental pricing policy for raw wood

— You created the corporate social responsibility policy of APPM and the “Titan” Group. What are the core points of this program?

— One of the main priorities for us is creation of a favorable socioeconomic environment for both our employees and the population of areas of operation. Every year, APPM spends about 350 million Rubles on social programs and benefits. Every year, the mill provides charity support virtually to all population groups, budgetary, social, and other organizations, as well as the Russian Orthodox Church. It also makes an invaluable contribution to patronage of Arkhangelsk Oblast — over both local young talents and renowned researchers and cultural figures. The mill has its own educational project — for years it has published and republished books, art books, and so on.

While the world’s economy goes global, the culture, on the other hand, gravitates towards localization. Our goal is to give local people a push, to help them realize their potential, no matter individually or as a group.

— We often hear about the special “spirit” of Pomorie’s businessmen. You were born in Arkhangelsk Oblast and you develop your business here. What are the main features of an Arkhangelsk businessman?

— I was born in Vilegodsk District of Arkhangelsk Oblast. I saw the everyday life of my father who worked for a logging company and my mother who was a healthcare worker. After graduation, I worked as a dentist for ten years and had to sweep streets to be able to provide for my family. But anyway, what’s there to do in Arkhangelsk if not the wood industry? Our land abounds with wood, and I saw all the processes and logistics with my own eyes since I was a kid. None of us could live without Pomorie with its smells of fir needles and cloudberries, clear winters and generous falls, rampant bunches of mountain-ashes. Even if physically we are not there. The forest is our cradle, our friend, our past, present, and future. I think the Pomor spirit also gives us the unbridled energy and passion. I love my job. It is my mindset and lifestyle. And great responsibility for the people and the business comes absolutely natural. I have always loved it.

— Coming from one of the biggest industrial enterprises of Arkhangelsk Oblast, what is your contribution to the economic development of the region?

— I could have answered in a standard manner: by the end of 2020, Arkhangelsk PPM and the “Titan” Group jointly paid over five billion Rubles in taxes. We allocated around 500 million Rubles to social sphere and invested more than 15 billion Rubles in renewal of production facilities. We provided charity support for more than 50 million Rubles, including anti-COVID-19 efforts. I think the figures speak for themselves. But I’d rather say it the Pomor way: over 15 thousand people work for these two leading companies. They have to provide for their families and feel confident about the future. We have always invested and will continue to invest in their future, and therefore in the future of Arkhangelsk Oblast. This is our main duty.