Price increases affect Estonia's industrial leaders

The thermal modification process takes place in a heating chamber.
The thermal modification process takes place in a heating chamber. Source: ERR

High energy prices and inflation have made it difficult to find foreign markets for Estonian products, which have become more expensive. Several well-known businesses have already ceased operations as a result of a decline in competitiveness. The flagships of Estonian industry are also in jeopardy.

The Thermory Group is the world's largest manufacturer of thermally modified wood and sauna materials.

Wood is heated in special kilns, first by using heat and steam to raise the temperature to approximately 100º Celsius, and then the temperature steadily increased to 130º Celsius – during this period, high-temperature drying takes place. After that, the temperature in the kiln is raised to a target between 185º and 215º Celsius. This process causes the wood to become less hydrophilic, resulting in enhanced rot resistance and durability, but also makes the end product visually attractive.

The company's energy expenditures have multiplied due to the fact that kilns are fueled by natural gas and production is electricity-intensive. So the price of thermowood has risen.

"Orders have been put on hold and delayed. So we are experiencing now a minor decline in output. It is a fall in demand due to people being on the sidelines, but our strength is that we operate in 50 countries around the world and are a global market players, where it is always the case that when conditions are a little bit worse in one place, they are a little bit better somewhere else, which helps us to succeed," Thermory Group HR manager Katri Jürine said.

While the company's export volumes, turnover and profits have fallen, it has led to production optimization. "We have a total of three factories and one sawmill in Estonia. We employ in total about 500 people, but we had to cut our workforce by about five percent," Jürine said.

BLRT Grupp is one of the largest industrial holding in the Baltic Sea region, has also experienced rising costs of production.

"Unfortunately, we have been forced to hike prices, as many others. We operate more than just ships, vessels and barges. There is also wind energy. We generate oil and gas offshore. So wherever possible, we had to negotiate and raise the price. If we don't raise prices, we will be forced to shut down our businesses," Roman Vinarchuk, advisor to the BLRT Group management board, said.

Food producers have similar predicament

The concerns of food manufactures are the same as those of Estonian consumers, who have seen a significant increase in price. For example, the price of milk in stores has more than doubled, while dairy producers are still struggling to stay profitable.

"Whoever maintains a profit this year is already a deserving cause. If we review our own nine-month statistics, with the tenth month remaining to be tallied, these figures are completely different from those of previous years. Food industry revenues have never been exceptional, but this year will certainly leave a lasting negative impression," Ülo Kivine, the chair of Nordic Milk, said.

Kivine also that said it is becoming increasingly difficult for Estonian food producers to sell their goods on our neighboring markets, given the current price environment, while neighboring countries keep supplying Estonia with cheap food.

"It is definitely worthwhile to prefer Estonian and domestic products, but when prices rise, the Estonian customer is becoming price-conscious and due to that there is a noticeable increase in the share of imported goods," he said.

Milk production. Source: ERR

Statistics show that industrial production in Estonia fell in September. In the third quarter, growth slowed in more than half of all manufacturing sectors and more than half of this drop was due to the wood industry and a quarter to the production of metal items. This is followed by electrical equipment and food.

However, the situation in manufacturing sector is expected to get even worse. "In the following year, the forecast for the euro zone or Europe as a whole, including the Nordic economies, worsens. This means that the foreign demand for our goods is declining, whereas manufacturing exports account for two-thirds of the sector's overall output," Tõnu Mertsina, chief economist at Swedbank, said.

Estonian products are no longer competitive on international markets. "According to industrial companies, their competitiveness both in Europe and outside Europe has plummeted. This decline is even deeper now than it was in 2008-2009. And if we include the market share of Estonian exports to the euro zone, it has declined significantly this year," Mertsina elaborated.

"One of the factors is the competitive advantage we had, such as cheaper labor, lower costs, etc. Work completed on time. However, the governments of other countries are now supporting their industries or give concessions, let's say, on the price of electricity. And not only somewhere in Western Europe, but also in Lithuania, for example," Vinarchuk explained.

The Estonian government only provides universal energy supply to micro and small industries. "Unfortunately, national subsidies for businesses and households vary greatly and Estonia has one of the lowest subsidies as a proportion of GDP in Europe," Mertsina explained.

There will be no more subsidies for businesses in Estonia, Minister of Entrepreneurship Kristjan Järvan said.

Järvan emphasized that subsidizing one sector would generate disparities with respect to other sectors, whereas the state should only participate in business when there is a market failure.

"We have a wide range of financial solutions to assist larger businesses in surviving this temporary setback. We have also, for example, boosted the Kredex endowment by €100 million, which is not a small amount," Järvan said.

"But if other nations subsidize their industries, does this also indicate a market failure for Estonian exports? In reality, if other nations have larger economies than ours, we cannot win this type of competition, i.e. in which we just pay companies. This just means that their financial sacrifices surpass ours; they are able to pay more than we can to their industry sector," Järvan said.


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Editor: Kristina Kersa

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