BRUSSELS, March 5, 2020 (PPI Europe)
Since taking the reins as CEO of the Russian pulp and paper (P&P) giant Ilim Group in 2016, Ksenia Sosnina has overseen an ambitious program of investment, modernization and expansion. PPI Europe caught up with Sosnina, Fastmarkets RISI’s European CEO of the Year 2020 and the first woman to win the honor, to discuss the company’s strategy and her vision for the future as well as the her thoughts on the opportunities and challenges facing the Russian and international P&P industry.
PPI Europe: Ilim has an ambitious development strategy. Under your leadership during the last four years what has had the biggest impact on the company’s growth and what have been the most significant challenges?
Ksenia Sosnina: Indeed, our company is implementing a large-scale investment program with strategic CAPEX allocation of around $2 billion. In 2018-2019, Ilim completed several important projects in Siberia, including the revamp and launch of a kraftliner PM in Bratsk and a pulp line retrofit in Ust-Ilimsk as well as a number of environmental, efficiency and modernization-oriented investments. Ilim continues to implement the Big Ust-Ilimsk project, which involves the construction of a containerboard mill and PM with a capacity of 600,000 tonnes/yr, making it the largest such PM in Russia. This large-scale project is worth $1 billion.
Upon completion, the capacity expansion at the Bratsk Mill will make Ilim one of the largest manufacturers of unbleached packaging materials globally, bringing the aggregate production output of Ilim Group to over 4.4 million tonnes/yr of pulp and paper (P&P) products by 2023. The project is welcome by our strategic customers in China and the rest of Asia, and we look forward to completing it.
Regarding challenges, first of all, the global environment is very volatile and the political agenda is having a major impact on the economy. For example, the US – China trade war has created even more uncertainty for market actors. China’s demographic shift, the economic slowdown and “black swan” events like the Covid - 19 epidemic will continue to impact the global supply-demand balance. We should look at this in a very responsible way, make well-considered investment decisions, balance our business portfolio and remain flexible in terms of strategy and business plan execution.
PPI Europe: Does Ilim plan to become more active in the downstream markets, becoming more of a packaging company?
Ksenia Sosnina: There are, basically, two ways to look at the downstream businesses – as a trade channel strategy, or deeply developing downstream as a business. We can combine these two things in a reasonable proportion, as we have been doing so far.
To make the choice, one needs a combination of the market-driven view into downstream with either already having or being able to build a clear competitive advantage in this market.
In reference to the market view, the importance of the consumer and the focus on the environment will keep growing, which we are fully aware of and ready for.
However, Ilim’s advantage is our forestry operations, our primary fiber expertise - which creates a sustainable cost advantage in relation to our strategic markets.
These advantages are not easy to achieve. At the same time, in packaging, you need to engage in secondary fiber to be successful, i.e. testliner production and, in one way or another, paper waste collection and recycling. Or in tissue, for example, one needs to create a consumer brand and run it with a B2C philosophy, which is a substantial competence in itself. These markets are very fragmented in Russia and at this point, we do not see this as a very attractive possibility.
We see Ilim developing further as a global player, growing the company’s value and focusing on strengthening the advantages that allow us to pursue this strategy.
PPI Europe: Given the recent challenging market conditions, is Ilim postponing any of the previously announced projects or adjusting the schedule for their implementation?
Ksenia Sosnina: We are not going to either curtail previously announced projects or reconsider key project parameters; we will maintain our long-term view for our business. I would, however, certainly allow some room for maneuver. This is linked to your first question, and as I mentioned before, flexibility is the name of the game. Or agility, if you will. We are not going to do projects for the sake of the projects. Our goal is to grow the value of our business to the benefit of shareholders, employees, customers and the communities in which we are active.
PPI Europe: Since 1998, when you started working for Stora Enso, how have the industry and market trends changed?
Ksenia Sosnina: I have been working in the sector for more than 20 years and in my view, the industry’s development has been incredible. I remember very well the times when discussions about Chinese growth and eucalyptus plantations in Latin America sounded fresh. Online trading, smart packaging – these were among the new trends then. Not to mention that the decline in demand for graphic paper was expected, and the first capacity closures and conversions were announced. Now we are into areas such as the modelling of forestry operations, routine forest spatial monitoring, AI, preventive maintenance, remote control of mills, digital twins and so forth. And in the near future we may see things like a ban on single-use plastics, autonomous vehicles, precision forestry and engineered wood. Our industry is speeding ahead with the rest of the world, and it has become very obvious that the key development areas will be defined by the needs of the large numbers of consumers living in a digital world and urbanized community lifestyle, mass migration, health and environmental awareness, public opinion formed by social media and other similar things.
PPI Europe: Ilim has invested significant resources in projects to improve the company’s environmental impact during your tenure. What do you consider as the most important initiatives in that regard and are you planning similar environmental investments in the future?
Ksenia Sosnina: Ilim has had a focus on environmental improvements for a much longer period than my tenure. This is a challenging field, since the assets were originally built during the Soviet era, in remote locations and in tough climate conditions with old infrastructure. This makes any project capital intensive. We have a set of goals aimed at reducing our environmental footprint using global best practices and Ilim will continue to make substantial investments in environmental enhancements to achieve these goals. We closely cooperate with federal and regional authorities to align the targets and priorities so that we make progress in the areas important for the local communities – things like air, water, solid waste and re-forestation. There is a lot to be done and we would like to do even more.
Ilim strives to use the best available technologies (BAT) in all production cycles from wood harvesting to the manufacturing of pulp, paper and packaging materials. In 2018, Ilim allocated more than $177 million for this purpose and in 2019 the funds that Ilim allocated for the implementation of BAT in order to reduce its environmental footprint exceeded $265 million. Of course, we will keep on investing in environmental initiatives.
PPI Europe: While the plastics industry is considered much less sustainable than the P&P industry, concerns remain over forest resources and their use. What is Ilim doing in this respect?
Ksenia Sosnina: I guess the plastics industry will keep growing via recycling, developing degradable composite materials and similar initiatives to become more sustainable. It is not going to vanish. However, it will face more control, regulation and public attention, no doubt.
Our industry started the journey to sustainability much earlier. The sector itself is generally more mature, with big capital investments at stake in a cyclical business. So, the responsibility becomes part of our DNA, because it is the only way to survive and succeed long term. And forests are at the core of this. It is rather stupid to make a living from forests while depleting them. These practices will not last, just like single-use plastic cannot continue to be dumped in our backyard or into the sea. Nobody can afford this for much longer.
Just days ago, Ilim Group Forest became the first Russian company to receive the European Legal Source Certificate allowing Ilim to sell its products on the European market in accordance with the EU Timber Regulation without any additional confirmation of the legal sourcing of the fiber used in the production process. We have planted three million seedlings with a high survival rate each year and we will increase the number by several fold in the future. We use modern technologies for forest monitoring and process controls and we have established a joint program with the government aimed at further developing forest fire monitoring and prevention. However, it is important that the government guides, controls, supports and stimulates –that is, creates the conditions for the more rapid development of these kinds of things.
PPI Europe: Do you think the Russian forestry industry could be managed in a way to make it as sustainable as that of Finland, for example? What should be done to achieve that?
Ksenia Sosnina: Private ownership of forests would support a long-term sustainable approach for sure. Today the government owns the majority of forests, offering a long-term lease of timberland to private business entities, i.e. there is no private ownership of forests in Russia. Experience shows that countries where forest ownership is shared between the government and private business entities demonstrate the most efficient engagement of forest resources – from both an economic and environmental standpoint.
According to statistics, private business entities show the best results in both forest management and reforestation. I believe that private business entities and the government should work hand in hand to ensure close collaboration; otherwise, we will not be able to unleash the full potential of Russian forests. In fact, the Russian forest industry has huge opportunities but, unfortunately, this resource is currently undervalued.
PPI Europe: Does Ilim plan to invest more in forestry assets (long-term leasing) or the acquisition of businesses involved in wood processing?
Ksenia Sosnina: We have been expanding our timberland holdings over the past year. We are prepared to consider both the acquisition and leasing of assets. Under Russian legislation, we are entitled to additional leases to support strategic investments and this is a great kind of support.
PPI Europe: Is Ilim considering any acquisitions or greenfield investments abroad? Which countries/regions, are the priority ones for growth?
Ksenia Sosnina: It depends. Our Siberian assets are geographically in Asia and are in an excellent position to serve this strategic market. Modernizing, expanding or building a greenfield or a brownfield project, developing partnerships in the region – these things are all in our hands.
The European part of the business is a different story. We would consider opportunities and present them to our shareholders for discussion.
PPI Europe: Are there any projects where Ilim could attract an external partner – a strategic or financial investor? Are there any joint ventures on the agenda, either abroad with local partners?
Ksenia Sosnina: The answer is similar – we are open to such possibilities and would consider opportunities that help to grow our business and are suitable for our shareholders.
PPI Europe: With the upgrade of the kraftliner PM at the Bratsk mill and the construction of a new 600,000 tonne/yr kraftliner machine in Ust-Ilimsk, Ilim plans to expand its pulp and paper output from the current 3.4 million tonnes/yr to 4.4 million tonnes/yr. You also plan to boost pulp and kraftliner exports to Asia and especially China by almost one million tonnes to 2.4 million tonnes/yr. How much of the demand growth do you expect to see from China and how do other countries in the region fit into your calculations?
Ksenia Sosnina: The capacity is designed for Asian markets. Containerboard and fiber demand in the region will keep growing. Of the total global demand for paper and board – approximately 430 million tonnes – packaging grades account for almost half of that. More than half of total P&P demand is in Asia and its share is increasing.
Customers in the box-making business are very open to kraftliner, since multiple recycling depletes the fiber content of recycled grades. As for China, end-use consumption will keep increasing along with purchasing power and continued urbanization, with the latter increasing from 50-60% today to 70% by 2030. China accounts for half of the total e-commerce transactions in the world; it is adopting higher environmental standards very effectively and will stay on this path. Plastic substitution will provide room for growth as well, even though we did not include this factor in our calculations, preferring to stick with relatively conservative assumptions. We will see Chinese companies developing beyond their home country, especially in adjacent regions, which will help the economy of China to develop too.
Ilim has traded with China for almost 25 years and built a close and mutually beneficial business partnership. Every important step we take and its timing we verify very carefully with our customers to ensure mutual benefit and aligned strategies.
PPI Europe: Has the market felt any impact from the coronavirus yet? What are the shorter-term effects on the market? Are you adjusting your production operations at all (temporary stops, etc.) in response to the situation?
Ksenia Sosnina: We will see an immediate negative impact in Q2 and Q3 this year. There is some explosive potential to cause wider problems too – depending on how soberly or not markets will react, and how other global political and economic issues develop.
Operationally, we have processes in place, ensuring the safety of our employees as much as possible, limiting travel, assessing risks and response measures, establishing regular communication with key stakeholders. The longer-term impact is yet to be assessed.
I must say that the reaction and efficiency of the Chinese authorities has been impressive.
PPI Europe: How is the Bratsk kraftliner machine’s operation going following the modernization? Is it producing at full capacity yet?
Ksenia Sosnina: We are close to the projected capacity, but the quality level is not that stable yet. This will be on target within weeks. We are increasing kraftliner production output to 300,000 tonnes/yr at the Bratsk mill. The CAPEX was $120 million, so it was a major rebuild. I would like to thank our project team and partners for the success of the project!
PPI Europe: Prices for a wide range of paper and paper products have been declining recently. When do you expect the trend to reverse and why?
Ksenia Sosnina: As I said, the market is cyclical and affected by multiple factors. Depending on the stock situation of various products, following the Covid-19 situation, we can expect prices to start recovering by the end of 2020.
PPI Europe: Ilim Group has set up a corporate accelerator for technology start-ups aimed at creating innovative technologies. What do you consider as some prime examples of innovative technologies that may change the pulp and paper industry over the next 10 years?
Ksenia Sosnina: We will see new technologies applied to better forest care and fiber property changes, widening applications for wood and P&P products, cross-sector and cross-material technology penetration, digital process modelling and control systems, remote surveillance and machine-assisted decision making.
Back in September 2018, which is a year-and-a-half ago, Ilim decided to create an open innovation platform. For our corporate accelerator we selected around 200 projects from all over the world, and we are now performing detailed studies for some of them.
We are practical about innovation. Presently, in the product and technology area we see three drivers – cost efficiency, CAPEX avoidance and potential new revenue streams. In digital – applications for forests, mills, the supply chain and process modeling.
PPI Europe: How did you decide to pursue a career in the paper industry? What makes it particularly exciting compared to other industry sectors?
Ksenia Sosnina: For me, complex issues are interesting and engaging. It is not the sector itself but, as we have discussed, the industry is large-scale, linking natural resources and global markets; it is a forward-looking business with high values at stake. These things make it a complex equation and permanently interesting. I enjoy it.
PPI Europe: During industry events it is noticeable that the vast majority of people working in the P&P industry are men. What could be done to attract more women, and what is Ilim doing in this regard?
Ksenia Sosnina: I am sure that the number of women involved in the P&P industry, as well as any other sector, will continue to grow at all levels. Women are increasingly free to choose how to realize their potential. The talent market is a highly competitive place. Employers, including in our industry, need be up to the challenge and constantly modernizing themselves, offering interesting work under proper conditions, for both men and women. Industries compete with each other for talent. This very often happens not just within one sector, but across sectors. So, successfully competing with other industries for talent is the name of the game for our sector.
PPI Europe: What, according to you, are the most important qualities of a leader of a large organization?
Ksenia Sosnina: Capability, including intellectual power, strong character and endurance, and being a catalyst. Open-mindedness that enables a person to look for what may sometimes be unconventional ways of reaching goals and the decisiveness to take the necessary steps towards goals without delay. Making things happen.