Spatial Forest Resource Competition: an Economic Study

DOCTORAL T H E SIS Department of Social Sciences, Technology and Arts Division of Social Sciences ISSN 1402-1544 Spatial forest resource competition: Elias Olofsson Spatial forest resource competition: an economic study competition: resource Elias Olofsson Spatial forest ISBN 978-91-7790-771-8 (print) ISBN 978-91-7790-772-5 (pdf) an economic study Luleå University of Technology 2021 How increased competition and production flexibility affect woody feedstock markets Elias Olofsson Tryck: Lenanders Grafiska, 135748 Economics Spatial forest resource competition: an economic study How increased competition and production flexibility affect woody feedstock markets Elias Olofsson Luleå University of Technology Economics unit Doctoral thesis Printed by Luleå University of Technology, 2021. ISSN 1402-1544 ISBN: 978-91-7790-771-8 (print) ISBN: 978-91-7790-772-5 (electronic) Luleå 2021 www.ltu.se Abstract This thesis explores the Swedish forestry and forest industry sectors, together with their adjoining markets, and examines how these sectors are currently positioned to meet future developments and demands. For this purpose, four specific research questions are formulated, focusing on: (1) the structural composition of forest industry sector and how it will be affected by an increasing feedstock competition; (2) the production flexibility of the forest industry; (3) the resource allocation and price effects from increased feedstock competition; and (4) the potential implications from improved harvesting efficiency. These issues are evaluated on a regional level, i.e., the Swedish county level and examined in four papers. Paper I outlines a regional forest partial equilibrium (PE) model, the Norrbotten County Forest Sector Model (NCFSM), covering three northern regions in Sweden and Finland, and is intended to function as a source of reference for the application studies (i.e., Papers II and III). The NCFSM follows the Global Trade Model’s (GTM) modelling structure and produces endogenous estimates of demand and supply volumes as well as price levels for woody feedstocks. The novelty of the NCFSM, compared to other Swedish forest PE models is that it utilizes a more detailed spatial resolution with its trans-national multi-regional scope. The spatial delineation allows for differences in local market conditions, e.g., reservation price and elasticities. In Paper II, the NCFSM is applied to analyse the economic implications from increased utilization of refined woody biomass (charcoal) in the production process of the iron- and steel industry (ISI) sector. Specifically, changes in woody biomass prices and the regional welfare are analysed. The results suggest that total welfare is relatively unaffected by increased woody feedstock competition, though some regional redistribution effects are observed. The price of roundwood will only be moderately affected while the price effect on secondary woody feedstocks, i.e., by-products and harvesting residues, are larger. The three regions are also shown to be highly interconnected, and the introduction of a large new wood consumer in one county will have spill-over effects on neighbouring regions. Consequently, inter-regional trade is important for optimal allocation of the woody feedstock and for the economic well-being of the regions. Paper III explores market implications from efficiency improvements in the harvesting of forest products. This is achieved through a two-step integration process, were a spatial forest sector model (FSM) is combined with efficient harvesting volumes from a network Data Envelopment Analysis (DEA) model. The FSM is an expanded version of the model outlined in Paper I. It includes the forest industry sectors in Sweden´s 21 counties and one aggregated region for the rest of the world (ROW). The forest sector’s efficient harvesting potential is estimated by the DEA model, which captures the multi-production structure of the forestry sector. These estimates are then used as input values in the FSM. Results from the DEA model indicate that the efficiency improvements in the forestry sector can, on average over counties and over the studied time-period, increase total harvesting volumes by 9.2% for sawlogs, 8.5% for pulpwood, 7.8% for fuelwood, and 9.7% for harvesting residues. In turn, the increased supply can reduce price levels by 20.3% for sawlogs, 25.8% for pulpwood, 4.3% for fuelwood, and 4.1% for harvesting residues. Furthermore, the results highlight large regional differences in efficiency potential, where some counties (e.g., Kalmar and Östergötland) have the potential to make large efficiency improvements, while the forestry sector in other counties are operating more efficiently (e.g., Blekinge and Västmanland). The price developments for woody biomass also exhibit regional differences. Finally, Paper IV analyses the production structure and input choice of the Swedish forest industry, on a county level. For this purpose, single-output regional translog cost models, using panel data with fixed effects, are developed for sawmill, pulp mill and district heating sectors. Own-, cross- and Morishima substitution elasticities are estimated for each sector. In addition, scale effects and technical change measures are also estimated. Results indicate that the district heating industry has the highest feedstock flexibility of the included sectors, while sawmill- and pulp sectors exhibit lesser flexibilities to substitute between different woody feedstocks. The results indicate that the rate of technical change is negative for all three sectors, thus indicating a technological deterioration. However, this can partly be explained by the short time-period used (six years) and by investments being uncharacteristically low during this period. Estimates of scale effects varies both within a given industry i sector and between sectors. For the district heating and pulp sectors there are large regional differences in scale effects, while they are relatively consistent across counties for the sawmill sector. Overall, the results of this thesis indicate that the Swedish forest sector is governed by complex driving mechanisms, were feedstock sellers and buyers are connected across a wide arrange of forest product markets and linked together in a greater system. Regional differences in the structural composition of markets or in expansion possibilities occur, but these are ultimately subject to the wider economic forces. Consequently, the forest sector has the prerequisites to adapt and meet future developments and demands without damaging societal welfare, but individual industry sectors or specific production means will experience difficulties going forward. To Mum and Dad iii “It's Dr. Evil, I didn't spend six years in Evil Medical School to be called mister, thank you very much.” [Mike Myers as Dr. Evil in “Austin Powers: International Man of Mystery”] v ”Vart är vi på väg? 10 poäng. … Norrländskt skogsbedrägeri ger er en ingång” (”Where are we heading? 10 points. … Norrländskt [Northern] forest fraud provides you with a start”) [Kristian Luuk, Swedish quiz show På Spåret, 12 January 2018. Answer to the clue: Baggböleri – illegal forest harvesting without owners consent or the purchasing of forestland below market price (or through other dishonest means). Destination: Bagdad] vii Table of contents Abstract………………………………………………………………………………………….…i Acknoledgement…………………………………………………………………………………..xi Preface……………………………………………………………………………………………..1 Paper I: Olofsson, E. (2018). An introduction to the Norrbotten County Forest Sector Model – Technical report for a regional partial equilibrium model Paper II: Olofsson, E. (2018). Regional effects of a green steel industry – Fuel substitution and feedstock competition. Scandinavian Journal of Forest Research, Volume 34, NO. 1, pages 39-52. Paper III: Lundmark, R., Lundgren, T., Olofsson, E., Zhou, W. (2021) Meeting challenges in forestry: Improving performance and competitiveness. Forestry, Volume 12, Issue 2. Paper IV: Lundmark, R., Nolander, C., and Olofsson, E. (2020) Spatial production structure and input choices of forest products in Sweden. Resubmitted to Forest Policy and Economics. ix Acknowledgements There are several people that have contributed to the completion of this thesis, and I would like to express my gratitude to some of them here. Naturally, there are many more not mentioned by name below, but these are certainly not forgotten. First and foremost I would like to express my gratitude to my supervisor Professor Robert Lundmark, who has guided me through this process. Your expertise, positive reinforcement and constructive criticism, have been vital for the completion of this thesis. For this, and for providing me with an opportunity to peruse a PhD, I will always be grateful. I would also like to thank my assistant supervisors, Senior Lecturer Åsa Lindman, and Ismail Ouraich (now at the Swedish Agency for Growth Policy Analysis). Thank you Åsa and Ismail for all your help, and for your friendship. I would also like to express a special thanks to Associate Professor Elisabeth Wetterlund and Chinedu Nwachukwu, both at the division for Energy Science Energy at Luleå University of Technology, for all of their help throughout this process. I wish nothing but the best for the both of you. I also wish to express my gratitude to present and past colleagues at the Economics unit: Carl, Elin, Elina, Elisabeth H, Jerry, Jesper, Jonas, José, Kristina, Kristoffer, Linda A, Linda W, Matilda, Mattias, Olle, Patrik, Salome, Stefan,

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