The Baltic Course
Pharmaceuticals

MANUFACTORING

Finance

Summary

Soft Gold

Olga Pavuk, Vakaris Deksnis (Lietuvos Rytas), Hannes Tamme

Common Trends

For many years, northern countries and the Soviet Union were the traditional breeders of these animals in Europe. After the collapse of the USSR, fur farming in the newly restored countries decreased significantly. With the completion of privatisation in the Baltic States in the second half of the nineties, some stabilisation took place (see the Table), but the Russian crisis turned everything upside down and threw the fur-farming industry a couple of years back. (see Chart on page 52).

The first increase in furs on the global market was recorded in the '80s, when Denmark suddenly tripled and even quadrupled the production of mink. The entire production of the USSR went to the West, either through Moscow's fur refrigerator or through the Leningrad fur auction. Furthermore, balanced fluctuations in prices of mink could be observed, while the prices of fox furs jumped drastically (see Chart on page 52). Nowadays, two international fur auctions dictate the market situation: one in Helsinki, with polar fox and black fox prevailing, and the other in Copenhagen, with basically mink on sale.

The main buyers of polar fox, black fox and common fox usually come from Hong Kong, Turkey and Japan, while mink has become increasingly popular in Russia.

Ert Eelmets, representative of the Finnish Fur Sales Co Ltd, notes that the auction is not just a place for selling furs; it is also a place for fur-farmers to obtain information on prices, which is an indicator for every farmer, including those who do not take part in auctions on a regular basis. Ert Eelmets believes that Baltic fur-farmers could have their products priced contingent to the global trends. In past good years, Baltic producers received even higher prices than their Western colleagues did. In 1998, when the Russian crisis moved the trade of Baltic furs to international auction places, Baltic producers suffered less than Finns or Swedes.

It is common knowledge that only pelts are sold at auctions. Until 1993, the countries of the former Soviet Union exported mainly processed fur. Developing capitalism, however, has led to a growing demand for furs in Russia, and it seems that they are the main consumers of fur clothing produced abroad.

Latvian Mink Takes the Lead

Despite significant price fluctuations on the global market, Latvia has managed to hold on to its market position. In the early '90s, there were 26 farms or, as we used to call them, state fur farms, in the country. Less than ten fur-farms have survived, and only three or four of the larger farms still operate: Gauja (holding a market share of 20.2% in 1998), Grobina (30.1%), and Turiba (10.5%). Local entrepreneurs generally own them. During the last decade, only one small farm, Sengauja, is newly established, keeping about a thousand young minks. Most farms have run into serious debts; many have found themselves on the verge of bankruptcy. Up to 90% of mink, polar fox and common fox furs are exported. The most far-sighted breeders attempt to provide the local market not only with raw materials, but also ready-made furs. The main wholesale purchasers represent the depths of Russia, from the Urals and further down to the north and east. As a rule, furs are purchased for production of caps, collars and fur decorations.

With regard to tanning furs, local producers at one time met high standards. For instance, with financial assistance from other farms, the fur-farm Lacplesis obtained Italian equipment for a million dollars in the early '90s. However, they did not have the money necessary for technical maintenance and purchase of chemicals, so the plant was actually kept idle. The old factory Elektra is still operating in Riga. Their basic business is dyeing furs in a variety of colours, thus making them bright and quite suitable for fashionable youth styles. Yet there is no European charm, exquisiteness or pastel shades present in those furs. On the whole, up to 90% of furs are tanned on the spot - they are good enough for sales to Northern Russia. It is only the leader of the industry - fur-farm Gauja - who sends approximately one third of its mink furs for processing abroad. Most of the furs are sent to Estonia (Eurotann, a company located near Tallinn, is equipped with Italian tanning, shading and dyeing devices). Some of the raw furs are tanned in Italy, at the Conceria Milanese company. Agris Naglins, Chairman of the Board of Gauja AB, proudly told us that their Italian partner processed furs for the famous Italian house Fendi.

In order for mink or fox furs to pass selection for international auctions, they have to be both durable and beautiful - glistening. The quality of fur depends on the pedigree, care and diet of the animals. Traditionally, minks and foxes are fed with raw fish and provender additives in Latvia. Agris Naglins stated that the Russian crisis had caused the pack to be cut down by one third at Gauja. However, 35 tons of feed (costing 4.5 thousand lats) is still spent every day. Up to 70% of the diet is constituted from fish - before the crisis the fish was imported from Denmark: now the animals have to put up with local cod remains. In addition, food additives (grain, curds, etc.) and provender from Holland and Finland are given. When the fishing-season is over, fish must be stored in refrigerators, which creates an additional expense. Farms, which cannot afford to buy fresh feed in advance, have to use provender.

Gauja is the only fur-farm in Latvia with a computer system for breeding and feeding. Of course, the system for centralised feed supply that is widely used in Denmark and Finland is cheaper and better. However, it requires significant initial investment, which is not available in Latvia today. According to Guntis Urlovskis, Deputy Chairman of the Board of Turiba, Latvian banks are reluctant to make loans to projects connected with fur farming because of the seasonal character of the business.

Historically, in the West fur production was divided - some people bred animals, others tan furs, while still others sew fur coats, caps, etc. That is in the West, where such order of things has long been established and accepted. Our fur-breeders, on the contrary, try to find innovative ways of survival. The fur-farm Gauja decided to sew fur coats themselves. When asked to explain the reason for such a decision, Agris Naglins was direct: Fur masters or sewing companies do not actually do much sewing. A single fur coat requires approximately 80 furs, and if we know that the average price of a single mink is up to USD 20, it is not difficult to calculate that USD 1500 to 1600 will have to be spent. But there is no money. That is why little sewing is done. Labour alone costs about USD 400. At the same time, it makes no difference for producers whether they have furs or ready-made fur clothing stored in their warehouses. Besides Gauja, fur mantles are also sewn in the fur-farm Turiba. In order to keep the brand name, an assortment has to be maintained with at least 60 kinds of products of various colours and styles, etc. Not everyone can afford keeping several thousand dollars idle which explains why sewing enterprises like Ljuvek set their prices 20% to 30% higher than fur-farmers.

Of course, we were curious to learn why Greek fur coats flooding the markets of post-soviet countries happened to be much cheaper than the local furs, especially when the production cost was lower here due to a cheap labour force. The answer is simple. Cheap fur coats in Greece, Italy and Turkey are produced from defective furs purchased from fur-farmers, including the Latvian breeders. It should be noted that defects differ, ranging from torn to poorly tanned furs, etc. Thus, it is quite possible that such a mantle will lose hair or colour at the first contact with humidity. One should not forget that it is simply impossible to buy a fur coat of good quality for less than USD 1200. Imported fur coats that compare to locally produced coats of matching quality cost 20% to 30% more. So, consider carefully where a genuine fur coat should be purchased. Agris Naglins asserted that no complaints had been lodged against the enterprise regarding the quality of products in the last couple of years. Plus, even if a problem should arise, everything can be fixed on the spot. The enterprise produces fur mantles, shawls and jackets, following the hottest fashion trends. Half of the best Latvian fur masters (there are only 10 to 12 of them in the country) work for Gauja today. This occupation is exclusive, and is usually passed over from father to son.

Lithuanians Are Looking for Western Markets

It seemed that the Russian crisis should have hit the Lithuania fur manufacturing industry hard, as the majority of mink and fox furs were sold to Russia. We will have to cut down the pack of animals and the number of employees, stated Cheslovas Tallat-Kalpsha, President of the Lithuanian Fur-Farming Association, just a year ago.

And that's what actually happened. A year later, the six largest farms - members of the association - had reduced the number of foxes two times, and the number of minks had also been cut. There are only 600 female black foxes left on the farms. As regards to mink, fur-breeders preserved only females of the Finnish breed.

Nevertheless, Cheslovas Tallat-Kalpsha does not consider the situation tragic at all. Fur breeders make changes in the packs. If formerly Lithuania produced almost exclusively furs that could be sold in Russia, now the time has come to reorient to other markets. Today, our furs are no longer offered on international auctions specifically distinguished as Lithuanian. Our farms have become equal participants in the auctions, asserted the President of the Lithuanian Fur Farming Association. The reduction in animal stock was also caused by a lack of working capital, which in turn, was a result of the largest enterprises updating their technology and renewing their stock after privatisation. Unfortunately, there was no spare money that could help them through a couple of years while waiting for a rise in world prices.

On the other hand, manufacturers of fur declare that they are not satisfied with Lithuanian furs. For example, the Lithuanian factory Nijole purchases furs exclusively in the West, while selling ready-made fur coats in Lithuania, the Ukraine, Russia, Switzerland and the United States. Lithuanian furs have not reached the quality necessary for clothing made of them to be competitive on the global market. We have set reaching such quality as our aim, says Jovita Pozheliene, director of the Nijole boutique. The famous Lithuanian fur factory has seen better times. Before the crisis, Nijole was mainly oriented towards the Russian market and had several agencies there. However, when many Russians could no longer afford not only Italian and American, but even Lithuanian fur coats, the company started looking for possible markets in the West. Simultaneously, the prices for fur coats sold in Lithuania experienced a sharp fall. The employees of the company declare that the fur coats of Nijole are no worse than those manufactured by the world grandees of fur industry, and Lithuanian products are much cheaper.

Chinchillas Have Adapted to Estonian Conditions

Fox and mink have been bred in Estonia since the 1920's. For instance, in 1938, there were 60 fur-farms in the country, comprising about 6 500 foxes and 3 500 minks.

During recent years, fur breeding in Estonia has greatly declined. A decade ago, there were 12 farms in the country, producing 38 000 silver fox, 76 000 polar fox and 188 000 mink furs. At present, there are no large farms remaining. Inadequate feeding of animals, as well as, gently speaking, the general old age and the consequent low quality of females brought about bankruptcy. Estonian foxes became smaller and smaller, their colouring was beneath contempt. Sometimes, it was impossible to distinguish between blue and silver foxes.

Today, only eight small fur-farms operate in Estonia. Mink is bred on only the farm in Karjakuula near Tallinn (the joint-stock company Balti Karusnahk is owned by Finns). 5 500 adult minks and 12 000 cubs are kept there. Last year, Balti Karusnahk suffered a loss of 1.5 million kronas. Russia purchases more than half of all the furs in the world, but they are experiencing a serious crisis right now. We have not sold a single piece of fur to them since August 1998, regretfully stated Anatoly Mustonen, Chairman of the Board of Balti Karusnahk. He would not recommend entering the fur business right now, as the eastern market is not as vast as it was three years ago.

Foxes are bred near Rakvere (Kadrina) and in the vicinity of Paarnu (Audru), as well as on the island of Hiijumaa and in Southern Estonia. Altogether, there are 8 600 silver foxes and 24 000 cubs, 9 500 blue foxes and 30 000 cubs. Estonian specialists are trained in Norway within the framework of a joint programme. Norway is also the place where new fresh breeds of foxes are obtained.

The decline of fur-farming in Estonia was partly triggered by the rapid fall in fur prices, presumes Salme Kangur, Chairman of the Estonian Union of Fur-Farms. In May the prices at the Helsinki auction reached the lowest rate in the last 10 years (see Chart on page 52). Now they are slowly rising to the customary range. Anyway, Estonian prices are 20% lower than in Scandinavia, notes Salme Kangur. Still there are some signs that give slight evidence of an improving situation. This year several small farmhouses in Southern Estonia began fur breeding.

Presently, chinchilla enjoys the most popularity in Estonia. This exotic creature was brought to Europe from Peru back in late 19th century. In 1994, chinchilla breeding was launched in Estonia. The animal consumes little food - around 7 kilograms of specialised feed per year. Offspring are produced twice a year. A single tiny animal costs USD 150.

Farmers engaged in chinchilla breeding and possessing over 500 females - there are about 50 farmers corresponding to such description in Estonia - have already formed a chinchilla association. Manufacturing a single fur coat requires approximately a hundred furs, each of them priced at USD 50 to 100.

Some 10 companies in Europe and the USA purchase chinchilla furs. Estonians sell it at the Copenhagen fur auction centre on the grounds of a concluded agreement. Chinchilla is considered to be very fashionable throughout the world; therefore, the market of extremely expensive fur coats has no limits. Chinchillas themselves are sold at pet-shops. Breeding requires huge investment, but on the other hand it may produce good income. Profit can be gained on the third year, and profitability may equal 240% per year. We have had good experience in breeding chinchillas, and we are ready to share our skills with our neighbours in Latvia and Lithuania, suggested Salme Kangar to the BC.

There are only two fur-tanning companies left in Estonia: joint stock company Agri owned by Italians, and joint stock company Elpis in Tartu, privatised by local entrepreneurs in 1992. Elpis can also dye furs after tanning.

Fur coats are made at three enterprises: joint stock company Armiin in Tallinn, Elpis and a small plant in Keila. The times are hard, we sell less than in the previous years, said Peeter Pree, Chairman of the board of Elpis. Half the turnover consists of cony coats, 90% of them made of dyed fur. Mink coats have always been popular, yet they are rarely purchased.

Elpis also sews fur coats out of blue and silver foxes, as well as of red fox and a little astrakhan. After the fall of the rouble last year, imported goods that were cheaper than the local products appeared in Estonia. That was an unprecedented case, said Pree. - We hope to survive the bad times and count on a new upswing.

Riga-Vilnius-Tallinn