Hancock Timberland Investor Brazil October 2018 The combination of historically high prices for softwood lumber and panels in the U.S. this past summer and the rapid fall in the value of the BRL relative to the USD has boosted Brazilian shipments of softwood panels and softwood lumber to the U.S. With the real dropping from a January’s 3.2 BRL / USD to July’s 3.8 BRL/USD, Brazil’s exports of softwood lumber and plywood trended higher, reaching a peak in May prior to losing ground in June following the trucker ’s strike, and then regaining forward momentum in July. Brazil’s share of total softwood panel imports into the U.S. increased to 6.4% between January 2018 to July 2018, which was two times greater than the historical average share of 3.2% during the period, 2013(January) to 2017(December). Brazil’s share of softwood lumber imports to the U.S. averaged 1.4% for the first seven months of 2018, compared to Brazil’s historical average monthly share of U.S. imports of 0.64% from 2013 (January) – 2017 (December). Hancock Timberland Investor Brazil October 2018 2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9 0 20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 180,000 January February March April May June July August September October November December January February March April May June July 2017 2018 USD per BRL U.S. Imports of Softwood Lumber and Panels (m3) Softwood Plywood Softwood Lumber Source:s Macrobond August 30 2018, USDA Foreign Agriculture Service September 20 2018 Brazilian Shipments of Softwood Lumber and Panels to the U.S. Rise as the BRL Falls Monthly Shipments of Softwood Plywood and Lumber from Brazil to the U.S (M3)
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Hancock Timberland Investor Brazil October 2018
The combination of historically high prices for softwood lumber and panels in the U.S. this past summer and the rapid fall in the value of the BRL relative to the USD has boosted Brazilian shipments of softwood panels and softwood lumber to the U.S.
With the real dropping from a January’s 3.2 BRL / USD to July’s 3.8 BRL/USD, Brazil’s exports of softwood lumber and plywood trended higher, reaching a peak in May prior to losing ground in June following the trucker’s strike, and then regaining forward momentum in July.
Brazil’s share of total softwood panel imports into the U.S. increased to 6.4% between January 2018 to July 2018, which was two times greater than the historical average share of 3.2% during the period, 2013(January) to 2017(December). Brazil’s share of softwood lumber imports to the U.S. averaged 1.4% for the first seven months of 2018, compared to Brazil’s historical average monthly share of U.S. imports of 0.64% from 2013 (January) – 2017 (December).
Hancock Timberland Investor Brazil October 2018
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Source:s Macrobond August 30 2018, USDA Foreign Agriculture Service September 20 2018
Brazilian Shipments of Softwood Lumber and Panels to the U.S. Rise as the BRL Falls Monthly Shipments of Softwood Plywood and Lumber from Brazil to the U.S (M3)
Hancock Timberland Investor Brazil October 2018 2
Second quarter economic growth dipped to a 1.0 percent growth rate year-on–year compared to first quarter’s 1.2
percent. May’s nationwide trucker strike affected Brazil’s economy, with estimates of total losses to Brazil’s
economy of US$25 - 30 billion1. In its June report, Brazil’s Central Bank cut projected annual growth in GDP
for 2018 to just 1.6 percent1. Despite the slowdown, the second quarter in 2018 marks the sixth consecutive quarter of positive economic growth in Brazil. With the national
presidential election scheduled for October, the unsettled and highly contentious political landscape may contribute
to heightened uncertainty and increased volatility in Brazil’s financial markets.
Slower Growth, Yet Still Positive Figure 1: Second Quarter Brazil Real GDP (Percent)
Inflation Ticks Upward While Borrowing Costs Remain Historically Low Figure 2: Quarterly Brazil Interest Rates and Inflation (Percent per year)
Sources: IBGE, Macrobond as of June 2018
Economic Indicators October 2018
Note: IPCA measures consumer price inflation. Selic rate is the benchmark overnight
bank rate calculated from daily rates for a quarterly average
Brazil inflation picked up modestly in the second quarter, averaging 3.3 percent, up from first quarter’s average of
2.8 percent, yet still below the average of 3.5 percent a year ago, and well below the five year average for the
period of 2013 – 2017 of 7 percent. Brazil’s Central Bank (RCB) referred to underlying inflation as now being at
“appropriate” rather than at “low” levels during a September 19 meeting2. The Selic benchmark interest rate was left unchanged at 6.5% at the BCB’s June 20 meeting,
resulting in an average of 6.4% for the second quarter. The BCB’s September 19 meeting further held rates
unchanged – the fourth meeting in a row where rates were untouched3. Given the recent movements in the foreign-
exchange market and the possible impacts of the weaker currency on inflation expectations, a possible tightening
cycle may be brought forward, and start earlier than proffered for 2019.
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
2005Q1
2006Q1
2007Q1
2008Q1
2009Q1
2010Q1
2011Q1
2012Q1
2013Q1
2014Q1
2015Q1
2016Q1
2017Q1
2018Q1
Current Quarter (Year over year) Lagging 4 Quarter Annualized
Sources: IBGE, Macrobond as of June 2018 2. Macrobond June 2018 3Capital Economics, Latin America Economics, September 20, 2018 3https://www.wsj.com/articles/brazil-central-bank-leaves-selic-rate-unchanged-at-6-5-1529530365
Hancock Timberland Investor Brazil October 2018 3
Foreign direct investment (FDI) into Brazil moved lower in the first quarter to $US 15.4 billion, down 12 percent
from the previous quarter, and now 30 percent below the cyclical peak of $US 21.8 billion reached in the fourth
quarter of 2015. Despite lingering economic and political uncertainty, the country’s sheer size makes it a persistent
destination for FDI.
Foreign Investment Slips Figure 4: Quarterly Foreign Direct Investment – Net Capital Flows (USD Millions)
The BRL weakened sharply in the second quarter against the USD (-11 percent) on sharpened strength in the USD
and tightening financial conditions in the U.S. The BRL weakened against most major currencies. The BRL fell
against the Chinese Yuan (-11) and the Euro (-8 percent). Given political and fiscal uncertainty over the outcome of
the October elections in Brazil, and recent strength in the USD, the BRL is expected to be volatile for the remainder of 2018.
BRL Weakens Figure 3: Quarterly Brazil FX
Economic Indicators October 2018
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$10,000
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Brasil México
Source: OECD as of June 2018 Note: FDI reports lag one quarter
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BRL per USD BRL per EUR BRL per CNY BRL per ARS
Source: Macrobond as of June 2018
Hancock Timberland Investor Brazil October 2018 4
Brazil exported 5.3 million metric tons of forest products in the second quarter of 2018, a 4 percent drop in total forest products exports from first quarter 2018, falling from last quarter’s record volumes. May’s nation-wide trucker’s strike limited production, forcing abbreviated production schedules by many pulp and paper producers in the country.6 Strong global demand and high prices for market pulp continued to support strong volumes of pulp exports - Brazil’s dominant forest product – in the second quarter. Wood panel and lumber exports from Brazil were also strong, with second quarter panel exports of 0.55 million metric tons, down 0.02 million tons from last quarter, while lumber exports were up .03 million metric tons, at 0.40 million metric tons, second quarter. The second half of 2018 looks promising for Brazil forest product demand and exports due to the depreciation of the BRL and the strength in global markets for market pulp and solid wood products.
Steel production fell to 8.22 million metric tons second quarter from 8.65 million metric tons first quarter, a slower start to 2018 after four consecutive quarters of steel production increases in 2017. Steel net exports second quarter fell 17 percent from first quarter, and steel consumption in Brazil moved sideways. The 11-day trucker strike in May disrupted steel exports. New trade tariffs on imported steel into the U.S. went into effect on June 1. Brazil was exempt from the broad based 25 percent tariff up to a defined quota, which varies by specific steel products4. Despite these new trade tariffs, the United States was the largest market for Brazil’s exports during the second quarter, followed by Turkey, and Germany5.
Sources: Brazil Ministry of Industry, Foreign Trade and Services, June 2018
Steel Production Falls With Lower Exports Figure 5: Quarterly Brazil Steel Production, Exports and Domestic Production (Million MT)
Pulp Export Volumes Remain Close to Record Levels Figure 6: Quarterly Brazil Forest Product Exports (Million MT)
Economic Indicators October 2018
6https://technology.risiinfo.com/logistics-35
2005Q1
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2012Q1
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2018Q1
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Net Exports Steel Production Apparent Consumption
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Celulose Paper Products Lumber Panels
Sources: Brazil Ministry of Industry, Foreign Trade and Services, June 2018
4http://agenciabrasil.ebc.com.br/en/economia/noticia/2018-07/brazil-steel-exports-us-rise-after-tariffs 5United States Dept. of Commerce, Global Steel Trade Monitor, September 2018
Hancock Timberland Investor Brazil October 2018 5
U.S. West Coast and Finnish Sawtimber Prices Climb Higher Figure 8: Quarterly Sawtimber Stumpage Prices for Timber (USD/m3)
Prices for Bleached Eucalyptus Kraft Pulp (BEKP) and Southern Bleached Softwood Kraft (SBSK) continued to set new highs in the second quarter of 2018, with BEKP prices (in USD) up 2.7 percent compared to the previous quarter and SBSK prices (in USD) up 7.8 percent. The expanding restrictions in China on recovered paper imports has boosted global demand for market pulp and are supporting record price levels7. Even with record pulp prices, pine pulpwood delivered prices in the U.S. South barely ticked upward (0.5 percent) compared to the prior quarter, as southern pulp mills tap into the growing supplies of manufacturing residuals made available from expanding production at the region’s lumber mills. Eucalyptus delivered pulpwood prices in Brazil moved lower by 8.1 percent from the previous quarter (in USD), largely due to the downward movement in the BRL relative to the USD.
In the second quarter, pine sawtimber prices (in USD) in Brazil fell 9 percent from first quarter prices and
down 8.8 percent from first quarter prices last year due to the sharp devaluation of the BRL. Measured in BRL, pine sawtimber prices in Brazil were flat second quarter
from first quarter8. Pine sawlog demand in Brazil is up due to the favorable export values in USD of Brazil’s lumber and panels shipped to the U.S. Prices for
softwood sawtimber in the U.S. West Coast hit record levels again second quarter, moving up 4 percent from first quarter, a 43 percent increase over second quarter
2017. The price of southern pine sawtimber in the U.S. South moved down 1.4 percent from last quarter, yet are 1 percent above prices a year ago. Finnish
softwood sawtimber prices slowed from last quarter’s price increases, increasing 2.7 percent from first quarter, and 18.5 percent above second quarter last
year.
Sources: STCP, Timber-Mart South, RISI as of June 2018