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  • Archive for May, 2010

    Investing in Environmentally Friendly Wood

    2010 - 05.27

    At the start of this year PriceWaterhouseCoopers published its annual review of the Forest, Paper and Packaging industry, entitled ‘Forest, paper and packaging: CEO perspectives’.

    A couple of interesting statements are as follows:

    “We heard a strong consensus from CEOs that the FPP industry needs to do a much better job at raising public awareness and understanding of the fundamentals of the business. The industry must improve its ability not only to publicize its successes in increasing efficiency and reducing carbon emissions, but also to convey the realities of modern sustainable forestry and pulp and paper-making processes.”

    “Virgin fibre based carton board is the most sustainable, most environmentally sound packaging application and we are very confident that the total demand and consumption of those packaging materials will very strongly increase also in the future.”

    On the whole these statements are correct. However, the industry will have a hard time proving that their products are environmentally sound as long as there are companies out there who are supplying their demand from old growth rainforests. Despite this a large number of paper companies have invested a lot in making sure that their production and wood supply is environmentally friendly and comes from sustainable sources.

    Unfortunately these efforts are not very news worthy and all it takes is one irresponsible company that conduct their business at the expense of the environment and the whole sector suffers.

    An added problem is that the industry has to think very carefully on how it shows itself to be environmentally friendly. The public is ready to condemn any project when development of genetic material is mentioned by the industry. As long as genetic engineering is part of these operations the public will not accept operations as environmentally friendly. Even the use of clonal material for timber plantations creates problems with environmentalists who cite the loss of biodiversity when using clonal material.

    “Increasing the fibre yield from existing forests will also play a role in helping the industry maintain competitiveness, such as… other executives point towards Brazil as leading the way, particularly in terms of developing genetic materials to increase yield”

    The forest products industry has a lot of potential for coping with challenges of in the future. Such as the new business model that the economic downturn and climate change are demanding. Called the ‘bio-based economy’, the forest product industry could be one of the key pillars of this new economy model. The main raw material for this industry is, was and will always be wood, however the challenge for the future is to make more out of wood.

    And forests are the first step. Timber must be grown in well managed forests, preferably by forest management specialists such as The Phaunos Timber Fund, Greenwood Management or Cambium. In this way sustainable forest management provides the proof that the wood has been grow in an environmentally friendly way.

    The Timber Investment Blog is sponsored by Greenwood Management. For more information on investing in Forestry please click here

    Forestry Fortunes Turn for the Better

    2010 - 05.26

    Over the past three years the forestry sector has suffered through one of the worst periods in its history.

    First in the latter half of 2006 the US housing bubble popped and sparked what experts have dubbed the ‘lumber depression’. In 2008, the global industry’s worst performer was Canada’s forest, paper and packaging sector. The biggest companies accounted for half of the sector’s losses of US$8 billion. 2009 was no better for companies focused on building products. Paul Quinn a RBC Capital Markets analyst estimates that one third of building material suppliers were driven out of business by severly curtailed demand.

    Now into 2010 the forestry sector’s fortunes have turned around. The supply chain is empty. Inventory levels are extremely low. Combine this with the modest demand that has increased in recent months and there’s a formula to send market prices through the rood and equities of forestry companies skyward.

    However, there is still plenty of uncertainy surrounding the demand and prices. The challenge facing investors is guessing which forestry stocks have room to grow and which are poised to be cut down, having risen too far, too fast.

    According to Daryl Swetlishoff, an analyst at Raymond James the answer lies in putting money into lumber for long term gains. Pulp and paper are probably the best bet for the momentum trader looking to capitalise on inflated prices.

    In Canada the forestry industry is intimately tied to the fluctuations of the US housing market. In 2009, housing starts in the US totalled 553,000 which was down by almost 75% from its peak in 2005. Despite this a marginal increase in housing starts this year combined with emerging demand in China has put some upward pressure on lumber prices.

    But depleted inventories have been the true driving force, Mr. Swetlishoff says. “It’s more of a supply-side event.”

    The composite price for western pine stands at roughly US$320 per thousand board feet, which is up by more than 50% since the end of 2009, according to price tracker Random Lengths.

    “The big question in the building material space is: Are today’s high prices sustainable? And have the stocks gotten ahead of themselves?” Mr. Swetlishoff says.

    Due to the variation in recommendations the majority of analysts monitoring lumber stocks have ‘hold’ or ‘sector perform’ recommendations on large solid wood companies.

    However, Mr. Swetlishoff says he believes those equities are currently trading at mid-cycle valuations and still have room to run. “Our take is that if you’re looking at these stocks, it’s not for a six-month trade, because we see an emerging cycle in lumber products.” He said.

    On the opposite end of this spectrum the less optimistic believe that prices are due to fall and compress valuations.

    “To the extent that forest-product stocks need on going lumber-price gains to outperform, we are doubtful that the recent spurt of share-price strength will persist,” said a report by Montreal-based think-tank BCA Research Inc.

    This lack of consensus reflects the uncertainty surrounding market forces. The timing of the U.S. housing recovery is far from certain, with some experts predicting a surge of shadow inventory from foreclosures and a double dip in prices.

    However the price of lumber could be somewhat insulated from demand fluctuations by other supply constraints. In fact even though demand has picked up the reduction in capacity over the past three years is not immediately reversible.

    “While restarting mills is relatively easy, a strong Canadian dollar would prolong the lean supply backdrop. The latter raises the break-even cost of restarting Canadian mills and/or adding capacity, given that lumber is priced in U.S. dollars,” the BCA report said.

    Mr Swetlishoff predicts that a number of demand and supply factors will combine to produce a lumber ‘super cycle’. He writes that this will lead to, “sustained elevated pricing associated with structural supply deficits.”

    Mr Swetlishoff also predicts that, while the peak lumber theory applies in the long term, the seasonal industry decline expected in the latter half of 2010 will not push prices below break even levels.

    The Timber Investment Blog is sponsored by Greenwood Management. For more information on investing in Forestry please click here

    Planting Forests in Brazil

    2010 - 05.25

    Currently under way is a project in Brazil by SCA, whereby they are planting forests where trees were removed in the past to make way for pasture land. They are planting a variety of different domestic tree species, including Parica, Tambori, Freijo and Cedro.

    In October 2008, the first seedlings were planted in Pará state and in December 2009 the site underwent an external audit by the Forest Stewardship Council (FSC).

    Stewart Begg, environmental manager for SCA tissue in Europe, says: “We’ve chosen an area in the Amazon basin in the state of Pará which is well known for having been deforested.”

    As part of the project, they are not only financing the planting but also supporting the indigenous population and encouraging biodiversity. The next part of the project will be to create a sustainable economic market for the domestic tree species, a social improvement programme and a conservation programme.

    The Timber Investment Blog is sponsored by Greenwood Management. For more information on investing in Forestry please click here

    Chilean Investment in Brazil

    2010 - 05.20

    Confirming Chile’s interest in Brazil, three Chilean companies, Cencosud, Sonda and Paz announced new investments in Latin America’s bellwether country.

    “Brazil is a huge market with enormous growth potential,” president of Copec, Roberto Angelini, said. “It is one of the economies that will stand out in 15 or 20 years.”

    In the last 20 years Chilean capital investment around the world reached US$52 billion, with Argentina accounting for 30% and Brazil 20%.

    According to Natalia Aranguiz, head of research at WAC Research, Brazil’s important domestic demand makes it the engine of Latin America.
    “Brazil is also a country rich in commodities and possesses all the factors necessary for a business to be successful,” she said.

    In Brazil the main area of Chilean investment is the energy sector, especially electricity generation and distribution. After the energy sector is agriculture, in particular investments in forestry and pulp assets. Coming in third is the services sector with Lan Airlines, Censosud and Andina Bottling.

    While there have been some successes, not all Chilean investments in Brazil have worked out. The pharmacy chain Farmacias Ahumada left Brazil after seven years because it couldn’t cope with the confusing market conditions.

    The Brazilian market is tricky for various reasons, the key one being that the tax structure varies from state to state. In order to learn and understand the country some companies form partnerships with local entrepreneurs.

    “Traditionally, it has been difficult to carry out entrepreneurial activities in Brazil, because it is easier to buy a business already established by Brazilian businessmen,” president of the National Chamber of Commerce, Carlos Eugenio Jorquiera said.  “Because of idiosyncrasy, language and culture, it’s a tough market to crack,” he added.

    Earlier this year Chile made its first investments in the Brazilian real estate market with two housing projects that could serve as a pilot for possible future investment. Currently Paz Corp’s stake in construction of the Sao Paula projects is US$15 million.

    BCI Corredores de Bolsa, a local brokerage said on Monday that Chilean IT company Sonda recently acquired Brazilian IT firm Telsinc for US$38 million. This will provide the company with access to new geographic areas in Brazil, such as Brasilia.

    The Timber Investment Blog is sponsored by Greenwood Management. For more information on investing in Forestry please click here

    Indonesia’s Forestry Industry At Risk Of Going Bankrupt

    2010 - 05.19

    Due to illegal logging Indonesia’s forestry industry risks going bankrupt. The illegal logging has triggered a lack of material and reduces the ability of local companies to compete with foreign counterparts.

    The Chairman of the Indonesian Forest Society, Sudradjat Djajapertjunda spoke at a seminar detailing how illegal logging is one of various chronic problems in the sector that poses a serious threat.

    “In the popular term, the threat of bankruptcy on forestry activities and industry is known as forestry de-industrialization,” said Sudradjat. In his opinion the national forestry industry has become a shadow of its formers self when it was the main player in the world’s wood market.

    “It is dying or at the brink of destruction more precisely,” said Sudradjat. “Many forestry companies go bankrupt, factories closed while employers and capital owners switched to other countries with much conducive economic climate,” Sudradjat added.

    The Indonesian forestry industry in the international market is being killed by the rampant illegal logging, which has been playing a big role in wood smuggling abroad. To make the situation worse the more expensive official wood price bought by legal wood processing companies puts them at a disadvantage when competing with illegal ones. In addition the forestry sector de-industrialisation will carry follow up effects.

    “Obviously, the gross domestic product in regions with significant forestry sector like provinces of East Kalimantan, Central Kalimantan, West Kalimantan, Riau and Papua will decrease,” said Sudradjat.

    Sudradjat added that it risks posing mass layoffs in a sector that provides jobs for over 16 million people. He said that in the long term the de-industrialisation will trigger security and political instability.

    The Timber Investment Blog is sponsored by Greenwood Management. For more information on investing in Forestry please click here

    Kenya Opens up to Forestry Development Programmes

    2010 - 05.18

    As the world switches to green economy investors are hurrying to form financing deals with Kenya. These partnerships are set to open new avenues for donor support, such as the country’s tree planting campaign, which can benefit from the international carbon credit market. According to Prime Minister Raila Odinga several investment bankers and overseas investors are currently engaged in negotiations with the government.

    “These are investors who see real and considerable opportunities in our forestry development programmes,” Odinga said on Wednesday at a consultative forum on Mau Rehabilitation.

    By 2030 the Kenyan government in a joint campaign with the private sector aims to increase the country’s forest cover from the current 1.7% to 10%. This has interested investment bankers who sense a financing opportunity.

    “Investors from the developed world have settled on Kenya as the most aggressive African country as far as preparedness to tap from the multi-billion international carbon credit opportunities are concerned,” Achim Steiner, the United Nations Environment Programme’s Executive Director said.

    The country has five water towers, which experts expect will stand as front runners in a rush to tap the multi-billion dollars, which industrialised countries have pledged to invest in green projects of the developing countries.

    The Mau Forest rehabilitation project has the potential of earning the country billions of shillings, according to Dr. Hellen Gichohi, president of the African Wildlife Foundation.

    “Our preliminary calculation estimates that Mau Forest has a potential of 15 million tonnes of carbon per year,” she said.

    If Kenya rehabilitates the Mau Complex and going by the average international rate of Sh1,600 per tonne of carbon it will earn Sh24 billion per annum in extra funding. Having looked at the budgetary allocation for last year this level of funding could be used to run the ministry of health for a whole year. In total according to the chairman of the Mau rehabilitation programme, Mr. Hassan Noor Hassan Sh7.6 billion ($99.5 million) will be spent on the four year Mau rehabilitation programme.

    The Mau rehabilitation programme was established by the East African Breweries, Nation Media Group and Equity Bank in partnership with State agencies such as the Kenya Wildlife and Forestry Service.

    “Initially, most international donors adopted a wait-and-see attitude but this is likely to change this year as the country – both political and private sector – has now shown unprecedented commitment to the rehabilitation of water towers,” said Mr Steiner.

    One outcome from the meeting in Copenhagen was that industrialised countries committed themselves to funding the impact of climate change in the developing world at the cost of $30 billion.

    The Timber Investment Blog is sponsored by Greenwood Management. For more information on investing in Forestry please click here

    Brazil Becomes the 4th Largest Producer of Oil

    2010 - 05.14

    The Brazilian government is planning to increase Petrobra’s capital so the oil giant can finance a $220 billion plan to increase drilling and improve production and distribution through 2014.

    Brazil’s Lower House approved a bill in March that will exchange the rights to oil reserves for shares in the company and gave the Senate 45 days to consider the proposal. At present as lawmakers squabble over how much their States will get from future production; investors are waiting for details on where the oil rights will be.

    After the discovery of the Tupi field in 2007, Petrobras has become even more important to the Brazilian government. Early estimates from the company suggest that the Tupi fields may contain as much as 8 billion barrels of oil and gas that is trapped beneath 2km of salt.

    According to London based BP Brazil ranks as the 13th largest oil producer but if Tupi and Brazil’s other smaller finds contain as much as Petrobras is saying then they would make Brazil the fourth largest producer behind Saudi Arabia, Russia and the US.

    The TCU’s Aguiar says the court will continue to do its job and investigate Petrobras’s contracts.

    “We cannot condone companies or people who misappropriate or misuse public funds,” Aguiar, 68, says, speaking from his office overlooking Brasilia’s Square of the Three Powers. “We’d be stimulating fraud and the waste of our own money.” He added.

    As the government prepares for the 2014 World Cup and the 2016 Olympics in Rio, conflicts with the TCU are bound to worsen. According to the organising committee the Olympics will need at least $11 billion in investments. Already Lula’s PAC programme has committed a staggering 70% of that total for the Olympics. To help fund that Lula wants to remove government oversight and environmental screening that would slow projects for the sports events.

    “We need to create some accord or code of conduct among the control agencies and the executing agencies in the government so that we don’t give the same treatment to these events — be it on the financial audits, or the environmental issues, or the internal controls, or at the TCU,” he said.

    Saving the Amazon is not just about the trees and for environmentalists of whom I like to count myself among this is one step to far for Lula. He has already weakened Brazil’s environmental agency Ibama by removing some of its power to review giant hydroelectric power dams (such as the Belo Monte Dam). Now he risks ruining his legacy by bulldozing ahead with Brazil’s growth spurt.

    The Timber Investment Blog is sponsored by Greenwood Management. For more information on investing in Forestry please click here

    Earth Capital Partners Launch New Latin America Forestry Fund

    2010 - 05.13

    Hedge Fund Review reported that Earth Capital Partners had launched its ECP Forestry Fund One LP Fund investing in sustainable timber plantations in Latin America.

    The general details of the fund are as follows: the fund will be aiming to achieve a $300 million investment, which will have a 10 year maturity and will go towards eight projects in the region. The minimum investment that investors will be expected to put up is $10 million with a 1.5% management fee and 20% performance fee.

    Stanley Fink, Chairman at ECP, commented: “The fund provides a vehicle for institutional investors to engage in forestry and biomass in Brazil and Latin America, which offer attractive returns coupled to strong sustainability benefits. ECP aims to reach a first close for this fund later in 2010 and a final close in 2011.”

    Through its ownership of productive land and fast growing sustainable timber ECP expects to generate solid non-correlated returns.

    ECP’s head of sustainable agriculture and forestry, Bosworth Monck, told Hedge Funds Review that Latin American countries like Brazil offered huge opportunities. As a sign of things to come Monck said that in the initial stages there had been significant interest from investors.

    One of the eight projects proposed was the planting of eucalyptus trees on degraded agricultural land. According to Monck, within seven years the eucalyptus trees could be cut down and turned into charcoal to feed Brazil’s growing iron and steel industry.

    “Trees have a myriad of end markets and there are many end uses for wood. The key component is cost. Latin America is at the forefront of development of species and clones and management techniques of plantations. They are among the most advanced in the world,” noted Monck.

    Other countries in Latin America of particular interest to ECP are Colombia and Central American states, where they hope to find more opportunities like that in Brazil.

    The Timber Investment Blog is sponsored by Greenwood Management. For more information on investing in Forestry please click here

    Indonesia and Finland Develop Their Economic Cooperation

    2010 - 05.12

    A meeting was held on Tuesday between Finish and Indonesian officials. On the agenda were discussions regarding combining bio-energy development, forestry management and investment.

    “Certainly we will focus on investment, renewable energy and forestry,” Coordinating Minister for Economic Affairs Hatta Radjasa said on Tuesday.

    In regard to the renewable energy forestry regulations that had been issued in 2006 and 2008 Hatta said that: “They are already signed by the President. We will use them. Finland will provide the funds for forestry management in Riau and Kalimantan,”

    He also went on to state that Finland was very active in relation to renewable energy development. “We wish to find the best form of cooperation in the development of bio-energy including biofuels,” he said.

    So far no figure has been announced to reveal how much investment Finland will be putting into Indonesia. “The essence is we will push efforts in investment, bio-energy development and forestry management. We will also offer geothermal energy development,” Hatta said.

    The Timber Investment Blog is sponsored by Greenwood Management. For more information on investing in Forestry please click here

    Biggest Rate Rise in Brazil for Years

    2010 - 05.11

    After the increase last week failed to tame rising inflation expectations Brazilian traders are betting for the first time on the central bank raising the benchmark lending rate by 1% point next month.

    Since central bank President Henrique Meirelles raised the overnight Selic rate by a bigger than predicted 75 basis points from a record low 8.75% on April 28th, the futures were raised by 14 basis points. In addition yields on overnight interest rate futures contracts due in July climbed two basis points (0.02 percentage point) to an 11 month high of 9.7%.

    In a central bank survey published last week economists are driving up their year end inflation forecast for a 15th straight week, which has led to bets on the first full percentage point increase since Meirelles’s second month in office in 2003. Since November the median estimate has risen from 4.25 percent to 5.42 percent. This is above the bank’s 4.5% annual target, reflecting the quickening expansion in Latin America’s biggest economy.

    “The front end of the curve has just blown out,” said Ram Bala Chandran, a Latin America currency and rates analyst at Citigroup Inc. in New York. “The momentum is so strong that it’s hard to step in front of it. As long as inflation is on the rise, the central bank has to go after it.”

    The national statistics agency said last week that industrial production soared by 20% in March, which is the biggest increase since records began in 1991. According to the central bank survey Brazil’s economy will grow by 6.1% this year with banks boosting loans by 17% in the month from a year ago to a record $840 billion (1.45 trillion reais).

    In a Bloomberg survey of economists Meirelles’s interest rate increase last week topped most of their predictions. Last month the Selic was held at 8.75% in a move that surprised economists, who had forecast an increase. Inflation has accelerated to an 11 month high of 5.2% in the year though mid-April.

    “The mood in Brazil is that activity is very, very strong, and the central bank is behind the curve,” said Ures Folchini, executive vice-president of local markets at the Brazilian unit of WestLB AG in Sao Paulo. “The market is confused about the next move.” He said he’s sticking to his 75 basis-point increase forecast at the June 10 policy meeting as “the market is overshooting.”

    The biggest threat to Brazil’s real is concern on Greece’s credit crisis spreading to other European countries and driving away investors from higher yielding assets.

    The real  posted a 33% advance in 2009 becoming the world’s best performing currency. Nelson Barbosa, the Finance Ministry’s secretary for economic policy told lawmakers in Brasilia that the government might have to take extra steps to control the real if it observes ‘excessive appreciation’. This was confirmed by Guido Mantega, the Finance Minister, who said that the government plans to make the exchange rate less volatile in order to aid growth. To do this he said that the government would be announcing new measures to help boost exports and these might include tax breaks.

    A week after Meirelles left the overnight rate unchanged yields began rising on the July futures contract on March 24th. Since then it has risen 59 basis points from 9.11%. Compared to inflation linked notes, Brazil’s fixed rate bonds are yielding the most in the past two years where there has been concern that consumer price increases will accelerate. Since the inflation linked notes were sold in January 2008 the gap between yields on the two securities due 2013 expanded to 613 basis points. The so-called breakeven rate reflects expectations for average inflation during the period.

    “The shift is taking place,” said Guillermo Mondino, head of Latin American research at Barclays Capital in New York. “We think they will do 75 basis points, but the market is likely to be positioning for a more aggressive hike. Activity has been very strong.”

    The Timber Investment Blog is sponsored by Greenwood Management. For more information on investing in Forestry please click here