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Brazil’s Political Realities & the Environment for Forest Investments

Brazil’s Political Realities & the Environment for Forest Investments

During the last year, Brazil’s political and financial situations have deteriorated significantly. Hounded by allegations of administrative misconduct and fiscal irresponsibility, President Dilma Roussef of the Workers’ Party (PT) has been removed from office and impeachment proceedings have begun, a process scheduled to conclude by August 2016. On top of the corruption charges, the added perception that President Rousseff had completely lost control of the government is driving the impeachment process.

Currently, Brazil’s vice-president, Michel Temer, a member of the Brazilian Democratic Movement Party (PMDB), has been named acting president. If President Roussef is found guilty of the political crimes she is charged with, Mr. Temer will become the official president until 2018.

Adding further turmoil to this political quagmire, Eduardo Cunha, a member of the PMDB who was speaker of the lower house of Congress until he was suspended in May following charges of obstruction, resigned on July 8. Cunha led the impeachment effort against President Roussef. Renan Calheiros, another member of the PMDB and the current President of the Brazilian Senate, is also under investigation for corruption.

This government stalemate could not have happened at a worse time for the Brazilian economy. Brazil’s gross national product (GNP) suffered a 3.8 percent reduction in 2015, and the unemployment rate reached its highest level in 25 years: more than 11 percent.

The acting president, Michel Temer represents a more conservative political party, one known for being more centrist and more market oriented. While he doesn’t have much time to govern, certainly not enough time to change things radically, Temer knows that quick action is crucial to prevent the economy from worsening.

Mr. Temer proposed some economic changes that prevented the economy from worsening further, a positive result from his first 45 days in office. Early signs from Temer’s tenure indicate that the measures he has taken are producing the desired effect: the country’s risk rating for investments was lowered, the currency is strengthening and, according to the Central Bank, GNP will fall by a lower percentage this year (3.3 percent in 2016 compared to the 3.8 percent reduction in 2015).

Once Cunha was suspended from office, however, Temer’s ability to get legislation passed began to impede further progress. Cunha’s resignation removed this obstacle.

If progress continues under Temer’s leadership, some economists believe that Brazil’s economy will start to grow again in mid-2017, or perhaps even earlier. In a recent interview, the new Finance Minister, Henrique Meirelles, was very confident that Brazil’s economy will begin to improve next year.

 

The Effect of the Political Situation on the Forest Industry and Forest Investments in Brazil

As the recession continues, internal consumption is likely to continue to decrease and the industry segments that are targeted to internal markets will continue to suffer. According to data published by the Brazilian association of forest industries (Indústria Brasileira de Árvores – IBÁ), domestic wood panel consumption reached 7,459,000 cubic meters in 2013. It then decreased 2.5 percent in 2014 and an additional 12 percent in 2015. In the first five months of 2016, consumption appears to have decreased 7 percent in relation to 2015. In the last 30 months, that equals a total decrease of about 22 percent.

Domestic sales of paper also decreased significantly: printing & writing paper sales decreased 12 percent between 2014 and 2015 and newsprint sales decreased 9.5 percent in the same period. Overall, Brazilian production of paper has decreased roughly 0.4 percent each year since 2013.

Industry segments targeted to external markets, on the other hand, have had much better success, as they have been able to take advantage of the favorable currency situation to increase results, sales and attract additional investment. The pulp sector is one of these industry segments, which has increased production about 10 percent every year since 2013. It is investing heavily in new facilities and new machines to increase production and efficiency.

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At the end of June, Klabin, Brazil's largest paper producer and exporter inaugurated its newest pulp mill in Paraná State that produces bleached pulp from hardwood fibers, bleached pulp from softwood fibers and fluff pulp. The R$8.5 billion investment was the highest private-sector investment ever made in the state of Paraná.

Almost a thousand kilometers north of Paraná, the pulp sector is also pumping investment dollars into Mato Grosso do Sul, the state that may currently be Brazil’s main forest region. Fibria and Eldorado, the two biggest producers of Brazilian pulp, recently announced the expansion of their mills. Once the expansions are complete, most likely in 2019, the two plants will have a capacity of 6.75 million tons per year, an increase of 125 percent, representing about US$ 4 billion of investments.

To meet this demand, additional supply will be needed. Currently, Brazil is seeing a flood of timberland transactions, mainly with properties owned by integrated companies being sold to US, Canadian and European TIMOs. Since the beginning of 2015, Forest2Market do Brasil and its Group have worked on more than 10 timberland acquisition due diligence projects in different regions of the country.

What are these companies looking for to invest their capital in Brazil’s forest business? They are looking at a unique combination of characteristics that is difficult to find anywhere else in the world: 1) fast growing rates; 2) low costs; 3) better incomes and; 4) long-term safety.

Altogether, the balance between the negatives of domestic markets and the positives of export markets is good. A famous former Brazilian economic minister once said that Brazil is like a giant cruise ship; it takes time to achieve speed but, fortunately, that makes it very difficult to sink. The political crisis and economic recession have not been enough to affect the forest sector significantly, and the major companies investing in Brazil agree: Brazil is a good place to invest, especially when you think of the long term. And forest investments are long-term investments.


Next September during the “Who Will Own the Forest 12” conference, which will be held in Portland, OR, the LATAM investments panel will be organized and moderated by Forest2Market do Brasil’s director, Marcelo Schmid. Brazil’s political and economic developments, as well as their effects on the forest products industry, will be discussed.

Learn more about Forest2Market do Brasil:

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