Hancock Timberland Investor Brazil

Transcription

1 Hancock Timberland Investor Brazil January 2019 As Jair Bolsonaro moved towards his October victory in the second-round of the presidential election, Brazil s equity benchmark index, the Ibovespa rebounded. Rising from a low-point in June of 69815, the Ibovespa gained 17 percent by early August as Bolsonaro rose in the polls. Following Bolsonaro s victory with 55 percent of the votes in the second round, the Ibovespa rallied, gaining an additional 10 percent by early November. Subsequently, the Ibovespa has traded in a relatively tight range, averaging in December and early January, which is a modest improvement (4 percent) over the average sustained in the first 5 months of, prior to the mid-year correction. Financial as well as currency markets (see Figure 3, on page 3) have uniformly reacted positively to the new administration and are hopeful that Bolsonaro s actions will reflect his rhetoric. President Bolsonaro and his economic team have set as goals achieving a balanced primary budget in their first year, and his economic advisor, Paulo Guedes, has repeatedly stressed the need for privatization of government assets and pension reform. A divided congress represents formidable hurdles to the implementation of Bolsonaro s economic reform programs. Bolsonaro will have the authority to cut discretionary spending (outlays not mandated by legislation), privatize some state assets and reduce the public payroll, but any serious changes to the pension system will need constitutional amendments requiring the support of 60 percent of the members of both houses of congress.1 Markets will be able to better assess the resolve of the new administration to address Brazil s fiscal deficiencies and reduce the structural impediments to growth as the budgeting process for 2020 gets underway in April, and whether it incorporates targets for a smaller primary deficit and more constrained growth in spending. New President Boost Ibovespa Daily Index Values Oct 8: BN-Brazilian Stocks, Currency Surge as Bolsonaro takes Commanding Lead Hancock Timberland Investor Brazil America Economies, Capital Economics, 4th, December January / 11/ 10/ 9/ 8/ 7/ 6/ 3/ 2/ 1/ 12/ Bloomberg, January 4, Latin Oct 29: BN-Brazil Assets Climb after Bolsonaro Renews Pledge to Fix Economy 11/ 8/ 7/ 5/ 4/ 3/ 1/ / / 10/ 5/ 9/ / 75000

2 Growth Again Figure 1: Third Quarter Brazil Real GDP (Percent) 10% 8% 6% 4% 2% Third quarter economic growth rose 1.3 percent year-on year, up from 1.0 percent year-on-year in the second quarter, and a positive 0.8 percent quarter-over-quarter from the second quarter. Consumer spending growth and exports drove third quarter growth, after industries recovered from the disruptions caused by the truck drivers strike in late May. 2 With the end of election uncertainty, the outlook for growth in Brazil is positive. 0% -2% -4% -6% -8% Current Quarter (Year over year) Lagging 4 Quarter Annualized Sources: IBGE, Macrobond as of September 2Latin America Data Response, Capital Economics, 30th November, Inflation Ticks Upward While Borrowing Costs Remain Historically Low Figure 2: Quarterly Brazil Interest Rates and Inflation (Percent per year) 25% 20% 15% 10% Selic IPCA Brazil inflation picked up sharply in the third quarter, averaging 4.4 percent, a full 1.0 percent increase from second quarter s average of 3.3 percent. Inflation is still well below the five year average for the period of 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 meeting. At this same meeting, the Selic benchmark interest rate was left unchanged at 6.5%, the fourth consecutive decision to hold rates unchanged. 3 Given the recent movements in the foreign-exchange market and the potential impacts of the weaker currency on inflation expectations, a possible tightening cycle may be brought forward, and start earlier than proffered for % 0% Note: IPCA measures consumer price inflation. Selic rate is the benchmark overnight bank rate calculated from daily rates for a quarterly average Sources: IBGE, Macrobond as of September 3.Trading Economics, December interest-rate Hancock Timberland Investor Brazil January

3 BRL per USD, EUR BRL per CNY, ARS BRL Weakens on Pre-election Uncertainity Figure 3: Quarterly Brazil FX BRL per USD BRL per EUR BRL per CNY BRL per ARS The BRL weakened sharply in the third quarter against the USD (-10 percent) on strength in the USD and tightening financial conditions in the U.S. The BRL weakened against the Chinese Yuan (-3 percent) and the Euro (-7 percent). Post-election in Brazil, the BRL has regained about half of the pre-election depreciation experienced in the third quarter and has stabilized near 3.8 BRL/USD Source: Macrobond as of September Foreign Investment Drops Sharply Figure 4: Quarterly Foreign Direct Investment Net Capital Flows (USD Millions) $25,000 $20,000 $15,000 Brasil México Foreign direct investment (FDI) into Brazil moved sharply lower in the second quarter to $US 10.1 billion, down 35 percent from the previous quarter, and now 54 percent below the cyclical peak of $US 21.8 billion reached in the fourth quarter of. Despite lingering economic and political uncertainty, the country s sheer size makes it a persistent destination for FDI. $10,000 $5,000 Source: OECD as of September Note: FDI reports lag one quarter Hancock Timberland Investor Brazil January

4 Steel Production Rises on Increased Domestic Consumption Figure 5: Quarterly Brazil Steel Production, Exports and Domestic Production (Million MT) Net Exports Steel Production Apparent Consumption Steel production rose to 8.9 million metric tons in the third quarter from 8.6 million metric tons in the second quarter, which is the first quarter in where steel production has grown. Steel net exports in the third quarter fell 19 percent from second quarter, while steel (apparent) consumption in Brazil moved upwards 19 percent. 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 products 5. Despite these new trade tariffs, the United States continues to be the largest market for Brazil s exports at 2.8 million metric tons or 41 percent of yearto-date total exports Sources: Brazil Ministry of Industry, Foreign Trade and Services, September 5http://agenciabrasil.ebc.com.br/en/economia/noticia/-07/brazil-steelexports-us-rise-after-tariffs 6United States Dept. of Commerce, Global Steel Trade Monitor, September Pulp Export Volumes Move off Record Volumes Figure 6: Quarterly Brazil Forest Product Exports (Million MT) Celulose Paper Products Lumber Panels Brazil exported 4.9 million metric tons of forest products in the third quarter of, a 7 percent drop in total forest products exports from second quarter, moving further from first quarter s record volumes. Exports of Brazil s dominant forest product market pulp contracted third quarter, falling 10 percent from second quarter. The impacts of May s nation-wide trucker s strike still lingers in production schedules by many pulp and paper producers in the country. 7 Lumber exports from Brazil were also lower third quarter, down 1 percent from second quarter. Wood panel exports were the exception, where volumes increased 20 thousand metric tons over second quarter, or 4 percent. The remainder of looks promising for Brazil forest product demand and exports due to the relative weakness of the BRL and the strength in global markets for market pulp and solid wood products. 0 Sources: Brazil Ministry of Industry, Foreign Trade and Services, September 7https://technology.risiinfo.com/logistics-35 Hancock Timberland Investor Brazil January

5 Market Pulp Delivered Pulpwood BEKP Market Pulp Prices Turn Lower Figure 7: Quarterly Prices for Market Pulp and Pulpwood (USD/MT) $1,400 $1,200 $1,000 $800 $600 $400 $200 SBSK Market Pulp (USA) Southern Pine Pulpwood (USA) BEKP Market Pulp (Brazil) Eucalyptus Pulpwood (Brazil) $70 $60 $50 $40 $30 $20 $10 Prices for Bleached Eucalyptus Kraft Pulp (BEKP) turned sideways third quarter, reversing a six quarter rising trend, as third quarter prices averaged a record $USD 1,240 tonne. Southern Bleached Softwood Kraft (SBSK) pulp prices continued to set new highs in the third quarter of, with 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 levels 8. Even with record pulp prices, pine pulpwood delivered prices in the U.S. South moved lower (1.0 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 again third quarter falling by 7.2 percent from the previous quarter (in USD), largely due to the downward movement in the BRL relative to the USD. Sources: Hawkins Wright, STCP, and Timber Mart-South as of September 8RISI World Pulp and Recovered Paper Forecast, U.S. West Coast Sawtimber Price Move off Recent Highs Figure 8: Quarterly Sawtimber Stumpage Prices for Timber (USD/m3) $120 $100 $80 $60 $40 $20 Brazil U.S. South U.S. West Coast Finland In the third quarter, pine sawtimber prices (in USD) in Brazil rose 1 percent from second quarter prices and down 2.0 percent from third quarter prices a year ago, due to the sharp devaluation of the BRL. Measured in BRL, pine sawtimber prices in Brazil moved upward 0.5 percent from last quarter 9. 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 turned down thrid quarter from second quarter recorded levels. U.S. West Coast prices are still 19 percent above prices thrid quarter of last year. The price of southern pine sawtimber in the U.S. South moved down slightly, -0.2 percent, from last quarter, now 0.3 percent from prices last year. Finnish softwood sawtimber prices slowed from last quarter s price increases, down 0.7 percent from second quarter, still 11 percent above third quarter of last year. Sources: STCP, Timber-Mart South, RISI as of September 9STCP Wood Price Outlook September/October Hancock Timberland Investor Brazil January

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Hancock Natural Resource Group Research Team Court Washburn Managing Director and Chief Investment Officer cwashburn@hnrg.com Keith Balter Director of Economic Research kbalter@hnrg.com Mary Ellen Aronow Associate Director, Forest Economics maronow@hnrg.com Daniel Serna Senior Agricultural Economist dserna@hnrg.com Elizabeth Shestakova Economic Research Analyst eshestakova@hnrg.com Weiyi Zhang Natural Resource Economist wzhang@hnrg.com Hancock Timberland Investor Brazil January