Forestry Update

Josh Spoores is a Research Manager for Majestic Steel based in the US and has closely watched the steel market for them for the last five years and recently launched the Spoores Report, a newsletter that monitors industry trends. Speaking in Rio de Janeiro at the Latin American Iron and Steel Trends conference, he said that increased domestic demand for steel will turn Brazil from a net exporter of finished steel into a net importer over the next three to five years. The impact of which would be to create a rapid price increase on the global market.

“Brazil’s economy is extremely steel-intensive and as this economy continues to grow, countries that now count on steel exports from Brazil will have to source materials elsewhere. This will have an impact on the global supply of steel and will cause prices to increase rapidly”, said Spoores.

Spoores was also part of the ‘Demand Drivers – What steel consumers are looking for’ panel that included the executive director of global ferrous products at JP Morgan, Jeffery Kabel, the deputy general manager of Sino steel Futures in China, Dongwei Chen and the principal consultant of the CRU Steel Business Unit in the UK, Chris Houlden. The Latin and American Iron and Steel Trends conference was organized by the CRU Group.

During his speech Spoores urged government officials and the Brazilian steel industry to work together to create a certification program for Brazilian pig iron, which will remove global concerns regarding questionable labour practices and environmental issues over the sources of charcoal. Charcoal of course being one of the key ingredients in the manufacture of pig iron, which is a main component in the production of steel.

Another aspect that is expected to impact the steel pricing is a shift in how iron ore is priced. In the past iron ore had been contracted for annually and only recently has the market shifted to quarterly pricing.

“Even with the change to quarterly contracting for iron ore, the current pricing structure lags the market,” Spoores said. “Iron ore will likely shift to monthly contracts based on spot prices, much like mills execute for natural gas or zinc. This new structure will bring greater volatility to steel prices and both mills and customers need to be prepared for this new reality.”

Forestry Update is sponsored by Greenwood Management. For more information on investing in Brazil please click here.

When it comes to illegal logging in Brazil a tightening of the laws and increased vigilance has led to a significant drop in deforestation rates across the whole of the Amazonian region. For decades illegal logging operations have thrived in the developing world, mostly due to weak or limited regulations. Despite this in an orchestrated move by both the US and the EU these producer nations are being steered towards a more sustainable forestry approach.

While these efforts have yielded some positive results, vast expanses of forest disappear each year, even the legal logging companies get in on the act by bribing officials to allow them to over cut and under report their activities. This is one area in particular which experts feel should be examined more closely.

It wasn’t until two years ago that the US passed the Lacey Act, which makes it illegal for anyone to import illegally harvested timber into the US. Up till then there was no international oversight in the area of logging, this led to a culture of corruption, over-exploitation and illegal mining. Europe is following their lead by exerting pressure to develop bilateral agreements with timber producing countries that require third party oversight of the logging process. This was particularly effective in Cameroon, leading to a significant reduction in deforestation rates.

Brazil on the other hand has been trying a different approach by discouraging the sale of commodities such as beef, soybeans and sugar from ranches and farms built on deforested land. The improvement in technology has assisted this approach by allowing the perimeters of farms and ranches to be recording using satellite imagery. This tracking system is accessible to the general public such as companies and civil groups. Each time a farmer or rancher is found to be encroaching on forested land that is audited and results in a hefty fine.

The approach appears to be working as Brazil has announced that an estimated 2,700 square miles of Amazonian forest was cleared in the year ending July 2009 that is down 46% over the previous year. This was the lowest rate since the government started monitoring deforestation in 1988.

So going by these figures let us hope that conservation is finally coming out ahead of deforestation.

Forestry Update is sponsored by Greenwood Management. For more information on investing in Forestry please clickhere.

I was browsing the internet the other day, when I came across an article where Jeremy Grantham (co-founder and chief investment strategist at GMO, based in Boston) called timber ‘a perfect investment’.

“Timber is safer than stocks but not quite as safe as Treasury inflation-protected bonds,” he said. “And as long as the sun shines and the rain rains, trees grow.”

Timber also acts as an inflation hedge.

“If you look at commodities, you find a pattern that all of them, except timber, had a declining real price up until 10 years ago,” Grantham said. “But standing timber has a long-term record of modestly rising prices.”

Forestry Update is sponsored by Greenwood Management. For more information on investing in Forestry please click here.