Forestry Update

Efforts to industrialise the Amazon region with initiatives such as the cultivation of palm oil for biofuel production and the planting of forestry plantations on degraded land have the added benefit of being championed by none other than the Brazilian President Luiz Inacio Lula da Silva.

“This is the start of a revolution in this region,” Lula said in a speech in Tome-Açu, a town in the northern state of Para.

The President has hit back at critics who are against plans to build palm oil processing plants by saying that they will generate wealth in one of the country’s poorest regions and reduce environmental pollution. The plans are backed by the state controlled energy company Petrobras and the federal government and will provide incentives for the cultivation of palm oil for the production of biofuels.

Under the current plans the scheme would encompass two different projects and would come to a total investment of $702 million (1.3 billion reais). The first project would involve producing 120,000 tonnes of palm oil based biofuel annually to supply the northern region of Brazil. The second project would include a partnership with Galp, a Portuguese energy firm, to export a portion of that fuel to Europe.

Despite being the world’s leading palm oil producer, Brazil still imports almost half of the oil it consumes. Lula believes that the projects would end the state’s dependence on the timber market, which is considered the main cause of Amazon deforestation. He hailed palm oil plantations as environmentally friendly and stated that only areas that were deforested would be used.

The project is expected to generate 7,000 direct jobs and 15,000 indirect jobs and the Brazilian government predicts that up to 2,000 Para farmers would benefit from the project. The entire region would also benefit from the improvements to the roads and bridges, which would be involved in a project of this size.

The controversial Belo Monte hydroelectric dam, which when completed would be the worlds third largest was also defended by the President.
“People have to understand, that the vast majority of people in Para are in favour of the dam.” Lula said.

The dam project has sparked international protests by environmentalists, indigenous communities and members of grassroots groups as it will flood almost 200 square miles of jungle and displace an estimated 50,000 people.

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

Last year the Chinese government determined that it had over stimulated its sprawling economy with cheap credit and direct outlays. In a bid to curtail these activities the government is now upping the amount of funds that banks must hold in reserve. This has led foreign investors to believe that the progress of tightening credit will diminish the country’s industrial prospects and at the very least, put a halt to expansion, consumer demand and corporate earnings.

John Burbank, a successful international investor believes the opposite is true. In his opinion Beijing is taking the right, decisive approach to prevent a real estate bubble by squeezing out excess liquidity as plenty of financial liquidity remains to power the Chinese economy into growth just as strong as the years previous.

“There was a huge de-stocking of steel, and now we see a big rebound ahead. There’s a real chance of a spike here from China and other countries, including the United States, where companies took down their inventories and now have to rebuild them. These are structural deficits.”

It is worth noting that China is aggressively buying up as many assets as it can directly through ownership.  However, due to political sensitivities China can not progress as quickly as it might like and that opens up opportunities in both public and private assets both for hedge fund managers and individuals.

“We try to get to assets China wants ahead of them,” Burbank said. “We deal directly with Chinese buyers and are able to see their determination to do something else with their money than continue to buy U.S. Treasury.”

Analysts at speciality company World Steel Dynamics and JPMorgan Chase agree with Burbank’s view and the investment opportunities are very convincing if you can be both patient and agile. While the shares of the major US steel makers were absolutely ruined last year, steel is still the standard industrial product.

U.S. Steel shares fell 90%, AK Steel (AKS) shares sank 92%, and ArcelorMittal (MT), the biggest global producer, sank 88%. These have all enjoyed vigorous rebounds in the past year but still have a very long way to go, if analysts’ views are correct. Each has upside potential of 35% to 50%, if not more, over the next 12 months.

The key to everything is pricing and due to the demand from severely depleted inventories steel makers have found that they can raise prices in bunches and not face blowback from buyers. Already prices for iron ore, coal and scrap metal have risen dramatically this year and as a consequence integrated steel makers have been able to lift their prices from $500 a ton in November to $580 a ton in February.

JPMorgan analysts observed that despite the rise in prices orders from buyers have increased as they try to get ahead of further increases, filling inventory holes as well as restocking. According to analysts more price rises are expected over the next couple of months, with prices reaching as much as $750 a ton later in the year.

If these predictions are correct, then AK Steel could earn as much as $2.30 per share this year and $3.65 next year, which would push the share price to at least $34 by the year-end with its typical price-earnings multiple for this point in the cycle. By the same token, U.S. Steel could earn as much as $4 per share this year and $9.45 next year, pushing its share price as high as $75 by the end of this year. And Mittal could earn $3.40 per share and $5.50 next year, pushing the share price target to around $55. Another one to put on your radar is Cliffs Natural Resources (CLF), which is the largest U.S. producer of iron ore. Now trading at $53.95 a share, it has potential to rise to $75.

“I realize it seems strange, but there is just not a lot of steel out there and with China constantly increasing its demand well beyond what it can produce, this will be an important story over the next couple of years,” Burbank said.

Burbank sees a potential for the broad market to sink as far as 15% by the autumn, but should it get out of hand, Burbank thinks the government would find a way to stop the damage if it were to occur in an election year.

“We know that they will come up with a new plan if asset prices fall dramatically again,” he said. “There is no political will to take any pain.”

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

In a move that has been called short sighted by the Farm Forestry Association, New Zealand’s government is planning to cut more than NZ$8 million from a fund designed to promote new tree planting.

The announcement of the funding cut to the Afforestation Grants Scheme is expected next month when the government presents its budget package. In addition to the cut of $12 million last year the move would leave the scheme with only $30 million of its original $50 million of funding.

Launched in 2007 the scheme was designed to encourage landowners to plant trees in order to reduce erosion and give greater greenhouse gas absorption. So far the scheme has been very successful with over 8,000 hectares planted.

Association president John Dermer is critical of the government’s decision. “Forestry is a 30-year investment but the Government can’t see past its three-year term” he says. Dermer also argues that the cuts show that the government is not committed to meeting New Zealand’s obligations under the Kyoto agreement.

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

A recently released report has found that the Australian pulp and paper industry is in danger of collapse with employment, investment and exports all falling. Roughly 19,000 people are employed by the $12 billion industry, which has been hard hit by the recent plant closures in Tasmania.

In February Paperlinx closed its Wesley Vale plant and the Burnie mill is due to close at the end of July. Just last week Forest Enterprises Australia went into voluntary administration after struggling to finance its $216 million debt.

There are 18 recommendations on the report the most pertinent are for the government to provide more investment and support for dealing with the growing competition in Asia, an expansion of timber plantations and for projected shortages of wood for pulp and paper.

In an attempt to reverse the decline in the sector the Federal Government has also established a Pulp and Paper Industry Innovation Council. Industry Minister Kim Carr says that the council will advise him on priorities for industry development.

“The work begins with discussion but it is my expectation, and the expectation of everyone involved, that it will culminate in concrete plans for action,” he said. “The new industry innovation council will champion innovation within the industry and build connections with the wider innovation system.”

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

Last March the New Zealand Superannuation Fund made $679 million on its $14.88 billion of investment funds, which works out at a 4.29% paper return. The fund has achieved a $30.02 billion net gain, which is 22.27% for the 2009/2010 full year to date, which ends in June. This gain reflects the rising share market prices for its investments in global equities.

Making up over 37% of the funds investments are large cap international equities, followed by international fixed income accounts, which make up roughly 16% and timber makes up 7% of the value.

During the 2007/08 and 2008/09 years the fund made a loss of 4.92% and 22.14% respectively. However, the funds rising return over the past year has helped make up for this.

Since the fund was first set up it has made an absolute return of 6.64% and its excess relative to Treasury bills is 0.5%. The New Zealand fund has substantial share holdings in three central companies, the Auckland International Airport at 10.11%, the New Zealand Refining Company at 13.34% and the fund also has a 8.14% shareholding in ConnectEast Group, which has an estimated book value of $186 million.

Last week the Super Fund terminated the global equity, non US small cap equity and multi strategy equity mandates run by GMO LLC after the firm managed these portfolios through the latter half of the decade. However, GMO Renewable Resources will continue to manage the Fund’s local timber assets.

Following the global financial crisis at the end of 2008 the Cullen Fund’s performance bolstered the government’s books after it took advantage of the rebound in markets in June of last year.

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

With the collapse of the largest two agribusiness companies last year in Australia the Australian Securities and Investments Commission has released a consultation paper called ‘Agribusiness Managed Investment Schemes: Improving Disclosure for Retail Investors’.

This paper outlines a plan for developing industry disclosure benchmarks, which should allow investors a measure of protection in agribusiness managed investment schemes.  This is good news for the forestry industry since it took the brunt from the fallout of the MIS fiasco last year. It is also good news for retail investors as they make up the majority of those investing in forestry MIS.

Running in mid-May the Wood Supply Chain Optimisation 2010 is receiving a lot of attention from forest product companies. The series focuses on innovative systems, tools and technologies, which improve efficiencies through the supply chain. The event has been long awaited and registrations for the technology events are pouring in.

In Burnie, northern Tasmania PaperlinX Ltd has closed their mill with a loss of two hundred jobs. In addition financially troubled Forest Enterprises Australia has gone into voluntary administration the result of which is the loss of a further two hundred jobs. The company had been trying to weather the difficult financial conditions in order to refinance its AU$216 million debt by restructuring the company and selling its plantation assets. Unfortunately after various extensions the banks ran out of patience, which is very disappointing as international and domestic forestry markets are now starting to flourish after several years of struggling.

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

The Queensland Greens reported that the State Government plans to sell off forestry assets will result in the loss of hundreds of jobs and put the economic and environmental future of the Gympie Region in jeopardy.

Dr. Jim McDonald the Greens Wide Bay federal election candidate claimed that in the long term the sustainability of Gympie’s forestry industry could be ruined by the sale of Forestry Plantations Queensland (FPQ).

“The Government’s (tender) documentation states that there is strong demand for FPQ products,” Dr McDonald said. “If that is so, why would the Bligh Government sell off such a good asset to foreign buyers? For the sake of $20 million of government investment a year in a healthy industry, which last year turned in $72.4 million of sales, the State is flogging off a viable asset. It doesn’t have the moral right to do that. That industry has been developed over the long term by taxpayers’ money for the public purse.”

Dr McDonald is concerned that the environmental record of some of the private forestry firms in Australia and overseas has been overlooked by the Government in the past. Now the same State Government that proposed the Traveston Dam are using Gympie and the Sunshine Coast as a scapegoat. What makes it worse is that the sale not only threatens the livelihoods of 400 forestry workers in the medium term but also the overall economic health of the region if the workforce is cut.

It now looks likely that by June of this year the forests in the Gympie and Sunshine Coast regions will be bought by foreign companies. The leading candidate is the American company John Hancock Financial Services Inc, as they have already bought up large tracts of plantations and forests in Victoria.

However, Victorian environmentalists have questioned Hancock’s clear felling practices especially in rain catchment areas and koala habitats.

“Environmentalists have accused the Hancock Company of decimating large tracts of koala habitat in the Strzelecki Ranges in south-east Victoria, and they claim the company has failed to apply proper koala management practices. I cannot see how it is the national interest to contemplate the sale. We support the unions and the community in objecting to this sell-off,” Dr McDonald said.

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

It was announced by iDynea Oy that its subsidiary Dynea AS sold its 50% share in Dynea Brasil S.A, a Brazilian joint venture company to JV partner Arauco do Brasil S.A.

Owned by Chilean Group Arauco, Arauco do Brasil S.A. is one of the largest forestry enterprises in Latin America. Certainly, in terms of surface area, plantation yield and the production of market kraft wood pulp, sawn timber and panels, it is.

Dynea Brasil S.A. produces resins for the panel board and paper industries at its production site in Araucaria whereas in Curitiba it produces decorative paper overlays.

In 1998 the joint venture was formed to satisfy Arauco do Brasil S.A. need for high quality resins and overlays as well as the growing panel board market in Brazil. Dynea Brasil S.A. has developed its markets relying on Dynea’s technology for resins and formaldehyde production. Arauco do Brasil S.A. is a leading producer of MDF, particleboard and related lumber and forestry products in Brazil.

“This transaction will give us resources for expansion in our key growth areas, mainly in Europe and the Asia Pacific region,” says Roger Carlstedt, Dynea President and CEO.

“Through this move we focus our activities in South America on our fully owned company Dynea São Paulo Indústria de Resinas Ltda in Brasil,” says Nina Kopola, Dynea Executive Vice President in charge of operations in Europe and South America.

“Dynea will continue to help its customers grow by providing value through our leading resins and overlays technology world-wide.”

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

According to a study commissioned by Norway’s Ministry of the Environment there is significant levels of illegality in Guyana’s forestry sector although it is lower than in several other major tropical timber producing countries in South America.

The study was carried out by the Centre for International Forestry Research (CIFOR) and Iwokrama, who titled it ‘Forest Law Enforcement and Governance and Forest Practices in Guyana.’ The report stated that Guyana like most under developed countries had limited financial resources but unlike those other counties it has developed a forest legal system for the management of its forests. Other basic governance requirements that Guyana has are forest monitoring and incipient mechanisms of public participation in place.

The report, which was carried out last year, said that improvement of the monitoring capabilities of the Guyana Forestry Commission (GFC) and regular use of the remote sensing data are required to address the problem of illegality. It must be noted though that the report did point out that some of the illegality has to do with social factors and land resource tenure aspects in the case of small loggers. In the case of large concessionaires it has to do with the system of timber charges and contractual arrangements.

“Forest users will have to become REDD [reducing emissions from deforestation and forest degradation] partners in any probable arrangement, and this is particularly important for the case of small loggers and community forestry groups. Critical geographical areas such as the region bordering with Brazil on the South and the border with Suriname on the East should be particularly taken into account in REDD initiatives, due to risks and potential leakages, as well as for the probable increased additionally involved in emission reduction efforts,” the report, which was made available by the Norwegian government, stated.

According to the report one of the main threats to Guyana’s forest is mining. The good news is that the forest resources of Guyana are currently healthy and productive; however threats are already forming and are expected to increase unless properly managed. The majority of these threats come from economic development and in particular the increased links with regional partners such as Brazil.

To many forest users the mining industry lacks the guidance of rules, to keep it from becoming invasive or detrimental to the environment. For forest company managers mining is a big problem and is recognised as an obstacle for forest certification.

“They resent what appear to be significant differences in control with their activity,” the report says.

A good step towards inter-sectored coordination was the establishment of the Cabinet Sub-committee on Natural Resources and the Environment, and the Natural Resources and Environment Advisory Committee. The report added that government officers have indicated that the issue of forest multiple uses, particularly the relationships between forestry, mining and agriculture are being addressed under the recommendations of the National Development Strategy and through the elaboration of land use plans.

“Loose or inadequate control of mining activities on forest lands has the potential to negatively affect a REDD program. It would have the direct effect of producing forest degradation and even deforestation, and it would also impact on monitoring costs,” the report warned.

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

The cancellation of a major power deal with Quebec is bad news for Norwegian solar company Umoe Solar AS as they are still undecided whether or not to build a $700 million plant.

In a phone interview, chairman and owner Jens Ulltveit-Moe said that his company was relying on a long term supply of cheap, green power for the proposed facility. Now that New Brunswick will no longer trade NB Power assets for $3.2 billion and a supply of clean low cost power from Hydro-Quebec, Umoe will be paying 23% more on electricity than it would have if the plant was up and running.

With engineering firms finishing the design of the proposed plant Ulltveit-Moe will have to decide soon whether to move forward or not.

“This will certainly be one factor coming into the decision, which I will take in a few months’ time,” Ulltveit-Moe said. “It might be as early as May. It might be as late as August.”

It is estimated that the plant would generate roughly 5,000 tonnes of polycrystalline silicon, which is the base material used to make solar panels and requires 80-100 megawatts of electricity. Since solar panels capture renewable energy the company wants to use the clean power at the Miramichi plant so they can market the product as green.

“One of the reasons I selected Miramichi was that it was not fossil-fuelled,” he said, explaining New Brunswick relies on a diverse power mix. “I looked at South Africa and Australia, which both gave very inexpensive power, but it was based on coal. And I thought it was a contradiction in terms to use coal to generate electricity to create clean carbon-free product.”

It appears though that Ulltveit-Moe is not concerned about the future of the solar plant but is instead concentrating on his other New Brunswick investment, Fornebu Lumber Co. Inc. Recently Ulltveit-Moe said that he had poured over $5 million to buy new sawing equipment for the firm’s Bathurst sawmill.

In a meeting with J.D. Irving company president Jim Irving, Ulltveit-Moe said that he is watching how New Brunswick invests in silviculture to improve the quality of the forests. In the future he mentioned that he would like to build a biorefinery in New Brunswick, which would be fuelled by forest products.

“That interests me because I have a substantial investment in Brazil, in biofuel. There I make 230,000 tonnes of sugar cane ethanol a year – which is a lot,” he said, referring to his company, Umoe BioEnergy ASA. “I think the timber resource, the forestry resource, is not worth much now but I think it will be valuable,” he said.

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