Timberland Investment Group Market Report... · July’s 1.174 million units (SAAR) and 9.4% versus...

Timberland Investment Group Market Report3rd Quarter 2018

2BTG Pactual • Timberland Investment Group

Table of Contents

Timberland Investment Dashboard..................................................................................................................................................................3

Executive Summary....................................................................................................................................................................................................5

United States...................................................................................................................................................................................................................8

Latin America...............................................................................................................................................................................................................15

Europe...............................................................................................................................................................................................................................21

South Africa...................................................................................................................................................................................................................23

New Zealand.................................................................................................................................................................................................................26

Australia...........................................................................................................................................................................................................................28

Global Pulp and Paper Markets.........................................................................................................................................................................30

Baltic Dry Index...........................................................................................................................................................................................................32

Disclaimer.......................................................................................................................................................................................................................34


Timberland Investment Dashboard


Indexed Exchange Rates of Selected Countries vs. the US Dollar (2009=100)

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US Southwide Quarterly Pine Chip-n-Saw and Sawtimber Prices

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Pine Sawtimber Stumpage Prices in Paraná State, Brazil

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Quarterly Charcoal and Eucalyptus Stumpage Prices in Minas Gerais, Brazil

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Baltic Dry Index

Source: Bloomberg

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ExecutiveSummary


TIG’s View from the GroundIn the US South, prices were generally weaker in part due to dry weather, which led to increasing timber availability. When Hurricane Florence hit the Southeast, infrastructure (e.g., roads and culverts) was more negatively impacted than timberland.

In the US Pacific Northwest, log prices modestly softened given increasing timber availability and rising log inventories.

In Brazil, timber demand continues to improve in Minas Gerais given better pig iron demand and strong pulp demand. Elsewhere in Brazil, timber demand has improved given better economic fundamentals while pulpwood remains oversupplied in certain regions.

In Uruguay, pine sawlog demand softened given slower Chinese demand in part due to a weaker Chinese yuan and higher ocean freight rates. Demand for eucalyptus pulpwood logs is strong given continued strong demand from Asia.

Industrial & Capacity UpdateIn the US, Biewer Lumber announced that it intends to spend US$ 40 million to expand its Newton, MS sawmill (250 million board feet [“mmbf”]) by 100mmbf while Georgia-Pacific announced that it intends to build a new 300mmbf lumber mill in Albany, GA for US$ 150 million. Meanwhile, Resolute Forest Products agreed to sell its Catawba, SC mill for US$ 300 million to New-Indy Containerboard, Glatfelter entered into an agreement to sell its specialty papers business, and Cascades announced plans to establish a lightweight recycled containerboard operation in the former Bear Island Paper Mill in Hanover County, VA.

In Brazil, Royal Golden Eagle completed the acquisition of Lwart Group (250,000 MT bleached eucalyptus kraft pulp mill). Meanwhile, a judge ordered Paper Excellence and J&F Investimentos, owner of the Eldorado pulp mill, to go to arbitration to resolve their dispute over debt belonging to Eldorado that is backed by J&F. Klabin is contemplating a new 1 million metric tonne (“MT”) unbleached kraft pulp line in Paraná to serve two new paper machines.

United StatesIn Q3, the US economy expanded with GDP increasing 3.5% quarter-over-quarter according to a preliminary estimate versus an increase of 4.2% quarter-over-quarter in Q2. Meanwhile, unemployment declined to 3.7% in September versus 3.9% in August, the Institute for Supply Management (“ISM”) Purchasing Managers Index was at 59.8% in September versus 61.3% in August, and August housing starts increased 9.2% over the prior month and 9.4% versus August 2017. The overall economic outlook remains positive.

Southern pine sawtimber prices increased 0.7% for the quarter and 0.6% year-over-year.

Southern chip-n-saw prices declined 1.9% sequentially in Q3 and 2.0 % year-over-year.

Southern mixed hardwood sawtimber prices increased 0.2% for the quarter and 2.5% year-over-year.

Southern softwood pulpwood prices declined 5.5% quarter-over-quarter and 5.8% year-over-year while hardwood pulpwood prices declined 0.9% quarter-over-quarter, but increased 18.5% year-over-year.


Latin AmericaIn Q2, Brazil’s economy slightly expanded with GDP increasing 0.2% quarter-over-quarter versus an increase of 0.1% quarter-over-quarter in Q1.

For the three months ended August, changes in Brazilian softwood sawtimber prices were generally positive, depending on assortment, with veneer logs (large-diameter) experiencing more notable year-over-year gains.

In Q3, Brazilian charcoal prices increased 63.3% year-over-year given lower charcoal supply, continued improvement in automobiles, and a weaker Brazilian real. The price of eucalyptus used in charcoal production increased 4.6% year-over-year.

Eucalyptus pulpwood prices in Brazil were flat for the three months ended August and increased 0.1% year-over-year.

Uruguay’s GDP increased at an annualized rate of 2.5% in Q2 versus 2.2% growth in Q1.

Eucalyptus pulpwood prices in Uruguay were flat quarter-over-quarter and year-over-year in Q3.

Elsewhere in Latin America in Q2, Chile’s GDP increased 5.3% year-over-year, Argentina’s GDP declined 4.2% year-over-year, and Guatemala’s GDP increased 3.3% year-over-year.

EuropeIn Q2, euro zone GDP increased 0.4% quarter-over-quarter versus 0.4% quarter-over-quarter growth in Q1.

In Estonia, pine sawlog prices increased 15.3% year-over-year while birch sawlog prices increased 12.5% year-over-year given increasing global sawlog demand. Estonian pine pulpwood prices increased 73.8% year-over-year while birch pulpwood prices increased 86.3% year-over-year due to challenging weather conditions and recent forest fires.

South AfricaSouth Africa’s economy entered a recession with GDP declining 0.7% quarter-over-quarter in Q2 following a quarter-over-quarter decline of 2.6% in Q1.

*GDP is reported in real terms while timber and wood products pricing are reported in nominal terms**For every country mentioned in this report, real GDP reflects 2Q2018; 3Q2018 3Q2018 real GDP will be released between late October 2018 and mid-January 2019.

In August, lumber prices declined 1.0% versus the prior three months and 1.3% from August 2017.

Softwood log prices were mixed. In Q2: A-grade logs declined 8.1% for the quarter and 2.2% year-over-year, B-grade logs increased 4.0% for the quarter and 22.2% year-over-year, C-grade logs declined 1.9% for the quarter, but increased 5.0% year-over-year, and D-grade logs declined 0.6% for the quarter, but increased 0.4% year-over-year

New Zealand / AustraliaIn Q2, New Zealand’s GDP grew 1.0% quarter-over-quarter versus growth of 0.5% quarter-over-quarter in Q1.

New Zealand A-grade export log prices increased due to modest demand improvement in China. Domestic log prices declined due to lower decking demand and wet weather.In Q2, Australia’s GDP increased 0.9% quarter-over-quarter versus growth of 1.1% quarter-over-quarter in Q1.

Australian softwood roundwood prices declined partly due to slowing export demand from China while prices of hardwood logs also declined. Softwood chip prices were flat while hardwood chip prices moved lower.

Global Pulp & Paper MarketsIn Q3, bleached hardwood kraft pulp (“BHK”) prices increased 0.5% versus Q2 and 20.3% year-over-year.

Prices improved largely due to steady demand and mill downtime.

Bleached softwood kraft pulp (“BSK”) prices increased 6.0% versus the prior quarter and 37.4% year-over-year.

During the quarter, softwood pulp pricing increased given downtime and tight inventory levels.


United States


In Q3, US GDP expanded at an annual rate of 3.5% according to a preliminary estimate versus 4.2% in Q2 (Figure 1). The Q3 growth in GDP reflected increases in personal consumption, private inventory investment, state and local government spending, federal government spending, and nonresidential fixed investment partly offset by negative contributions from exports and residential fixed investment. Imports also increased, which subtracted from GDP. The unemployment rate declined to 3.7% in September versus 3.9% in August, the lowest level since 1969, while the change in total nonfarm payroll employment (seasonally adjusted) was 134,000 in September versus 270,000 in August. Meanwhile, the labor force participation rate remained flat at 62.7% in September versus August, continuing to trend along low levels (Figure 2).

Economic activity in the manufacturing sector continued to expand in September. The ISM, a bellwether of manufacturing activity, was at 59.8% in September versus 61.3% in August (Figure 3). The ISM is a diffusion index with values over 50% indicating growth and values below 50% indicating contraction.

Figure 1. Annualized Quarterly US Real GDP Growth (%)

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Figure 3. US ISM Purchasing Managers Index

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US HousingThe US housing market continues to improve at a gradual pace. In August, housing starts were at a seasonally adjusted annual rate (“SAAR”) of 1.282 million units (Figure 4). This figure is up 9.2% versus July’s 1.174 million units (SAAR) and 9.4% versus August 2017’s 1.172 million starts (SAAR). The share of multifamily starts as a percentage of total starts increased to 31.7% versus 26.7% in July.

New single-family home sales increased 3.5% month-over-month in August (Figure 5). Existing home sales were flat month-over-month in August (-1.5% year-over-year) at 5.34 million units (SAAR). Inventories of existing homes were flat at 4.3 months in August versus July, still a very low level of inventory by historical standards.


Figure 4. Annual US Housing Starts, Seasonally Adjusted Annual Rate and 30-year Mortgage Rates

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Figure 5. Monthly New Home Sales, New Building Permits, and Existing Home Sales, Seasonally Adjusted Annual Rates

Sources: US Dept. of Commerce Census Bureau, National Association of Realtors

In August, building permits declined 5.7% month-over-month. This decline was driven by a 4.9% month-over-month decline in multi-family permits and a 6.1% month-over-month decline in single-family permits.

US Forest Products and Timber MarketsLumber and Oriented Strand Board (“OSB”) markets experienced pricing weakness throughout most of the quarter while plywood markets managed to rebound later in Q3. In aggregate, softwood lumber prices declined 14.1% quarter-over-quarter. This compares to a historical average sequential decline of 0.5% over the last decade (Figure 6). Through most of the quarter, lumber prices declined due to thinning order files, destocking, and slower construction activity in certain parts of the US due to inclement weather (e.g., Hurricane Florence; heavy

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rain in Texas). Further, exports of southern pine lumber notably declined starting early August given Chinese tariffs (please refer to Paper & Forest Products Duties below), resulting in an increase in domestic lumber supply. During Q3, structural panel pricing declined 12.5% quarter-over-quarter. This compares to a historical average sequential increase of 1.4% over the last decade (Figure 6). Similar to lumber, OSB prices declined in July and most of August due to destocking and as producers lowered prices in order to move product. Construction activity in the US South also moderated due to heat. By the end of Q3, Southeast 7/16” OSB prices declined 28.9% to US$ 295 per thousand square feet (“msf”) versus US$ 415/msf at the end of Q2. Meanwhile, Q3 plywood prices declined in July and most of August due to destocking and thinning order files. However, prices began to modestly improve in late August given increased sales, increased construction activity, and some inventory replenishment. Plywood prices in the US South continued to increase in September given increased demand from Hurricane Florence. Versus the quarterly low of US$ 440/msf reached in early August, Southern Plywood 15/32” 4-ply prices increased 11.9% to end Q3 at US$ 493/msf.

Figure 6. US Framing Lumber Index and Panel Composite Index

Source: Random Lengths

Figure 7. US Southwide Quarterly Pine Chip-n-Saw and Sawtimber Prices

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Throughout the US South, pine sawtimber prices increased 0.7% in Q3 and 0.6% year-over-year according to TimberMart-South (Figure 7). Chip-n-saw prices declined 1.9% sequentially in Q3 and 2.0% year-over-year. Pine sawtimber and chip-n-saw prices averaged the highest in Florida and lowest in Tennessee.

Southern hardwood sawtimber prices were generally positive during Q3. Region-wide, mixed hardwood sawtimber prices increased 0.2% for the quarter and 2.5% year-over-year. Oak sawtimber prices slightly declined 0.3% quarter-over-quarter, but increased 2.8% year-over-year (Figure 8).

In New York’s Adirondack region, northern red oak sawtimber increased 17.0% quarter-over-quarter and 33.3% year-over-year. Hard maple sawtimber increased 4.5% quarter-over-quarter, but declined 2.8% year-over-year (Figure 9).

Figure 8. US Southwide Quarterly Mixed Hardwood and Mixed Oak Sawtimber Prices

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Figure 9. Quarterly Northern Red Oak and Hard Maple Sawtimber Prices in New York

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In Ohio, red oak sawtimber increased 13.7% versus Q2 and 22.7% year-over-year. Hard maple sawtimber declined 19.5% during the quarter, but increased 3.2% year-over-year. White oak sawtimber increased 18.6% quarter-over-quarter and 7.1% year-over-year (Figure 10).

In Wisconsin, northern red oak sawtimber declined 5.9% quarter-over-quarter in Q3, but was flat year-over-year (Figure 11). Hard maple sawtimber was flat quarter-over-quarter, but increased 5.6% year-over-year. Yellow birch sawtimber was flat quarter-over-quarter and year-over-year.

Figure 10. Northern Red Oak, Hard Maple, and White Oak Sawtimber Prices in Ohio

Source: Forest2Market

Figure 11. Northern Red Oak, Hard Maple, and Yellow Birch Sawtimber Prices in Wisconsin

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In the Pacific Northwest, softwood sawlog prices generally improved across all grades. While the price of Douglas-fir #2 modestly declined 1.2% sequentially, it increased 12.4% year-over-year (Figure 12). As of August 2018 (latest data available), Douglas-fir #2 is now 10.8% higher than its prior 2014 peak. The price of Whitewood #2 sawlogs increased 0.9% for the quarter and 19.0% year-over-year. As of August 2018, Whitewood #2 is now 7.0% higher than its prior 2014 peak. In June 2018 (the latest available data), total softwood log exports to China increased 30.8% year-over-year to 123.45mmbf from 94.41mmbf in June 2017 while softwood log exports to Japan declined 24.5% year-over-year to 28.98mmbf from 38.36mmbf in June 2017.

In the US South, hardwood pulpwood prices declined 0.9% in Q3, but increased 18.5% year-over-year while pine pulpwood prices declined 5.5% quarter-over-quarter and 5.8% year-over-year (Figure 13).

Figure 12. Monthly Columbia River #2 Douglas-fir and Mixed Whitewood Log Prices

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Figure 13. US Southwide Quarterly Mixed Hardwood and Mixed Pine Pulpwood Prices

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TIG’s View from the GroundIn South Carolina, North Carolina, Georgia, and Alabama, the weather was generally dry in Q3 allowing for increased harvesting and timber availability. In Florida, there was an abundance of wet weather, which made procuring wood somewhat challenging. In mid-September, Hurricane Florence hit the Southeast although it appears that infrastructure (e.g., roads and culverts) was more negatively impacted than timberland.

In East Texas, pulpwood remains oversupplied and pricing is challenged. Some of this excess may be absorbed by Roy O. Martin’s new OSB mill in Corrigan, Texas which is currently running at slightly over 50% of capacity and expected to reach full capacity by Q1 2019. Similarly, the pine sawtimber market remains oversupplied with mills having ample inventories and beginning to institute quotas.

In Southwest Arkansas, pine pulpwood pricing remains depressed given a lack of industrial facilities. That said, hardwood pulpwood pricing is positive given good demand and limited supplies. With respect to pine sawtimber, prices have softened as supply increased during the summer given dry weather. Some timberland owners remain hopeful that upcoming lumber mill expansions will help tighten the sawtimber market.

In Virginia, pulpwood is oversupplied. Meanwhile, timber sellers are cautious as WestRock’s pending acquisition of KapStone will give it increased pricing power (controlling the four largest integrated board mills in Virginia).


In Ohio, demand for hardwood sawtimber remains strong given growing end-markets including whiskey barrels, railroad ties, flooring, and furniture. As mentioned above, Glatfelter announced the sale of its specialty papers business unit, which includes its Chillicothe, OH mill, to private equity firm Lindsay Goldberg, affording timber owners some hope that the mill will continue to operate.

In Appalachia, despite concerns around Chinese tariffs, demand for quality hardwood sawtimber remains steady given growing domestic end-markets including railroad ties.

In Wisconsin, timber markets remain challenged given increasing timber availability and slower sales.

In the Pacific Northwest, log prices modestly softened given increasing timber availability and rising log inventories. However, timberland owners expect these inventories to be worked through and prices to rebound by year-end.

Industrial & Capacity UpdateDuring the quarter, Biewer Lumber announced that it intends to spend US$ 40 million to expand its Newton, MS sawmill (250mmbf ) by 100mmbf. The expansion is expected to be completed by fall 2019. Georgia-Pacific announced that it intends to build a new 300mmbf lumber mill in Albany, GA for US$ 150 million with production planned for late 2019. This is Georgia-Pacific’s third new softwood lumber mill announcement in the last 12 months. Boise Cascade entered into an agreement to sell its northeast Oregon lumber mills in Pilot Rock and La Grande and particleboard operations in Island City to Woodgrain Millwork, a manufacturer and supplier with a diverse product offering including moulding, door shop products, and window parts. Arauco announced the purchase of Panolam’s industrial assets located in Albany, OR. The site includes two thermally fused lamination lines with an annual installed capacity of 120,000msf (212,000m3), as well as two impregnation lines and warehouse capacity. Mountain Top Timber Products will invest around US$ 4 million in the Town of Dungannon, VA to expand the company’s wood chipping operations, and add a new sawmill and dry kiln capacity. Zilkha Biomass scuttled plans to build a US$ 90 million wood-pellet mill in Monticello, AR. As a result, the company agreed to forfeit land for the proposed

mill to the Monticello Economic Development Commission and repay thousands of dollars already spent on environmental and energy studies during the planning stages.

In paper and board, Glatfelter announced that it has entered into an agreement to sell its specialty papers business unit to Lindsay Goldberg, a private investment firm, for US$ 360 million, allowing the company to focus on engineered materials. The company had been evaluating strategic options for this business since February. Closing is expected in Q4. Meanwhile, Resolute Forest Products agreed to sell its Catawba, SC mill for US$ 300 million to New-Indy Containerboard. The mill will produce market pulp, lightweight coated papers, and specialty papers as well as new products including high-quality, virgin, ultra-lightweight linerboard. Verso announced that it will make strategic technology investments in its Androscoggin Mill in Jay, ME, that will increase the release liner paper capacity of its No. 4 paper machine. Cascades announced plans to invest US$ 275 million to establish a lightweight recycled containerboard operation in the former Bear Island Paper Mill in Hanover County, VA. In addition, Global Win, a Chinese-owned paper products manufacturer, announced that it intends to spend US$ 150 million to reopen the former Verso mill in Wickliffe, KY. Global Win intends to reposition the mill to produce pulp and brown paper packaging and anticipates reopening the mill by the end of 2018. Following-up on its recent acquisition of two mills in Rumford, ME and Biron, WI, Nine Dragons announced an agreement to acquire a recycled bleached kraft pulp mill in Fairmont, WV from Resolute Forest Products for US$ 55 million.


Paper & Forest Products DutiesIn August, China’s Commerce Ministry released a preliminary list of proposed tariffs on US$ 16 billion in US goods in response to the additional US$ 16 billion in tariffs that the US imposed on Chinese goods. The Chinese tariffs on US goods include a number of softwood logs such as Doug-fir (5%-10%, depending on diameter), hemlock (5%-10%, depending on diameter), and southern yellow pine (25%). In response to the US imposing tariffs on an additional US$ 200 billion of Chinese goods in September, China began to levy tariffs of 5-10% on an additional US$ 60 billion in US goods, including approximately 100 pulp and paper products. Specifically, China imposed a 5% tariff on US kraftliner and market pulp, and a 10% tariff on recycled pulp.

In July, the Canadian government imposed a 10% tariff on softwood plywood as well as veneered panels, and paper & paperboard amongst other products from the US. On average, the US exports around 250-350 million square feet (“mmsf”) of

softwood plywood to Canada annually. Canada’s tariff was in response to the United States imposing tariffs on imports of steel and aluminum products from Canada.

In late August, the US International Trade Commission (“ITC”) ruled that US imports from Canada of uncoated groundwood paper (a material used to make newsprint) which the US Department of Commerce (”DOC”) determined are subsidized and sold in the United States at less than fair value, do not materially injure, or threaten with material injury, the US papermaking industry. In March, the US DOC issued a preliminary determination in its antidumping investigation into newsprint and uncoated groundwood imports from Canada and calculated a preliminary dumping rate of 22.16% for all producers. Due to the ITC ruling, no new antidumping or countervailing duty orders will be issued on imports of newsprint and uncoated groundwood from Canada while previous duties collected will be returned.


Latin America


Brazilian EconomyIn Q2, Brazil’s economy slightly expanded with GDP increasing 0.2% quarter-over-quarter following a 0.1% quarter-over-quarter increase in Q1. Quarter-over-quarter, agricultural production was flat, industrial activity declined 0.6%, and service activity increased 0.3%. Investment declined 1.8% quarter-over-quarter following a 0.3% quarter-over-quarter increase in Q1. BTG Pactual’s Brazilian Economics team currently expects 2018 GDP of 1.4% and 2019 GDP of 2.0%.

As part of this modest improvement, household spending increased 0.1% quarter-over-quarter in Q2 versus 0.4% quarter-over-quarter growth in Q1. Unemployment slightly declined to 12.1% in August from 12.3% in July. Moreover, industrial production increased 2.0% year-over-year in August after increasing 4.2% year-over-year in July.

During the quarter, inflation increased mainly due to higher fuel costs and a weaker Brazilian real. As a result, the Índice de Preços ao Consumidor Amplo (“IPCA”) increased to 4.53% annualized in September from 4.39% annualized in June (Figure 14). Real rates have also trended somewhat higher as evidenced by rising Treasury inflation-protected bond yields (Figure 15). In September, Brazil’s central bank held the Selic rate flat at 6.50% as it continues to evaluate economic conditions.

Meanwhile, exports declined 5.5% sequentially in Q2 following a 1.8% quarter-over-quarter increase in Q1. Imports declined 2.1% sequentially after increasing 0.8% in Q1. Separately, in Q3, the real depreciated 9.7% sequentially and 25.2% year-over-year (Figure 16) given fiscal and political uncertainties.

Figure 14. Brazilian SELIC Rate and Annualized IPCA Index

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Figure 15. Brazilian Treasury Inflation Protected Bond Yield

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Figure 16. US Dollar: Brazilian Real Daily Exchange Rates

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On the political front, in early October, former army officer Jair Bolsonaro of the PSL handily won the first round of presidential elections, but fell just short of the votes needed to secure the presidency and avoid second round elections on October 28. As such, he faced the Workers’ Party candidate Fernando Haddad, former mayor of São Paulo, who became that party’s candidate after the Electoral Court barred former President Luiz Inacio Lula da Silva from participating in the October 7 elections. On October 28, Bolsonaro won the election and will be sworn in as the new President of Brazil on January 1. In early July, an appeals court judge ordered former President Lula to be released from jail; however, he was overruled by the president of the appeals court who ordered that former President Lula remain in jail and serve out his 12-year sentence.

Brazilian Forest Products and Timber MarketsThe price of pine timber in Brazil was generally positive during the quarter. Through the end of August, pulpwood (8-18 cm) in Paraná State declined 0.8% quarter-over-quarter, but increased 0.4% year-over-year in local currency terms. Small sawtimber (18-25 cm) increased 0.8% quarter-over-quarter and 4.1% year-over-year while large-diameter sawtimber (25-35 cm) increased 0.2% quarter-over-quarter and 2.8% year-over-year. Veneer logs (+35 cm), used primarily for export-oriented softwood plywood, increased 1.3% quarter-over-quarter and 6.6% year-over-year (Figure 17). The price of larger diameter sawtimber continues to be driven by exports, particularly plywood and lumber.

Wood charcoal, which is used to produce pig iron which in turn is used to make steel, has improved after a number of years of being challenged by a significant supply/demand imbalance. In Q3, charcoal prices in Minas Gerais increased 3.2% quarter-over-quarter and 63.3% year-over-year given lower charcoal supply (e.g., fewer producers as a result of the downturn), continued improvement in durable goods such as automobiles (Figure 18, left axis), and a weaker Brazilian real. Charcoal pricing also tends to be one of the central drivers of eucalyptus stumpage pricing (Figure 18, right axis). In Q3, Minas Gerais eucalyptus prices increased 3.5% quarter-over-quarter and 4.6% year-over-year, more modest increases as compared to charcoal due in part to continued accumulated timber supply in the region.

Figure 17. Pine Sawtimber Stumpage Prices in Paraná State, Brazil

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Figure 18. Charcoal and Eucalyptus Stumpage Prices in Minas Gerais, Brazil

Sources: Associação Minera de Sivicultura; Poyry Silviconsult

Meanwhile, eucalyptus pulpwood prices were flat quarter-over-quarter (ended August) and slightly increased 0.1% year-over-year on a countrywide basis (Figure 19).

The price of pine resin, a secondary product that can be collected from pine plantations between harvests and is used in the production of synthetic rubber, glues, adhesives, printer inks, and other products, increased during Q3. Mixed tropical pine resin increased 1.7% quarter-over-quarter while slash pine resin increased 1.4% quarter-over-quarter (Figure 20).


Figure 19. Brazil Eucalyptus Pulpwood (8-18 cm) Stumpage Prices

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Figure 20. Average Annual Resin Prices in Brazil

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TIG’s View from the GroundIn Q3, TIG’s Brazilian regional foresters reported that improving Brazilian economic conditions resulted in better timber conditions in most Brazilian states.

In Minas Gerais, demand for timber continues to increase resulting in higher stumpage prices. Through August, automobile production, a significant driver of pig iron production, has increased 12.7%. Meanwhile, pulp demand remains robust (production up 10% year-to-date according to Ibá, the Brazilian Tree Industry Association) with some mills aggressively looking to procure timber.

In São Paulo (Itapeva region), demand for pulpwood and sawnwood remain strong. Shipments of corrugated board, which are used to package a

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variety of goods, have increased 2.3% year-to-date. With respect to sawnwood, demand continues to increase, rising 4.0% year-to-date according to Ibá. That said, pulpwood supply still remains elevated as the large area of new plantations established in 2007-2009 have started to reach harvestable ages.

Similar to the other regions, the pulp market in Paraná (Guarapuava region) remains robust with many companies increasingly looking to purchase wood. Log demand has also benefited from strong sawnwood exports. That said, the area is faced with a surplus of standing pulpwood similar to the situation in São Paulo.

In Santa Catarina, timber supply exceeds demand as tree plantations established around the same time are beginning to be harvested. Moreover, timber demand is concentrated among a limited number of buyers, thereby making it difficult for timberland owners to increase prices. There has been some market speculation that a large pulp / packaging company is looking to acquire timberland to supply its own mills, which would further concentrate ownership.

Industrial Capacity UpdateDuring the quarter, Royal Golden Eagle (“RGE”), a Singaporean based manager of resource-based manufacturing companies with global operations, completed its acquisition of Lwarcel Celulose’s assets in São Paulo including its 250,000 MT/year bleached eucalyptus kraft pulp mill. Lwarcel will be managed as a member of Bracell Group, which operates RGE’s cellulose businesses in Brazil. The company continues to evaluate a new 1.25 million MT bleached eucalyptus kraft pulp line at the mill. Further, Paper Excellence’s proposed acquisition of the 51% stake of pulp producer Eldorado that it doesn’t already own is taking longer than expected due to a dispute between Paper Excellence and Eldorado’s current owner, J&F Investimentos, over the payment of around R$ 8 billion (US $1.95 billion) in debt belonging to Eldorado that is backed by J&F. In early September, J&F canceled the contract allowing Paper Excellence to purchase the remaining 51%, which caused Paper Excellence to sue and a judge to order both companies into arbitration to resolve the issue. Meanwhile, Klabin is contemplating a new 1 million MT unbleached kraft pulp line in Paraná, southern Brazil to be integrated with two paper machines; a 400,000-500,000 MT


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kraftliner paper machine and a 400,000-500,000 MT boxboard paper machine. The company’s plan is to begin production at the kraftliner paper machine in 2020 and boxboard paper machine in 2023. With respect to Suzano’s acquisition of Fibria, Brazil’s CADE (anti-trust agency) approved the deal without any restrictions (e.g., mill divestitures) in mid-October. China’s anti-trust authority approved the deal without any remedies in late August while shareholders of both Suzano and Fibria approved the deal at separate extraordinary shareholders’ meetings in mid-September. The European Commission’s decision regarding the transaction is expected by November 15.

UruguayIn Q2, Uruguay’s GDP increased 2.5% year-over-year versus 2.2% year-over-year growth in Q1. Manufacturing increased 6.8% year-over-year while transportation increased 4.5% year-over-year. Gross fixed capital formation increased 0.8% year-over-year in Q2 versus a decline of 2.5% year-over-year in Q1 while household spending increased 2.5% year-over-year versus an increase of 2.8% year-over-year in Q1. Exports declined 6.7% year-over-year versus an increase of 4.2% year-over-year in Q1 while imports increased 5.6% year-over-year versus an increase of 3.7% year-over-year in Q1. During Q3, the Uruguayan peso depreciated 10.5% year-over-year.

In Uruguay, E. globulus and E. grandis prices were flat quarter-over-quarter and year-over-year in Q3 (Figure 21).

Figure 21. Uruguay E. globulus and E. grandis Pulpwood Prices (Nominal US$ / m3)

Source: Litenco

TIG’s View from the GroundIn Q3, TIG’s local staff reported that pine sawlog demand softened given slower Chinese demand in part due to a weaker Chinese yuan and higher ocean freight rates. However, demand for eucalyptus pulpwood logs remains strong given continued strong demand from Asia. Meanwhile, timberland sellers have been more aggressive selling their properties partly given an expectation of a new UPM pulp mill.

ChileIn Q2, Chile’s GDP increased 5.3% year-over-year following 4.3% year-over-year growth in Q1. Mining increased 4.8% year-over-year with copper increasing 4.7% year-over-year while retail increased 8.1% year-over-year. Meanwhile, gross fixed capital formation increased 7.1% year-over-year, government spending increased 2.8% year-over-year, and consumer spending increased 4.5% year-over-year. Exports increased 7.5% year-over-year while imports increased 10.0% year-over-year. In Q3, the Chilean peso depreciated 3.2% year-over-year.

On the industrial front, Arauco’s board approved construction of its MAPA project, a new 1.56 million MT/year bleached eucalyptus kraft pulp line (line No. 3) at its Horcones mill in central Chile. Meanwhile, CMPC intends to install two industrial cranes with specially designed spreader clamps to its Brazilian Celulose Riograndense pulp mill, allowing the mill to handle 2 million MT of bleached eucalyptus kraft pulp per year versus current capacity of 1.75 million MT.

ArgentinaIn Q2, Argentina’s GDP fell 4.0% quarter-over-quarter versus 0.7% growth quarter-over-quarter in Q1. On a year-over-year basis, GDP declined 4.2% versus 3.9% growth year-over-year in Q1. Argentina’s economy contracted in Q2 as a severe drought negatively impacted agricultural production (-31.6% year-over-year), which in turn negatively affected exports (-7.5% year-over-year) as the country is one of the largest global producers/exporters of soybeans and corn. The decline in exports also comes even as the Argentinian peso depreciated 49.8% year-over-year (19.9% sequentially) against the US dollar. To assuage concerns over its ability to finance its debt, Argentina has pursued fiscal austerity policies, which have substantially reduced its fiscal deficit by 58% year-over-year.


In late September, the International Monetary Fund (“IMF”) increased its credit line to Argentina to around US$ 57 billion over three years from the US$ 50 billion it originally offered in June while also promising to deliver more of the funds sooner. Given the country’s currency crisis, Argentina’s central bank raised its benchmark interest rate to 60% from 45% and asked the IMF for additional assistance. Argentina received the first US$ 15 billion in June and has access to another US$ 35 billion by the end of 2019. As part of the amended agreement, Argentina agreed to tighten monetary policy to accelerate budget savings and reduce inflation. The country also agreed to stop aggressively supporting the peso. Prior to this amendment, Argentina had already ordered a public sector hiring freeze until the end of 2019, cut travel expenses and perks for top officials, and launched a new fiscal plan including increased export taxes and eliminating half of the government ministries. Meanwhile, Luis Caputo, who had only been Argentina’s central bank chief since June, resigned and was replaced by former economic policy secretary Guido Sandleris.

On the political front, an Argentine judge formally indicted former president and current senator

Cristina Fernandez de Kirchner on corruption charges accusing her of receiving bribes from business leaders who had been awarded meaningful government contracts. Some of the alleged bribes may have been delivered to Ms. Kirchner’s apartment in Buenos Aires and the official presidential residence over a 10-year period. The judge also ordered a pre-trial detention, which will require a vote in Senate as Ms. Kirchner has a certain amount of legal immunity as a senator. Meanwhile, by the end of August, more than two dozen government officials and business leaders had been detained, with a number of them admitting to paying bribes and then subsequently striking plea bargains with prosecutors.

GuatemalaIn Q2, Guatemala’s GDP increased 3.3% year-over-year versus 2.0% year-over-year growth in Q1. All industries generally improved versus the prior year except mining & quarrying which declined 53.9% year-over-year. Exports declined 5.0% year-over-year in Q2 versus a decline of 2.8% year-over-year in Q1 while imports increased 5.6% year-over-year in Q2 versus a decline of 2.4% year-over-year in Q1. During Q3, the Guatemalan quetzal declined 3.5% year-over-year.


Europe


In the euro zone, Q2 GDP increased 0.4% quarter-over-quarter as compared to 0.4% quarter-over-quarter growth in Q1. Year-over-year, GDP increased 2.1%. On an individual country basis, quarter-over-quarter GDP growth declined in Spain and Italy, was flat in France, and increased in Germany. Gross fixed capital formation grew 1.2% quarter-over-quarter in Q2 versus growth of 0.3% quarter-over-quarter in Q1. Personal consumption increased 0.2% quarter-over-quarter, weaker than the prior quarter, while government spending increased more than the prior quarter. Unemployment slightly declined to 8.1% in August versus 8.2% in July.

Meantime, European net exports (exports less imports) declined year-over-year. In August (latest month reported), exports increased 5.6% year-over-year while imports increased 8.4% year-over-year, resulting in a euro zone trade surplus of €11.7 billion versus a surplus of €15.3 billion in August 2017.

Estonian Forest Products and Timber MarketsSawlog prices in Estonia softened over the last few months, but remain higher versus last year. Pine sawlog prices (latest data available July 2018) declined 2.6% from three months earlier, but were up 15.3% year-over-year. Birch sawlog prices declined 2.6% from three months earlier, but were up 12.5% year-over-year (Figure 22). Sawlog prices have increased year-over-year given increasing global sawlog demand, particularly from China.

Estonian pulpwood prices were generally higher. Pine pulpwood prices (latest data available July 2018) declined 3.2% from three months earlier, but increased 73.8% year-over-year while birch pulpwood prices increased 19.2% from three

months earlier and 86.3% year-over-year (Figure 23). Prices remain elevated due to challenging weather conditions earlier in the year, which limited harvests, and recent forest fires.

Figure 22. Estonia Sawlog Prices (Nominal € / m3)

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Figure 23. Estonia Pulpwood Prices (Nominal € / m3)

Source: RMK (Estonia State Forest Agency)

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South Africa


In Q2, South Africa entered a recession as GDP declined 0.7% quarter-over-quarter following a quarter-over-quarter decline of 2.6% in Q1. Agriculture, forestry, and fishing declined 29.2% quarter-over-quarter due to a decline in crop production while transportation and storage declined 4.9% quarter-over-quarter.

On the political front, the ruling African National Congress (“ANC”) party continues to explore whether land expropriation without compensation is permissible under the current constitution and whether it is possible to amend the constitution to allow for the expropriation of land owned by white individuals.

On the industrial front, Sappi announced that it will invest ZAR 2.7 billion in 2018 and 2019 to expand dissolving pulp production capacity at its Saiccor mill in Umkomaas to 890,000 MT from a current 780,000 MT. The company will also invest ZAR 5 billion at Saiccor over the next five years to lower production costs through maintenance and upgrade projects, new technologies, optimized processes, and improved manufacturing systems.

South African Forest Products and Timber MarketsIn August, lumber prices declined 1.0% versus the prior three months and 1.3% from August 2017, as measured by the South African Lumber Index, a composite price series (Figure 24).

Softwood log prices were mixed (Figure 25). Sawlogs in South Africa are categorized into A, B, C or D grades, with A-grade logs being the smallest and D-grade logs being the largest. In nominal terms in Q2 (latest data available): A-grade logs declined 8.1% for the quarter and 2.2% year-over-year, B-grade logs increased 4.0% for the quarter and 22.2% year-over-year, C-grade logs declined 1.9% for the quarter, but increased 5.0% year-over-year, and D-grade logs declined 0.6% for the quarter, but increased 0.4% year-over-year.

Despite the aforementioned price gains, it is worth noting that annual inflation in South Africa is 4.9%, so in real terms most of the gains are less notable and in some cases even negative (i.e., A-grade logs: -6.7% real year-over-year, B-grade logs: 16.5% real year-over-year; C-grade logs: 0.0% real year-over-year, and D-grade logs: -4.3% real year-over-year). Meanwhile, in Q3, the rand depreciated 3.3% sequentially against the US dollar (Figure 26) and 8.7% sequentially against the Euro (Figure 27).

Figure 24. South Africa Lumber Index

Source: Crickmay and Associates

Figure 25. South Africa Pine Sawlog Prices

Source: Crickmay and Associates

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Figure 27. South Africa Rand to Euro Exchange Rate

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New Zealand


In Q2, New Zealand’s GDP increased 1.0% quarter-over-quarter versus 0.5% quarter-over-quarter growth in Q1. Exports increased 2.4% quarter-over-quarter on strength in both meat (10.9% quarter-over-quarter) and agriculture and fishing products (5.9% quarter-over-quarter) while imports increased 1.5% quarter-over-quarter due to passenger cars. In Q3, the New Zealand dollar depreciated 5.4% quarter-over-quarter against the US dollar (Figure 28).

New Zealand Timber MarketsNew Zealand A-grade export log prices increased 1.4% quarter-over-quarter in June to NZ$ 167/m3 from NZ$ 165/m3 in March (Figure 29) due to modest demand improvement in China. While trade commentary suggests that export log prices began to soften in Q3 given the US-China trade dispute, they appear to have rebounded in early Q4. Domestic structural logs used for construction (S1 and S3) were weaker from lower decking demand and wet weather (Figure 30).

Figure 28. NZ Dollar / US$ Exchange Rate

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Figure 30. New Zealand Domestic Log Prices

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Australia


In Q2, Australia’s GDP increased 0.9% quarter-over-quarter versus growth of 1.1% quarter-over-quarter in Q1. Mining increased 1.5% quarter-over-quarter due to coal mining and exploration while agriculture, forestry and fishing increased 0.8% quarter-over-quarter due to stronger livestock and grains. Meantime, exports increased 1.1% quarter-over-quarter while imports increased 0.4% quarter-over-quarter. In Q3, the Australian dollar depreciated around 3.5% quarter-over-quarter (Figure 31).

Australian Timber MarketsSoftwood roundwood prices declined 3.5% in Q2 to US$ 83/odmt (“oven dry metric ton”) from US$ 86/odmt in Q1 (Figure 32) partly due to slower export demand from China. Hardwood roundwood prices declined 2.9% quarter-over-quarter to US$ 99/odmt from US$ 102/odmt in Q1 (Figure 33). Softwood chip prices were flat while hardwood chip prices declined 2.6% in Q2. Australia is the second largest exporter of chips to China following Vietnam.

Figure 31. Australia Dollar to US$ Exchange Rate


Figure 32. Australian Softwood Pulpwood Prices

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Figure 33. Australian Hardwood Pulpwood Prices

Source: Wood Resource Quarterly

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Global Pulp and Paper Markets


During Q3, BHK prices in Europe, a key benchmark, increased 0.5% quarter-over-quarter and 20.3% year-over-year, averaging around US$ 1050/MT (Figures 34 & 35). Prices improved largely due to steady demand and mill downtime.

Specifically, hardwood pulp shipments increased 4.7% year-over-year in August and are up 3.5% year-to-date. Importantly, overall pulp shipments in China have increased 3.8% year-to-date. Meanwhile, downtime has limited the availability of hardwood pulp. The Brazilian truckers strike in May reduced hardwood pulp supply by 300,000 MT while APP took 90,000-110,000 MT of downtime in July at its Indonesian mills due to the Indonesian Lesbaran holidays. Supply is likely to remain tight in the near future, especially as APP expects to take downtime at its Rizhao complex in Shandong, China in September resulting in lost supply of 70,000 - 80,000 MT.

The price of BSK in Europe, a bellwether of the pulp and paper sector, averaged around US$ 1229/MT, up 6.0% versus the prior quarter and 37.4% year-over-year (Figures 34 & 35).

During the quarter, softwood pulp pricing increased given downtime and tight inventory levels. Södra’s Mönsterås pulp mill experienced production problems resulting in loss of 20,000 MT, Fibre Excellence’s Tarascon, France mill incurred a production loss of 90,000 MT as production was suspended all spring, and SCA took extended downtime as part of the startup of its new line at the Ostrand mill. Further, Hurricane Florence caused significant flooding in North and South Carolina

disrupting softwood pulp production. Meanwhile, European softwood pulp inventories are tight with August inventories at 15 days versus a 10-year average of 20 days.

Figure 34. Global BSK and BHK Pulp Prices over Time

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Figure 35. Global BSK and BHK Pulp Prices Recent Performance

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Baltic Dry Index


In Q3, the Baltic Dry Index, which provides a benchmark for the price of transporting major raw materials including grains, coal, and iron ore by sea, increased 11.2% during the quarter (Figures 36 & 37). Amongst other factors, the ongoing US-China trade

dispute has led to higher ocean and freight rates as buyers placed additional orders ahead of tariff implementation. At a value of 1540 on September 28, 2018, the index remains well below its peak of 11,793 reached in May 2008.

Figure 37. Baltic Dry Index Recent PerformanceFigure 36. Baltic Dry Index Performance over Time

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Disclaimer


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Contact

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