January 2010

“Green steel for the Brazilian steel industry”

The text below is from the Brazilian federal government’s website on December 4th 2009.

“Considered as an environmental villain, the steel industry may become an ally of the Federal Government in the challenge to reduce Brazil’s emission of greenhouse gases. The proposal presented by the Ministry of Environment aims to produce the “green steel”, which uses charcoal from afforested areas, instead of coal, to produce the pig iron (steel with impurity). As a result of the Brazilian proposal, the iron and steel industries will commit to use only charcoal in their high temperature furnaces.

Another point of the proposal conceives that the reposition of the timber used in the charcoal should be of 100% e will only involve exotic species like eucalyptus. This will ensure the preservation of the native vegetation. It is worth mentioning that one ton of pig iron produced from coal emits 1.9 tons of CO2, while the production of 1 ton of green steel removes 1.1 ton of gas from the atmosphere.

The news is good and specialists from the sector believe that, in the near future, the green steel will help the Brazilian steel industry to distinguish from its competitors abroad.”

http://www.cop15brasil.gov.br/en-US/?page=noticias/green-steel-for-the-brazilian-steel-industry

So what does this all mean?

“The Iron and Steel industries will commit to use only charcoal in their furnaces” spells it out clearly to us.

Eucalyptus grown charcoal will be the only game in town, but there isn’t enough capacity. Good timing if you happen to be invested in eucalyptus plantations in Brazil!

Timber.... the new oil?

After a year of soaring commodity prices, 2010 is forecast by financial analysts to see further increases.

So how about a few quotes from those lovely financial institutions to kick off the New Year?

Investec… "In the first quarter of 2010, more buying is anticipated by consumers and institutional funds increasing their allocation to commodities."

UBS Wealth Management…. "As to broad trends, we think the market should continue to favour commodities with an industrial demand backdrop and structural supply bottlenecks, as well as those with highly concentrated sources of supply,"

Barclays Capital….. "For metals, the uptrend is still very much in place."

So where does that leave lumber prices? I hear you ask.

According to Peter Ruschmeier, a basic materials analyst with Barclays Capital, lumber futures surged between October and November 2009, though the cash price has yet not yet reflected this. Reduced inventories, run down by the credit crunch, will further drive price rises.

In fact, optimism over the prospects for timber prices has been growing steadily over recent months and major new amendments to Chinese building rules have certainly done its prospects no harm at all.

Commodity index recovers to uptrend in 2009

In China, a significant breakthrough in building regulations is confidently being cited as one of the main drivers behind a global surge in timber demand. These new building rules allow Chinese building needs to be met by modern wood-frame construction techniques. Now that may not seem too significant until you realise the scale of things out in China.... 20 million people every year are moving from rural China to the cities and the Chinese national budget has set aside $141 billion (almost €100 billion) for the production of 20 million square metres of affordable housing by 2012.

Some models are suggesting that the predicted mass urbanisation of China over the coming decade could see timber prices increase by over 300 per cent above the 2009 low point. Similar to the run on oil that came in to produce the $150 oil barrel prices in 2008.

China is running a massive supply shortfall of timber, and analysts see no signs of the trend changing at the level of about 160 million cubic metres a year for at least another ten years. According to forestry analysts, China’s consumption of timber products is already well above the world average.

John Chu, an analyst with Research Capital Canada, says. “China’s insatiable appetite for wood products is driven by its growing population, strong economic growth and growing export markets for the wood it produces.”

Many analysts now believe that even greater change is on its way. Roughly 60 per cent of Chinese live outside of urban areas, but this is forecast to change dramatically and drop to 40 per cent by 2030. As a result of the mass migration to urban areas, residential construction will boom yet further, as will the demand for new furniture. Demand pull inflation could drag timber prices higher for many years to come.

What’s more, according to Barclays Capital Analysts, the good news is that, if timber is on the verge of a new bull run, the shortest upswing since 1900 lasted 12 years!

The Economist Reports on Brazil

http://www.economist.com/opinion/displaystory.cfm?story_id=14845197

At Greenwoods, we consider Brazil to be one of the most attractive locations, from an investment perspective, to add to our portfolio of forestry projects.

Having witnessed the explosive growth in Brazils economy at first hand, we are now seeing the story gradually unfolding as the rest of the financial community gets up to speed. “The Economist” recently homed in on Brazil, with an in depth study, the thrust of which was an unambiguously bullish outlook.

Some highlights to consider from the report

• Brazil is now the world's fourth largest democracy.
• Brazil has the world's largest freshwater supplies and land so fertile that farmers can harvest three crops a year.
• Brazil exports large amounts of iron ore and is a major source of the world's pulp
• Sao Paulo's futures and options market is one of the world's top 5 by volume.
• The "big 3" rating agencies classify Brazilian government paper as investment grade.
• Brazil announced it would lend money to the IMF.
• Brazil is now self sufficient in oil.

Brokenhagen?

The Copenhagen conference is over. Some have dubbed the summit a disaster. In fact, the so called “Hopenhagen” is now labeled “Brokenhagen” by Friends of the Earth.

Now the dust has settled, it seems sensible to look at the current state of play.

As things stand we have a non-legally binding agreement and a document full of intentions, but without targets or signatures.

In summary, the Copenhagen Accord will:

• Make a global acknowledgement that global warming should be limited to less than 2C, the degree of warming generally accepted as being "dangerous".
• List what each country is doing to tackle climate change.
• Provide $30 billion of immediate short term funding from developed countries over the next three years to kick start emission reduction measures.
• Commit developed countries to work to provide long term financing of $100 billion a year by 2020.
• Introduce scrutiny to ensure emission targets are put into effect, with mandatory reporting every two years for developing countries.

Analysts hope that more countries will support the document and another climate meeting in Germany in 2010 will result in more progress. If not, the pressure will be on once again, when the COP16 takes place in Mexico in December 2010.

Multi-national co-operation in forestry protection still remains a vital component of any climate control agreement and at Greenwood Management we believe the best way to protect the natural forests at present is to grow timber from sustainable, managed forestry plantations.

Greenwood Management Network

Greenwood Management has expanded its agency representative network, with branches now being based in Slovenia, Israel, Italy and Malaysia. More representatives are expected to be coming through early in 2010 and we will be announcing the expansions in due course.

Regards,

Joe Randall
Greenwood Management

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