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Investments of Foreign Funds in The Brazilian Forest Sector

According to a Consufor - Advisory & Research survey, the investment of foreign funds in planted  forests in Brazil exceeded R$ 1,9 billion (Reais) in 2008 (base market value of the assets in 2008).

Following a process initiated in the beginning of the decade, the acquisition of planted forests in Brazil by international investors has been ever more present in the economy of the country, with a prospect of growing in the following years.

Forest investment is recognized worldwide for its long-run characteristics, low risk and attractive return. This allows investment funds to diversify its portfolios, reducing risk and generating the best return for its investors/corporate shareholders (Figures 1 and 2).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Although forest investment is an appealing allotment of funds in developed countries, the search for more profitable returns has directed investors from the north hemisphere to the south, and Brazil surely has considerable opportunities.  

In Brazil, besides the high productivity of our forests (Figure 3), which reduces significantly the projects forest ripening time, we have the most advanced technology, qualified workers, more competitive production costs, a strong market well established in all the industrial areas of the sector (Figure 4) and most important, available lands for the expansion of existing plantings and/or new investments (Figure 5).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Besides the land availability, the price in some regions is still very attractive for forest planting, further increasing the investment yield through the valorization of the land asset (Figure 6).  

 

 

 

 

 

 

 

 

 

 

 At the present time, the vast majority of investments come from American and Canadian funds (Figure 7).

 

 

 

 

 

 

 

 

 

However, European funds have been studying this investment opportunity in the country. Some of them have already allocated millions of dollars in forest projects in order to get familiar with the Brazilian market characteristics and intend to develop acquisition projects or joint venture in the future, maybe even new plantings.

Even national funds have been studying investing in Pinus and Eucalyptus forests, mostly. Claritas Investments has recently put FIP - Brazil Forest on the market - FIP has about R$ 100 million (Reais). Other great pension funds are performing economic analyses and contemplating entering definitively in the sector.

Considering only the investment projects currently being studied by Brazilian TIMOs (Timber Investiment Management Organization) for the next 10 years, it is estimated that about R$ 1 billion (Reais) will be invested in new forest projects (green field).

The expectation is that the participation of national TIMOs will represent about 30% of the total amount invested by TIMOs in Brazil (Figure 8).

 

 

 

 

 

 

 

 

The TIMOs are responsible for identifying the opportunity and managing the forest asset. Among the most prominent international TIMOs operating in Brazil there are:

GFP – Global Forest Partners (Paraná, Santa Catarina, Bahia and Rio Grande do Sul)
HTRG – Hancock Timber Resource Group (Paraná)
RMS – Resource Management Services (Paraná and Santa Catarina)
RMK Timberland Group (Minas Gerais and Rio Grande do Sul).

The initial concentration of investments happened in the south region of Brazil due to the existence of vast Pinus forest massifs there. Now these investments are spreading to the Center-West and Southeast regions, and focusing on the Eucalytpus forests (Figures 9 and 10).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With the recent exchange rate depreciation, which favors acquisitions in Brazil on account of the increase in purchasing power of the U.S. dollar compared to the Real, Consufor expects more acquisitions and/or mergers, by foreigner investors, occurring in the country in the following years.

This movement of international and national funds entry is extremely interesting for the sector.

When purchasing assets, the seller (usually industries of the sector – saw-mills, plywood, paper and cellulose manufacturers, etc) obtains more cash for the company, becoming capitalized and allowing for expansions and modernization of the industrial complex (Core business). Many times the operation involves only the forests, and the seller continues to own the land, which enables replanting the forest after the liberation of the area with the clearcut.

When investing in new plantations (greenfield projects) the wood offer is risen, affecting the timber supply market positively, since at the present time it is concentrated in few suppliers.

There is another important impact for the economy of the country. The international investments are usually administered by a foreign manager (TIMO). However the whole operation (which includes a great amount of human resources and input) is conducted by local companies specialized in managing forests assets, securing local jobs and income for the project area.

However, it is necessary to highlight the fact that the country still needs to work hard to develop better legal security for the forest investor, mainly in the case of land invasions and wood theft. Also the Brazilian forest law code needs to regard planted forests as productive cultures, such as agriculture. Taking this course of action this sector will become more dynamic and legal environmental impediments can be diminished when the projects are carried out.

It is important to point out that the Brazilian forest sector is already responsible for an important part of the Brazilian GDP (about 4,0%) and in 2008 it answered for an amount equivalent to 30% of the Balance of Trade, this being achieved via foreign commerce.

In spite of that, for a country with Brazil’s continental dimensions and its notorious forest vocation, the sector still is very distant from its true potential, because it only represents 4% of the international trade in the forest sector and compared to other countries, it has a very modest planted area.