June 25, 2019

Agricultural Engineer Nicolás Lussich.

Forestry is one of the most dynamic sectors of the economy. In recent times, the pulpwood production subsector has seen the greatest success, with UPM and Montes del Plata as its main players.

Conversely, the subsector linked to the production of physical wood (that which is not chemically altered and maintains its structural properties) has faced greater difficulties. The production of plywood (from peeled logs) and sawn timber faces market restrictions and high local costs that hinder industrial activity. Large projects to establish industrial plants in these sectors, originally conceived by the American company Weyerhaeuser, were reduced to a single plant, which was recently sold to a group led by the Brazilian bank BTG Pactual, along with a significant area of ​​forest. Urupanel—the other plywood company—failed along the way. The number of sawmills has decreased, although some new, larger, and more efficient ones have been added (such as Frutifor).

In the forestry sector of this subsector, the difficulties of industrial development mean that standing timber is difficult to sell and offers little to no profit margin. The marketing of pine trees has been particularly challenging, as the forests of this species are mostly located in the north, far from ports, making freight costs (extremely high in Uruguay) prohibitively expensive. Even so, given the opportunity to finalize sales and with the intention of replanting areas with eucalyptus, significant volumes of pine have recently been sold to China, another major consumer of these products.

Similar challenges are faced by the placement of Eucalyptus grandis for veneer or sawmilling. Exports in this case have been lower, and there are companies with good processing experience and a proven track record in the market, but it is expected that supply will gradually increase to much larger volumes. Unlike those destined for pulp, these Eucalyptus trees are managed to achieve much larger diameters, with appropriate pruning and thinning, which allows for the production of knot-free wood with properties suitable for construction, furniture making, and cladding.

Despite this challenging outlook, there are some signs of increased dynamism in the timber production sector. On the one hand, the decision by Harvard University’s fund to divest its forestry assets (mostly eucalyptus for sawmilling) attracted interest from various players; these assets were ultimately acquired by the AFAPs (Pension Fund Administrators) through a new trust structured by Agroempresa Forestal. This firm already operated three other trusts with AFAP funds, accumulating over 100,000 hectares and a cumulative investment of more than US$600 million (see table). The valuation of the assets generated discussion within the sector, given the market difficulties described for these products, with speculation that an inflated price had been paid. The company reported that an independent valuation by the Brazilian consulting firm BM2C established a value 5% lower than the amount actually paid.

According to Francisco Bonino, director of Agropempresa Forestal, the outlook for these investments is positive in the long term. “Good quality eucalyptus wood sells in Uruguay at prices equal to or higher than in New Zealand. In the case of pine, there are indeed difficulties, but the project proposes long cycles and—eventually—replanting with eucalyptus,” he explained on Radio Carve.

The Central Railway can facilitate business in the most remote forests by reducing freight costs. Furthermore, Agroempresa Forestal is developing long-term agreements with Chinese buyers to establish stable and larger-scale sales volumes.

While it may seem surprising, exporting raw timber (logs) presents logistical challenges similar to, or even greater than, those of seemingly more delicate products like meat or dairy. These logs are only valuable if they arrive at their destination with high moisture content (green); otherwise, the ability of buyers (Chinese, Vietnamese) to work and process them is hampered, which can disrupt sales.

To maintain the moisture level of the logs, the logistics chain needs to be very well-oiled. Until now, they have been exported in containers, which helps, taking advantage of the «returns» from imports. If larger volumes are considered, the number of containers could be a limiting factor; storage with irrigation to maintain humidity, specialized warehouses, etc., would be necessary. There are already Uruguayan companies with experience, but on a smaller scale. Agroempresa Forestal’s business is more ambitious and will surely require significant investments.

The firm’s previous trusts have had mixed results. The first entered the market with relatively high land prices, which has resulted in some losses as prices have moderated in recent years. Subsequent funds have mitigated this effect and generated positive margins.

According to some analysts and market players, forest land in Uruguay appears to have reached a price floor, creating a more favorable environment for renewed investment. This is aided by the US Federal Reserve’s decision to maintain interest rates, contrary to previous expectations of an increase. In this context, some Chilean groups, among others, have shown renewed interest in investing.

In any case, there are two key factors influencing the projections. On the one hand, of course, there are the markets: Uruguay has done very little to open new markets for wood products, and within Mercosur, Brazil is a major producer, so the regional market is not an attractive option. It is necessary to create these opportunities, and China is a key partner (see chart), as are Vietnam and Indonesia, where significant volumes of sawn timber have been sold. But without preferential access and with distances working against them, Uruguay will almost certainly pay a premium.

The unions in the sector don’t understand this, and here’s where the other factor comes in. These days, the Union of Wood and Related Industry Workers (SOIMA) is mobilizing, with strikes and assemblies, demanding wage increases and improved working conditions. Without much consideration for productivity or the market circumstances facing the companies, the unions are making demands that, in many cases, are unsustainable, ultimately costing jobs. It’s not the only factor, but the unions’ lack of consideration doesn’t help sustain forestry companies that could be important job creators. The Urupanel case was a regrettable example.

Without changes in labor policy and a more dynamic trade policy, achieving the goal of high value-added industrial development in the timber and other sectors will be difficult. All these risks are present in recent investments. The opportunities exist, but they must be seized.

Pulp mills are crucial because some of the timber from forests intended for sawmills ends up being used for pulp anyway (tree tops, thinnings, etc.). But if the competitiveness of the solid wood sector doesn’t improve, more timber than anticipated will be used for pulp.