The North American wood based panels economy is booming. As our report on the International Woodworking Fair makes clear, optimism and orders are everywhere. South of the border, Latin America has huge plantations and equally huge potential reserves of supply, with panel making lines aplenty; so the big northern boom should reflect happily there, with export opportunities waiting to be grasped. Add the Rio Olympics which, despite some criticisms, attracted all eyes to the region and were a successful showcase for what Latin America can do, and the feel-good factor should be immense.
But South American economies themselves are not so buoyant. There have been currency crises, political crises, economic crises; domestic demand for panels has actually shrunk. How are Latin American panel producers responding?
Ask Ibá, the body that represents the Brazilian wood industry, including panel producers. Latin America is much more than Brazil, of course. The continent contains some 26 countries each with differing, sometimes wildly differing, conditions. Venezuela and Brazil are facing deep recessions, while Peru and Mexico are by and large weathering the storm. On the political front, Argentina and Brazil both have new leaders and Venezuela is collapsing into, as a recent Forbes report put it, a ‘slow-burning political crisis.’ Overall, according to Forbes, ‘Latin America is facing a difficult external environment in 2016, as well as a number of complex internal problems.
Growth in Latin America remains tepid at best.’ In 2015 the region’s economy contracted by 0.1%; the 2016 contraction is expected to be worse. Forbes’ projection is for the region to contract by 0.5% this year, which, if confirmed, will mark the first time that Latin America has registered two consecutive years of negative growth since 1982 and 1983, when it was hit hard by a severe debt crisis.
But, as we remarked above, the region is far from homogenous. Forbes’ analysts suggest that though the trend is for substantial weakness overall, it masks the fact that some countries are enduring the region’s recession in a more manageable fashion and are growing, while other economies are facing severe economic deterioration. External conditions – oil prices, monetary policy in the US and the slowdown in China – will continue to play a key role in the region’s performance this year; but different growth outcomes within Latin America will depend on each country’s domestic factors and economic policy making.
The phenomenon, marked already, is growing. Last year saw increasing growth divergence among the largest economies in the region, and this divergence will continue to increase. The economies which face the Pacific Ocean and comprise the Pacific Alliance – Chile, Colombia, Mexico and Peru – are expected to grow this year, although more modestly than in 2015. The Atlantic-facing economies of Argentina, Brazil and Venezuela, on the other hand – the largest members of Mercosur – will face contracting output. This, says Forbes, will be mainly due to domestic factors. Foolish, then, to expect a ‘one-size-fits-all’ analysis of the wood based panel industry in the region.
Nevertheless, the sheer size of Brazil, the sheer size also of its reserves and plantations – and the fact that it claims to be the premier manufacturer of reconstituted wood panels from plantations in the world – make it a very good place to start and to give some kind of overview.
"Our premier position stems from continuous investment in technology and automation of business and production processes, and best practices and forestry operations," says Paulo Matthias, spokesman for Ibá. He points to versatile industrial parks, new units, technological upgrading of existing plants, the implementation of continuous production lines and new printing processes, impregnation, coating and painting as evidence. He points also to 18 units producing reconstituted wood panels.
And raw materials are plentiful. "The total area of trees planted in Brazil – 7.8 million hectares – shows that wood sources are satisfactory."
Still more reason for optimism is that possibilities to increase this area – to ecological benefit, at that – are great. "The government intends to encourage five million hectares of Crop Integration, Livestock and Forestry" – a management system that puts all three together in close proximity, to give greater efficiency in all three and that increases carbon capture as well. "The government also plans the recovery of 12 million hectares of degraded areas. These are targets announced at Cop21, the United Nations Climate Change conference held in Paris in December 2015.
With them, the market becomes even more attractive. In 2015 there was an increase of 8.3% over the previous year in the planting of trees for plywood. Production reached 2.6 million m3."
So much for the easy part. But life is never quite so simple, as Matthias acknowledges. There are challenges.
"The main challenges actually impact the entire planted forest sector. In recent years, wood production has become more expensive in Brazil. Sector inflation reached 12.8% (INCAF-Pöyry). By the end of 2015 the Brazilian segment of wood panelling and laminate flooring stood 8th in the world ranking of largest producers, with 7.5 million cubic meters of reconstituted wood panels. This was a decrease of 6.3% compared to 2014. Production of MDF / HDF, MDP and fibre sheets (hardboard) decreased by 0.8%, 14.9% and 0.4%, respectively. Production of laminate flooring totalled 12.7 million m2 in 2015, equivalent to a reduction of 8.0% compared to 2014."
And, despite the giant consumer appetite to the north, Brazilian output has been overwhelmingly for its domestic market – which is shrinking. "By July 2016, domestic sales amounted to 3.6 million cubic metres, a volume 5% lower than in the same period last year.
With the economic crisis and the reduction in purchasing by Brazilian families, the wood panelling segment fell by 11.3% in domestic sales last year, compared to 2014, with the sale of 6.4 million m3." Yet only 5% of sales are directed to the foreign market. As Matthias, perhaps wryly, puts it: "The market dynamics of reconstituted panels and laminate flooring is strongly linked to the internal economic situation and performance of the construction industry."
For the past three years, the Brazilian economy has been challenging, with the prospect of recession and high inflation.
Economic instability and reduced activity in the construction sector directly impacted the furniture sector and flooring. Laminate flooring domestic sales also fell 9.7% in 2015, reaching 13.5 million m2, which contributed to the reduction in production of 8.0%.
But, as ever, there is a bright side: "On the other hand, it is noteworthy that the country still has a housing deficit that, after Brazil's current economic crisis eases, can generate good growth opportunities for the sector."
The industry’s response? Export to the north would seem an obvious one, until domestic demand recovers. That, though, is not straightforward. "One of the great challenges of the wood panels market is the production cost of wood," says Mathias. "In 2000, it was 40% lower than the cost in the United States, but in late 2014 the Brazilian advantage was less than 10%. During this period, there was a 20% appreciation of the Real against the US dollar. What weighed more, however, was the combination of real wage increases – of 12% annually – with the stagnation of labour productivity and rising energy costs.
"Panel segment prices are below average given the current economic scenario. Some manufacturers have implemented increases of 7 to 15% on products in the first half of 2016." Nevertheless, exports are up, both to Latin America and to the north: "To absorb the surplus production not being taken up by the domestic market, wood panel exports reached 641,000 m3, up 52.3% compared to 2014," says Matthias. 54% of these exports are to Latin America, 23% to North America, leaving 23% to the rest of the world.
Plywood exports reached 1.5 million m3, accounting for 58% of the produced volume. We have mentioned that by July 2016 domestic sales amounted to 3.6 million m3, a volume 5% lower than the same period last year. The difference of 291 million m3 was transferred to exports, which ended by growing 56%, from 343,000m3 to 535,000m3. As a result, the trade balance increased 18.5% to 128m US dollars.
Investment
If the Forbes analysis describes overall growth in the region as ‘tepid’, not all investors have taken flight. Some have put their plans on hold: planned investments announced by industries associated with Ibá in the region of 1 billion Reals (R$) (US$ 310m) have been temporarily suspended. But investments actually made between late 2015 and early 2016 totalled R$ 0.7bn and have led to a production capacity increase of around 1.1 million m3/year in MDP and 200,000m3/year in MDF – as witness the case studies below.
And Ibá has been working to defend and improve the prospects of the industry. "We have been pressing for the establishment of public policies that address aspects of tax relief on investment, and on resolving the main obstacles in infrastructure and logistics.
"We want improvements in labour laws and in bureaucratic processes such as environmental licensing and product registration," said Mathias.
