2018 Outlook

• Increasing demand for Pulp has led to an upward price cycle in 2017, which we estimate would be followed by gradual declines in 2018 due to ramp-up of new projects. However, lack of new Pulp projects translates to a positive price scenario by 2019-2020. This has resulted in upward revisions to our flow projections for companies under our coverage. We expect a favorable scenario in the Forestry sector amid a strong demand capable of absorbing large amounts the new supply in the market.
• Considering the increase in Pulp supply, prices would slightly drop in 2018 reaching ~US$838 for short-fiber and ~US$874 for long-fiber, before rising from a lack of new Pulp projects (US$1.000 and US$1.050, respectively in 2020). In this realm, we estimate the medium term softwood-hardwood spread at ~US$50/Ton. For its part, we estimate that in the long term, attractive Pulp prices would encourage entry of new plants, thus we have incorporated long term prices of US$800 for short-fiber and US$880 for long-fiber in our models.
• M&A in Empresas Copec continues to drive inorganic growth, generally at high EV/Ebitda acquisition ratios, thus the contribution to valuation is lower. Our top pick in the sector is CMPC, offering greater exposure to Pulp, a commodity in which we are positive and expect better flows once the Guaíba II mill resumes operations in November 2017.

Risks

• Deceleration in China triggering transversal contraction of demand for natural resources, reflected in declining Pulp prices, causing misalignment to our baseline scenario.
• Economic growth below expectations in Latin America, United States and Asia, limiting expenditure on construction and favorable perspectives in the wood board industry.
• Ebitda generation below our projections, leading to deterioration of the balance sheet and increases in debt ratios, beyond possible mitigation measures (sale of non-core assets).
• Rate hikes by the Fed in 2018 would cause greater than expected devaluation of the Yuan, exerting downward pressures on commodity prices in USD.
• Pulp mill maintenance downtimes beyond expectations would impact our forecasts.

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