Market Report Sisal

November 2014 - March 2015

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Brazil
The corruption scandal linked with the name of PETROBRAS, the countrys largest company and
most influential Brazilian state enterprise, has reached a climax with Maria das Gracias Foster,
Chairman, and other members of the Executive Board having handed in their resignation. It is
known that Ms. Gracias Foster had been on friendly terms with Brazilian President Dilma
Rousseff since long time and that the former had offered her resignation several times in the
past, but each time was persuaded by the latter to carry on. The corruption scandal of
PETROBRAS, the former exemplary enterprise of Brazil, has peaked out and the situation of the
Brazilian Government could now become tight. At the time of writing it cannot yet be foreseen
what repercussions the widening corruption scandal will have. The scandal is already weighing
heavily on the Brazilian economy. The oil group of companies represents 10% of the Brazilian
industrial basis.
Brazils currency slid to a 10 years low against the US-Dollar on 4th March 2015 as
concerns grew that the corruption scandal of state-run PETROBRAS engulfing the
countrys political elite is threating to scupper the governments austerity drive. The REAL fell 2.2
% against the US-Dollar to REAL 2.9947 after Senate leader Renan Calheiros of the PMDB, the
main coalition partner of Dilma Rousseff, blocked in the Congress an important fiscal measure
that is seen as essential in helping to reverse Brazils widening budget deficit. The move
coincided with a request to the Supreme Court by the attorney generals office to pursue 54
people, mostly politicians, allegedly involved in the Petrobras case, Brazils biggest corruption
scandal. Members of Congress can be put under formal investigation only with the permission of
Brazils highest court.
Central banks worldwide are concerned about the rampant deflation. However, Brazil is the
exception. On 23rd January 2015 the Brazilian Central Bank has raised the key interest rate by
half percent to 12.15 % because of concern about the rising currency devaluation. After 3 years
of weak growth the inflation is hovering above the ceiling set by the Central Bank i.e. 6.5 %,
Notwithstanding the highest key interest rate worldwide most investment bankers expect an
annual inflation rising to 6.7 %. Yet optimists in Brazil anticipate 7 % in the very best case.
Rising interest rates are fatal for Brazils economic situation. The growth prospects have
significantly worsened during the last week. The International Monetary Fund (IMF) expects that
this year economic growth rate in Brazil will be just above 0.3 % instead of earlier forecast of
1,4 %. IMF have corrected their forecast for next year by lowering the expected growth rated
from originally 2,22 % to 1,5 %. According to an announcement made by the Brazilian Central
Bank last years economic growth in Brazil was just 0.1 %. However, there is every possibility
that this year the country may be even pushed into a stronger recession.
Brazil is threatened by massive power and water rationalisations. It is expected that power prices
will increase this year by 40 % which will fuel inflation. Early February the Brazilian Government
decided to let the REAL float without interventions from the Brazilian Central Bank.

Burchardstrae 17, 20095

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This means for Brazilian importers, who are used to avail themselves of credit facilities of usually
180 days usance which are available from their foreign suppliers, an incalculable risk (in case of
further devaluation of the REAL). It remains to be seen how long the Brazilian Central Bank
would remain inactive in case of a devaluation of the REAL, since the country is very much
dependent on imports.
Since the last sisal market report went to press the exchange rate REAL/US-Dollar developed as
followed:

(Source: http://de.exchangerates.org.uk/)
With the means of fast telecommunication being available everywhere sisal market participants,
even the deepest interior of the country, are always informed what happens on foreign exchange
markets and are thus monitoring very attentively the development of the exchange rated
REAL/US-Dollar. Accordingly REAL prices for sisal in the North East of Brazil increased.
The Brazilian Minister of Finance announced tax increases. Thus, the fuel tax will be increased
as follows: Petrol by REAL 0,22 per litre and Diesel REAL 0,15 per litre. The so called finance tax
(which is levied on all financial transactions) increased from 1.5 % to 3 %. Furthermore, credit
interest rates increased. Overdrawing private bank accounts entail interest of 300 % p.a. instead
of 260 % p.a. hitherto. When overdrawing company accounts, the credit user has to pay interest
at the rate of 100 % p.a.
Regrettably since September 2014 there have been only sporadically rain falls in some of the
regions of North East Brazil and as consequence availabilities of fresh fibres became reduced,
this specially applying for the region of Coit where sisal production has meantime declined by
almost 50 %. In the region of Sertao the situation is slightly better. Altogether the fibre quality
deteriorated. Fibre now as before is supplied to processors / sisal mills / exporters with high
moisture content, i.e. around 20 %.

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In order to reduce the moisture content to a level of 13 % (max. at time of shipment) there is
need for storage/drying process of 45 to 50 days. This means a long lock up of capital which is
very problematic for smaller companies. On occasion of a meeting of sisal producers early
February it was agreed by them that for the time being prices should be maintained at the same
(high) level as before. As time goes on it remains to be seen whether this agreement will hold.
Total exports 2014
Carpets
Mats
Ropes
Sisal Yarns
Sisal binder twine
Sisal Fibres

69.251 mtons with break up as follows

abt.
abt.
abt.
abt.
abt.
abt.

15 mtons
303 mtons
2.081 mtons
6.250 mtons
20.228 mtons
40.374 mtons

To this has to be added as outlet the inland market absorbing abt. 12.000 mtons.
Sisal fibre exports increased last year by abt. 12.000 mtons against 2013. On the other hand
exports of binder twine declined by abt. 2.500 mtons (in comparison to 2013).
China continues to be the main buyer of Brazilian sisal with abt. 64 % of exports going to that
country of destination, followed by Portugal abt. 8 % and Indonesia, Algeria and Mexico with
about 4 % each. Exports to Egypt and Morocco represented 3 % each of the total quantity
exported by Brazil.
There continues to be the huge problem of finding enough labour being willing to work on the
sisal fields specially for cutting leaves. This kind of work is not liked. The acute shortage of labour
is the reason why during the period May/September 2014 a sizeable quantity of good quality
sisal was left on the fields. Although export prices of sisal fibres have sharply appreciated during
the last years, workers on the fields have not benefitted from this upward price trend and wages
paid to them have remained almost unchanged.
The root of the problem of rather average quality of sisal fibres is obsolete equipment which is
used for decortication. During the last years a lot of money was spent on Research and
Development but so far with little noticeable success.
The Diesel price increase will make road transports more costly which again will result in an
increase of FOB Salvador prices. The distance between the port of Salvador to the warehouses
(and back to the port) is almost 500 km. As had been apprehended end of February a strike was
declared resulting in blockades of truck drivers and trucking companies. Receiving containers
and despatching containers from and to the ports of Salvador/Bahia and Santos has become
almost impossible. The strike has quickly spread in ten Brazilian federal states and after 8 days
the repercussions for agricultural industry make themselves already strongly felt. The Soya
beans production (in Mato Grosso) and the supply of petrol/diesel are affected.

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The trucking companies want to achieve a reduction of fuel prices respectively increase of freight
rates. Road blockades are organized to lend more weight to the demands of striking parties.
Negotiations between strikers and the Government have been so far inconclusive. The strike
road blockade is negatively interfering with sisal exports.
East Africa:
Offerings of East African sisal fibres were totally inadequate to cope with strong demand which
continued during the period under review. In the past during the months of December and
January there were at least some irregular, scattered rainfalls in Kenya and Tanzania. However,
even these rainfalls were lacking. This has very negative effects not only for sisal production but
for the whole agriculture in both countries. More than 4.000 farmers in the Region of Timboroa
(North East of Nairobi) suffer big crop losses and thus financial losses. When normal weather
conditions prevail 3 harvests per year are possible. However, the continuing drought makes new
plantings impossible. The situation is similar in Tanzania.
Tanzania:
One of the big events in Tanzania this year will be the presidential elections in October 2015.
There are quite a few people who are of the opinion that Professor Muhongo, currently Minister
for Energy and Minerals, will win the election. The African oil producing countries are suffering
from the turbulences caused by the sharp decline of oil prices. At the same time oil importing
countries are rejoicing. According to Bloomberg agency East African shares appreciated during
the last half year by share prices rising in Kenya by 10 % and in Tanzania by 22 %. This
tendency reflects direct investments in both countries. Still one year ago it seemed that investing
in very expensive offshore-installations in East Africa for exploration of crude oil and natural gas
would be rewarding on long term basis. Such ventures along the coasts of the Indian Ocean
attracted in 2009 alone US-Dollar 25 billion. Now the once existing enthusiasm is at a very low
ebb.
Although Tanzania has fundamentally ideal agricultural conditions to offer, however, the country
continues to be a net importer of food. Though for example has the third largest beef stock in
Africa, it is still compelled to cover a large part of its needs of milk products from abroad. The
reasons responsible for this are manifold: Frequently bad infrastructure, lacking access to
financial services, unclear property conditions and lack of market access to Europe and the
USA. Besides, small plots and structures geared to subsistence economy make it impossible to
make full use of the agricultural potential which the country has to offer.
Tanzania has a lot of pent-up demand. Power and Transport systems are regularly overloaded
and cannot cope with growing demand. On the other hand the growing telecommunication
market inspires hope. Dependability of power supplies is now as before wishful thinking in
Tanzania. The power network suffers from excessive voltage fluctuations and often there is a
complete collapse of power supplies. Sisal production is particularly hit by these shortcomings.
The power cuts are not only a matter of anger but they cause severe economic disadvantages
since unreliable supplies of power make efficient productions processes impossible and smooth
industrial production very difficult.

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According to TSB (Tanzania Sisal Board) sisal production during the period January/December
2014 was about 38.000 mtons. Exports during the same period under review were 18.000 mtons
and the main importing countries were China (42 %) and Saudi-Arabia (31 %).
Kenya:
The strong dependence of the country on an agriculture being at the mercy of rain and on
Tourism, expose Kenya easily to the cycle of boom and bust. The agricultural sector employs
75 % of the countrys population of 38 million inhabitants. Half the countrys agricultural
production caters for the proper needs of Kenya, the farmers of which are cultivating small plots
of agricultural lands. The economy of Kenya very much depends on exports of agricultural
produce and price fluctuations of the world market negatively affect the national economy. The
growth of the population is faster than the growth of the economy allows. An extremely long
drought or drought-like period continues to make ration power necessary. Notwithstanding
foreign investments the infrastructure of the country continues to deteriorate. Notwithstanding a
decline of the number of foreign visitors the economy of Kenya registered a healthy growth in
2014. Armando Morales, the IMF Representative in Kenya, reckoned end of last year with a
growth of 5,8 %. This is 1 % above the growth rate in 2013. Notwithstanding the number of
tourists having drastically declined, the tourism sector altogether proved to be robust. In order to
cope with growing population economic growth of 8 to 10 % would be required to
ensure sufficient number or work places for school leavers.
According to information received from the KSB (Kenya Sisal Board) sisal productions during the
period January/December 2014 was abt. 26.040 mtons of which 23.030 mtons were exported.
More than 50 % of exports were absorbed by 4 countries: China, Saudi Arabia, Nigeria and
Morocco. When looking in retrospect it is clearly recognizable that exported sisal quantities have
shifted in favour of Nigeria and Morocco, while this trend was accompanied by less Kenya sisal
having been imported by China.
The financially strong construction industry in Saudi-Arabia, Nigeria and Morocco has meantime
become a very serious competition for traditional sisal processing companies (spinning mills,
carpet manufacturing and paper pulp producers).
The shortage of availabilities of East African fibre has meantime attracted criminal elements.
During the last months more fraud cases were reported. In such cases the assumed offering
party submits offers at prices being significantly below ruling market prices. Potential buyers who
accepted the non-solicited offers in good faith had to make advance payments but subsequently
had to realize that they had become victims of fraudsters.
Madagascar:
Since elections were held beginning of 2014 Madagascar is only gradually recovering from the
political crises which lasted some 5 years. Foreign sanctions imposed on Madagascar when the
country was considered to be a pariah were lifted. Mining projects (such as titan, nickel and
cobalt) and a slow return of tourists are hoped to bring a change of trend for the better. The end
of the crisis allowed western donor countries to resume cooperation with Madagascar.

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The most important donor is the EU which will support Madagascar with financial aid to the tune
of EUR 455 million until 2020.
According to the United Nations the food situation of a third of the population of 24 million
inhabitants is precarious. Since 2002 the political crisis have led to a shrinkage of the per capita
income. 77 % of the 24 million inhabitants are living below the poverty line of USD 1.25 per day.
In Androy in the South of Madagascar it is even 94 % of the population which is living below the
poverty line. The South of the country continues to be neglected by the Government. The
Government and its law and order authorities are virtually not present in the south of the island.
Gang delinquency, violence and the frequency of murders make it an unjustifiable risk to travel to
the south of Madagascar. Though the Government in the capital of Antananarivo is perfectly
aware of the impossible conditions ruling in the south of the country, Government remains totally
inactive and no action is taken to restore law and order in that part of the country.
During the period January/December 2014 total sisal exports were abt. 6.390 mtons. This
means a decline of about 11% against the quantity of sisal exported in 2013 (abt. 7.170 mtons).
Since end of 2014 the south is suffering from spells of drought with negative impact on growth
and condition of sisal plants. At the moment it cannot yet be forecast how sisal production and
exports will develop in 2015. All depends on the capricious climatic conditions.
China was once again No. 1 buyer of Madagascar sisal in 2014. 52 % of total exports went to
China, 25 % to Morocco, 7 % to India and 6 % to Spain. The distribution of exports country-wise
has mot very much changed during the last few years.
Prices followed market prices of East African sisal. Same as in the case of
Tanzania/Kenya, availabilities of Madagascar sisal for export are totally inadequate so as to
satisfy growing world demand.
Sisal exports are hampered by problems caused by irregular calls of MSC vessels at the port of
EHOALA. MSC is the only shipping company serving that port. The rotation of vessels between
Port Louis/Mauritius and Madagascar ports is continuously varying. For example there were no
sailings offered during the period 18th December 2014 and 15th February 2015! It is next to
impossible to make a planning of shipments as time and again in almost weekly intervals the
schedule of vessels is changed.
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