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BRAZIL

1. GENERAL ECONOMIC SITUATION - 2002

The performance of the Brazilian economy in 2002, especially during the second semester, was affected by uncertainty regarding future policies, excessive currency devaluation and rise of the inflation rate.

Economic development was hampered by a reduction in external financing and foreign investment. It was also impacted by the Argentine moratorium and the instability of the international scenario, which made foreign investors more cautious.

The re-opening of credit lines is connected to three factors: the level of confidence of the market in the socio-economic policy to be implemented by the new government; the results of negotiations of the agenda for reforms; and other adjustments highly important to the development of the Brazilian economy.

The agreement with the International Monetary Fund, which covers all of 2003, establishes disbursements conditioned to the accomplishment of primary superavit and inflation rate goals.

The new president and the leading members of his economic team have already stated their commitment to respect signed agreements, emphasizing the accomplishment of the inflation rate and of the fiscal superavit, as well as the continuity of the floating exchange rate policy.

The latest GDP projections for 2002 indicate an increase of only 1.6 percent, far below the Brazilian economic potential, which has all the required conditions to reach a sustainable growth of 4 to 5 percent.

The 2002 trade balance, boosted by the high devaluation of the currency (52%) and import reduction, caused by the lower activity level, reached a surplus of US$13.1 billion. This was the result of exports valuing US$60.3 billion, an increase of 3.7 percent over the previous year, and imports valuing US$47.2 billion, a decrease of 15 percent.

This substantial trade balance improvement allowed the country to reduce the current transactions deficit to 2 percent of the GDP, in spite of the strong economic constraints observed during the period.

Central Bank forecasts indicate that the public sector should close the year with a primary surplus of approximately 4 percent of the GDP and a net debt of 57 percent of the GDP. The generalized price adjustments caused by the exchange rate crisis during the second semester forced the Monetary Policy Committee to adjust the basic interest rate from 18 to 25 percent a year. This measure was required in order to restrain the rise of inflation, which aimed at 12 percent per year.

2. PERFORMANCE OF THE PAPER AND WOOD INDUSTRY - 2002

a. Production, consumption and trade

Preliminary projections of the industry's performance in 2002 indicate that, with the start-up of new capacities, pulp production increased 7.9 percent over 2001 figures to reach 8 million tonnes while paper production increased 2.9 percent to 7.7 million tonnes.

Domestic pulp and paper sales, influenced by a depressed demand caused by reduced industrial activity, grew 5 percent and 2 percent, representing 750 thousand tonnes and 4.9 million tonnes respectively.

The apparent consumption of paper, reflecting a significant reduction in paper imports, reached 6.8 million tonnes, an increase of 1.2 percent over the previous year. This result indicates that per capita consumption stabilized at 38 kg per year, below many less developed countries.

In addition to the consumption of 3.7 million metric tonnes of pulp, 2.8 million metric tonnes of paper have been recycled, with cardboard corresponding to 1.7 million metric tonnes of that total.

In 2002, pulp and paper exports reached US$2.1 billion (pulp US$1.2 billion and paper US$900 million) as Brazil participated in a globalized trade environment which featured reduced movement in international prices. The main pulp destinations are the European Union and North America, which together correspond to 70 percent of Brazil's exports. Paper exports are mostly oriented to Latin America and the European Union, which together correspond to 60 percent of the total.

The strong devaluation of Brazil's currency, of approximately 52 percent, and the import substitution process, led to a fall of 21 percent in foreign purchases. These purchases totaled US$593 million, indicating a reduction of 21 percent compared to the previous year.

In spite of difficulties, the industry trade balance showed a surplus of US$1.5 billion, which is 3 percent higher than in the previous year. This surplus was supported by a combination of export growth and import reduction.

The pulp and paper industry, with a forested area of 1.4 million hectares, uses exclusively wood from planted forests that use modern forestry techniques. In conjunction with adequate soil and favorable climate conditions, Brazilian forests reach a high productivity level of approximately 45 st/ha per year for eucalyptus and 36 st/ha for pinus. According to the Brazilian Forestry Society, in certain regions the productivity levels reach 60/70 st/ha per year for eucalyptus and 45/50 st/ha per year for pinus.

b. Outlook for the future

With new capacities which came on stream during 2002 (1.5 million tonnes of bleached hardwood pulp and 250 thousand tonnes of printing and writing paper), Bracelpa projections for 2003 indicate an increase of respectively of 13 percent and 5 percent for pulp and paper production.

The industry's trade balance is expected to show a positive result of US$2.5 billion as a result of forecasted exports of US$3.1 billion and imports of US$600 million.

The industry is seeking to increase its share in the international markets through the intensification of regional integration agreements and the completion multilateral negotiations within the FTAA-Free Trade Area of the Americas and with the European Union.

The Brazilian government is also negotiating to open markets with Russia, China and India.

3. ISSUES OF PARTICULAR INTEREST

a. Illegal logging

As in the pulp and paper industry in Brazil, producers of wood panels (particle board and MDF) also use wood exclusively from planted forests.

The Brazilian forest industry supports the maintenance of forest areas protected by law and as such, keeps areas for permanent preservation, as well as legal preservation areas. This is done in excess of the amount required by Brazilian legislation.

The organized industrial forest industry opposes felling, processing and illegal marketing of wood and forest products.

The Brazilian forestry-base industry acknowledges the need to fight the underlying causes of illegal extraction and trading of wood and forest products, as well as non-sustainable native forest management in the Amazon Region.

The illegality does not necessarily occur only in forest operations, but in the entire chain of production and marketing, from the forest to the consumer. Therefore it is not fair to consider illegal as only occurring at the felling stage, which would penalize only the products.

The organized industrial forestry industry in Brazil supports all government efforts aimed at restraining the illegality of wood production in the Amazon.

Many measures to control and survey, such as normative acts and legal instruments, have significantly reduced the level of illegally extracted native wood in Brazil (from 80% in 1996 to less than 20% in 2002).

Bracelpa, as a member of the International Council of Forest and Paper Associations, is a signatory of the Position Paper on illegal logging and is committed to the implementation of sustainable forest management to satisfy high environmental, social and economic standards for forestry activity.

The Brazilian government adopted and is implementing many legal, political, economic and administrative measures to curb illegality in the Amazon. Examples are the PNF - National Forests Program; the Law for Environmental Crimes; the deferment and revision of harvest authorizations; the expansion of legal reservation areas; the Integrated System to Monitor and Control Forest Resources and Products (SISPROF); and credit lines to finance sustainable forest management.

b. Environmental aspects

Brazil and its forestry industry recognize the potential of the CDM to attract investment to their social, economic and environmental development, which simultaneously contribute to mitigate the effects of greenhouse gases.

The Brazilian government is performing a fundamental role as it promotes and makes viable the CDM project. Several important measures have already been adopted including:

• Establishment, in 1999, of the Interministry Commission on Global Climate Change, as the Designated National Authority, chaired by the Ministry of Science and Technology and including as members representatives of all activities described in Annex A of the Kyoto Protocol;

• Establishment, in 2000, of the Brazilian Forum of Climate Change;

• Ratifications, in August 2002, of the Kyoto Protocol;

• Improvement of the regulatory framework for environmental issues;

• Conclusion of the national communication of the Emissions Inventory, according to IPCC methodology;

• Identification, in conjunction with industry, of CDM activity projects which attain COP's criteria.

In December 2002, under the sponsorship of National Economic and Social Development Bank (BNDES) and United Nations Conference for Trade and Development (UNCTAD), the Brazilian Ministry of Science and Technology prepared and presented the "Orientation Guide to the Mechanism of Clean Development - MDL". This guide considered the rules, procedures and guidelines of the document to conceive projects signed in COP7 and COP8.

The Brazilian Government appointed BNDES as the treasurer and commercial agent for greenhouse gas reduction investment projects, susceptible to be entitled to the CER market. BNDES will accredit certifying companies, and will receive, analyze and qualify the projects.

From the forest industry's point of view, on the topic of forestation projects, the CDM offers good conditions to:

• reduce pressure on native forests;

• renew riparian buffer zones and degraded areas;

• produce social and economic benefits with the generation of thousands of employment opportunities;

• provide the multiple use of forest products;

• increase the forest base for environmental and industrial purposes.

Forestry companies, especially in the pulp, paper, and steel industries, are negotiating carbon dioxide sales agreements through projects with terms of up to 21 years with Annex 1 companies or countries, as well as with the World Bank

In September 2002, Brazil and the World Bank signed an agreement to create the Brazilian Exchange for Emission of Dioxide Reduction Certificates entitled "The Plantar Carbon Offset Project". The goal of this project is to replace energy by using biomass from eucalyptus planted forests as renewable energy, employing charcoal instead of mineral coal to produce cast iron. One tonne of cast iron produced with mineral coal discharges 1.8 tonnes of CO2, while its production with charcoal causes the sequestration, or retention, of 1.1 tonnes of CO2.

c. Progress in sustainable forest management and certification

The Brazilian Government has established many measures related to ecosystem conservation and management. The national system of conservation units, re-modeled in 1998, is being regulated. The general political lines of policy and use of conservation units are defined by the National Environmental Council (CONAMA), with its executive agencies IBAMA and state and municipal agencies. The conservation units are divided into two groups: i) Total Protection (5 categories) and, ii) Sustainable Use (7 categories), whose total area comprises 45 × 106 federal hectares and 30 × 106 state-owned hectares. In 2002 the world's largest tropical national park, PN Tumucumaque, in the Amapa State, was created (3.8 × 106 ha). All conservation units are subject to management plans.

Sustainable forest management is increasingly becoming an integral part of the agenda of both government and private enterprise. Currently, more than one million hectares of planted forests in Brazil are certified with ISO 14001 standards.

IBAMA has revised all management plans licensed for native forests, and is implementing extensive control and surveillance measures. The federal government defined as a goal the protection of at least 10 percent of all ecosystems in Brazil and the Environmental Ministry is implementing a model of ecologic corridors to connect various conservation units by biomass and/or by ecosystems.

Forest certification is spreading and forest areas sustainably managed by private enterprise are growing.

Brazil's involvement in the development and use of criteria and indicators for sustainable forest management occurs in different levels and processes:

Tarapoto Process

Brazil participates in this process related to Criteria and Indicators for Amazon basin forests. By 2001, after the second regional meeting, 37 indicators had been selected, corresponding to 11 criteria.

CERFLOR Forest Certification System

This system was developed under the Brazilian System for Conformity Evaluation. The Brazilian Association of Technical Standards (ABNT) developed, in a participative process, the model for forest management includes principles, criteria and indicators for planted forests (already finalized); and principles, criteria and indicators for native forests (now being finalized), as well as the standards for custody chain and audit. The National Metrology and Industrial Quality Institute (INMETRO), as Brazil's "single voice accreditation body", defined the guidelines and regulations for evaluation of conformity and accreditation of the certifying organisms which will operate CERFLOR.

In August 2002 CERFLOR was formally launched, to become operational in 2003. CERFLOR was developed with the aim of gaining international recognition from several national and regional Certifying Systems. The equivalence of the technical standards and the structure of accreditation of certifying organisms constitute the basis for mutual recognition.

During the 6th General Assembly of the Pan European Forest Certification Council (PEFCC), in November 2002, Brazil became a member of PEFCC. In this sense, the Brazilian participation in PEFCC is of fundamental importance to the international recognition of the Brazilian Forest Certification Program - CERFLOR.

Because it constitutes a Forest Certification System, environmental, social and economic aspects are inherent to the process. In addition, because the System contains technical norms assuring sustainability of forestry management it therefore allows increased competitiveness of Brazilian forest products in the international market.

The Forest Stewardship Council (FSC) has certified 26 units of managed forests in Brazil, totaling 1 180 000 ha, of which 822 000 ha correspond to planted forests and 358 103 ha to native forests.

Until 2002, 109 custody chain certificates were issued. Standards for the Atlantic Forest are currently being defined.

The Buyers Group for certified wood consists of 59 companies, 2 state governments and 2 municipal governs. It is estimated that those groups demand approximately one million cubic meters of raw certified wood per year.

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