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Brazil The corruption scandal linked with the name of PETROBRAS, the country’s 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. Brazil’s 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 country’s political elite is threating to scupper the government’s 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 Brazil’s widening budget deficit. The move coincided with a request to the Supreme Court by the attorney general’s office to pursue 54 people, mostly politicians, allegedly involved in the Petrobras case, Brazil’s biggest corruption scandal. Members of Congress can be put under formal investigation only with the permission of Brazil’s 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 Brazil’s 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 year’s 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.

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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 Coité 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 69.251 mtons with break up as follows Carpets abt. 15 mtons Mats abt. 303 mtons Ropes abt. 2.081 mtons Sisal Yarns abt. 6.250 mtons Sisal binder twine abt. 20.228 mtons Sisal Fibres abt. 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 country’s population of 38 million inhabitants. Half the country’s 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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