PORTUGAL

1. GENERAL ECONOMIC SITUATION - 2002

In 2002, the Portuguese economy continued the slowdown trend that started in the second semester of 2000. After the intermediate elections in December 2001, where a change in the political leadership of the country occurred, some preoccupying figures relating to the effective economic performance in 2001 were made known.

In fact, by mid-2002, it had already become clear that the budget deficit had reached 4.2 percent of the GDP in 2001, (while the Committee's last year report mentioned 2.2%); therefore well above the 2 percent target set in the Stability Programme agreed with the European Union.

In 2002, the real growth of GDP slowed down once again to a figure below 0.5 percent, reflecting poor exports, lagging private demand and a decrease in public investment. This figure is substantially lower than the forecasts made one year ago.

On the other hand, a strong grip on budget policy and restraint in internal demand (a deterioration in the labour market occurred and the VAT was increased from 17 to 19%) appear to have allowed the budget deficit in 2002 to settle somewhere slightly below the 2.8 percent agreed between Portugal and the European Union. An even lower deficit (2.4%) is anticipated for 2003, together with a stabilized (slightly higher) growth of the GDP (1.3%).

The forecast for the (slight) recovery of the Portuguese economy is basically grounded on the anticipation that exports will increase and that will obviously depend on the European growth rate as well as on the internal salary trend.

Inflation decreased in 2002, as expected, when compared to 2001 and reached a level close to 3.6 percent. A further decrease, between 2.5 percent and 2.8 percent, is anticipated for 2003.

According to preliminary results, exports of goods and services have shown a growing profile during the first three quarters of 2002 and a variation of over 3 percent is expected as compared to 2001. For 2003, as previously mentioned, a further growth around 4.7 percent is anticipated.

Regarding imports of goods and services the growth in 2002 was only 0.2 percent and it is believed they will increase no more than 0.5 percent in 2003.

In 2002 the unemployment rate continued to grow and may have settled close to 4.75 percent. The slowdown in the economic activity and the expectable decrease in investment (especially public investment) in 2003 favour the anticipation that unemployment will go on escalating to levels close to 5.5 percent.

2. PERFORMANCE OF THE PAPER AND WOOD INDUSTRY - 2002

As forest fires have a direct impact on the forest industry, it is important to note the statistics that have been gathered in the last year. Provisional data relating to forest fires recorded in 2002 indicates 6 539 occurrences, corresponding to a total burned area of 103 000 ha of which 42 000 ha were forest stands. As the summer of 2002 was relatively short, the area of burned forest stands was approximately 15 percent less than the average of the last ten years.

The sawmill industry was substantially affected by the slowdown in civil construction activity and the utilization rate of installed capacity stood between 60 and 65 percent. While some sawmills closed down in 2002, an important modernization movement occurred in a major part of the remaining industrial units which led to the maintenance of installed capacity. This capacity is estimated at approximately 1.7 million cubic metres of sawn wood. For 2003 a further decrease in the number of sawmills is anticipated, although a serious effort at modernization and corporate restructuring in the remaining units may be expected to occur in the second semester, with a view to responding to the competition from eastern countries and the tendency towards replacing sawn wood with alternative materials (especially in civil construction).

Exports of sawn pine wood - which have been important in the past - were close to 250 000 m³ in 2002 (i.e. less than a quarter of the total production).

Production, imports and exports of main Portuguese forest raw materials

(thousand m3)		Production	Imports	Exports
	2000	2 413	10	22
Coniferous logs (maritime pine)	2001	3 313	88	17
	2002*	2 980	48	23
	2000	296	484**	5
Non-coniferous logs (total)	2001	181	310**	4
	2002*	160	499**	2
	2000	5 086	566	400
Eucalyptus pulpwood	2001	5 481	410	640
	2002*	5 260	230	690

* estimate, ** 80%, on average, is tropical timber

The utilization rate of the installed capacity for particleboard came close to 80 percent in 2002 (rather lower than the rate in 2001) and no changes were recorded in relevant overall installed capacity. In the case of medium density fibreboard (MDF) the utilization rated of the installed capacity neared 85 percent in 2002 (lower than in 2001) and no changes were identified in the overall installed capacity. The market for wood panels is expected to remain stable in the current year.

Production, imports and exports of wood panels

(thousand m3)		Production	Imports	Exports
	2000	694	57	310
Particle board	2001	680	78	286
	2002*	690	60	286
	2000	492**	93	346
Fibreboard	2001	470**	110	309
	2002*	480**	116	345

* estimate, ** 85% is MDF

Pulp and paper production, imports and exports

(thousand m3)		Production	Imports	Exports
	2000	1774	94	1026
Woodpulp	2001	1806	159	974
	2002*	1790	152	919
	2000	1290**	665	845
Paper and board	2001	1419**	662	1074
	2002*	1380**	754	1121

* estimate, ** over 60% are for graphical uses (uncoated)

The pulp industry operated at full capacity in 2002 while the paper and board industry recorded a utilization rate of their production capacity close to 90 percent. The expectations of the pulp and paper industry for 2003, due to the exporting character of the sector, follow the European and world expectations closely.

The recovery rate for recycled paper was about 40 percent in 2002 (i.e. slightly lower than those recorded in the last two years). Recovered paper consumption also fell almost 8 percent compared to 2001.

Worthy of mention is the announcement of the partial privatization of state-owned stock in the Portucel Soporcel Group, due to occur in 2003. The state will be keeping approximately 33 percent of company shares.

3. ISSUES OF PARTICULAR INTEREST

a. Illegal logging

As is the understanding of the Portuguese industry and authorities, illegal logging occurs when forest exploitation is carried out in violation of applicable laws. This would be the case with removals in protected areas or removals of indigenous species in forests specifically under protection of the law.

As 100 percent of the raw material (eucalyptus) for the Portuguese paper industry originates from plantations grown on inadequate land for agriculture, the trees are considered true `crops' (obtained within a stable legislative framework) and thus the `illegal logging' issue does not apply in Portugal. The same applies with regard to the maritime pine, the single source of raw material for sawmills and wood panel mills.

b. Environmental aspects such as carbon sequestration and substitution

National authorities have not yet defined the criteria according to which CO₂ emission quotas are to be assigned, nor have they given any indication as to how (regionally, per sector or per company) credits for carbon sequestration are to be awarded.

The paper industry has been adopting voluntarily the extension of eucalyptus rotation from 10/12 years to 13/15 years, claiming that in this way it should be awarded the credits referred in the Kyoto Protocol relating to changes in forest management leading to higher carbon sequestration.

The active forest fire prevention and fire fighting policy that allows fire hazards for forest stands of industrial companies to be ten times inferior to that of private owners is another action that may entail recognition of future carbon credits.

c. Progress in sustainable forest management and certification

The Portuguese standard on sustainable forest management will come into force in 2003 and it is anticipated that the standard on chain of custody will be equally enforced. It is therefore possible that in 2003 some areas of the industrial companies may come to be certified, pending the adhesion of the Portuguese standard to the Pan European Forest Certification scheme (PEFC).

There is a wide acceptance of the need for a mutual recognition process among the main certification schemes in order to enlighten the consumer and simplify the market. National authorities are now showing signs of being interested in and available to facilitate the adoption of certification in Portugal (a country with small and very small forest areas), maintaining however the voluntary character of certification as a market tool.

Public positions defending the free adoption of any certification scheme have been taken but there is a strong will to fight any attempt at monopolizing activity and certifying schemes.