Empresas Copec SA
SGO:COPEC
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Good day, everyone, and welcome to Empresas Copec's 2Q '19 Results Conference Call. Today's presentation and the 2Q '19 earnings release are available on the company's website at www.empresascopec.cl and also on our Investor Relations website, investor.empresascopec.cl.
As a reminder, today's call is being recorded. Before we begin, I would like to remind you that this presentation may include market outlooks and forward-looking statements, which are based on the beliefs and assumptions of Empresas Copec's management and on information currently available to the company. They involve risks, uncertainties and assumptions because they relate to future events, and therefore, depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Empresas Copec and could cause results to differ materially from those expressed in such forward-looking statements. This presentation contains certain performance measures that have been adjusted with respect to IFRS definitions, such as EBITDA.
I will now turn the call over to Mr. Rodrigo Huidobro, Chief Financial Officer of Empresas Copec. Please go ahead, sir.
Yes. Thank you very much, and welcome, everyone, and thank you for joining us today on this call where we will be taking a look at the results related to the second quarter 2019.
We are joined today as usual by our IR team, led by Mr. Cristián Palacios and also we are joined by people from Arauco, our forestry division, led by Mr. Gianfranco Truffello. They will all be helping us out to answer any questions you might have at the end.
Having said that, let us flip directly to Page 5 where we are placing the results of this quarter in a historical context. We can see there that EBITDA came up to $542 million, which implies a drop of 33% with respect to the second quarter last year, which was a record $810 million. And also implies a drop of 8.3% with respect to the immediately preceding quarter, the first quarter 2019. So $542 million EBITDA for this quarter. Together with that, we are reporting a net income of $135 million compared with $335 million in the second quarter 2018 and $221 million in the immediately preceding quarter, the first quarter of 2019. So 59% and 38% drops, respectively, with respect to the 2 comparable quarters.
We will now go into the reasons for those declines. On Page 6 and just as a brief reminder, we are putting in place -- as of January this year, we're putting in place the new accounting rule IFRS 16, which basically means accounting for leases as both the liability and an asset are right of use basically and liability. The impacts of these accounting change on our balance sheet are indicated there. We are showing a new asset for approximately $730 million and a very similar amount for the corresponding liabilities.
In terms of the effects on our net income statement, you can see them on Page 6 as well. This means basically lower leasing expenses. So the leases are not accounted anymore as leases, rather than that they come out of EBITDA. So we have a $78.8 million accumulated as of June. So this is for the whole first semester, $78.8 million of lower leases and therefore, higher EBITDA. And we also have nonoperational accounts in the net income statement, which are affected, which are financial expenses, which go up by $16 million on a consolidated basis. Higher depreciation and amortization, which is $69.8 million up and all in all, the effect on net income is a drop of $7 million in our net income, the bottom line.
So that is what we have in relation to the impact of the new accounting rule, IFRS 16. This is related as we stayed there to the leases regarding several different types of assets, such as land, tankers, vehicles, warehouses and so on.
On Page 7, we can see the main variations, division by division regarding EBITDA for this quarter. Of course, there is the effect of IFRS 16, but other than that we are showing that the main variation here comes from Arauco. Arauco is basically affected by the scenario of lower pulp prices which you are all pretty much acquainted with. Together with that, we are showing a decrease in our fuel division in Copec, which is basically related to lower margins. We will dig deeper into that in a while.
A similar analysis for net income has been made and is shown on Page 8. Net income comes down from $335 million in the second quarter 2018 to $135 million in this quarter, which is 60% down. Once again, the main effect comes from Arauco, which shows a decline of $181 million. And this is related once again to operational -- to a weaker operational performance in Arauco stemming basically from the pulp division. Together with that, we have some losses in some of our associated companies. We will go into that in a while. All of this is partly offset by better results in our LPG company Abastible and also at the parent company.
Just to final comment on that chart, to the right-hand side, you can see that as always, as usual, most of our income and also most of our EBITDA in the previous slide is made up of the results coming from our forestry and fuels divisions.
On Page 9, we are showing a little bit more detail regarding our income statement. You can see that there is a drop in net income, which basically comes from a drop in operational income. Operating income goes down basically because of results at Arauco, which are affected by lower pulp prices and lower price -- lower pulp volumes as well. In the case of Copec, our fuels division, operating income goes down as well because of lower margins, which are related basically to revaluation of inventories, which is what we call the FIFO effect and also to a lower supply margin. In the case of Abastible, which is our LPG subsidiary company, we have a higher operational result, which is basically explained by stable margins and also lower distribution costs.
Still on Page 9. We are seeing a less negative nonoperating income. Some effects that I would like to mention here. There is higher revaluation of biological assets, which is recorded in the line called other income. This is higher than in the comparable quarter. And there is also a one-off income here, which has to do with the divestment of 1 associated company, which is called Puertos y Logística. We sold our stake in that company, where we own a 23% stake. This is a port, and we divested the stakes in that port. And the net income before taxes is a total of $47 million divided between Arauco and the parent company, $41 million at Arauco and $6 million at the holding company, for a total effect of $47 million of other income, onetime nonrecurrent is the sale of the company.
Together with that, we are seeing lower results in some of our associates, particularly in Mina Invierno, which is our coal-related company, which operates a coal mine in the south of Chile and also in our fishing associate Corpesca, lower result as well. We have higher financial expenses. This is related to 2 things. One is the higher level of debt, basically because we have been going ahead with some funding operations in relation to our MAPA project. So Arauco has been anticipating part of the funding for its MAPA project and therefore, we have a higher level of debt. And also, the effect of the new accounting rule IFRS 16, which means higher level of financial debt and therefore, a higher level of financial expenses as well as we saw in one of the first slides.
All of that is offset to a certain extent by lower taxes and this has 2 drivers. One, of course, is a lower taxable income because of lower results in general. And also we have, in this case, favorable effect of variations in exchange differences, which affect the recognition of our investments outside of Chile. So in this case, there is a positive tax effect, which brings down taxes and it has -- is related to the evolution of the exchange rate.
Moving on to Page 10. A brief look at some of our key financial ratios. Of course, one of the trends you can see is that our margins and our returns have been going down in line with the drop in net income and in operating income as well. Together with that, we see an increase in our leverage ratios, in particular, the net financial debt to EBITDA is up to 2.9. This is partly explained by IFRS 16, which brings up our liabilities. If we exclude that effect, it's a 2.7. So 2.7 compared with the 2.0 with which we started the year, but 2.9 is the final ratio or the final indicator considering the effect of IFRS 16. In relation to our debt maturities, which we have a quite balanced -- quite well-balanced schedule going forward.
I will now move into our forestry division. And if you turn to Page 13, we can see some more detail about the figures at Arauco. In Arauco, in general, we have a decrease in net income, which is related to basically lower revenue in the pulp business. So we have a lower operational income where the drivers are particularly weaker price of pulp scenario and also lower volumes in pulp particularly. This is, to some extent, offset by higher revenue and then higher EBITDA coming from the wood products division, which is in turn basically explained by increases panels offset by a drop in sawn timber.
Regarding nonoperational income, we have higher other income, which comes from 2 sources. One is a more positive change in fair value of biological assets. So the revaluation of forests and biological assets has a positive effect when comparing it with a comparable quarter last year. And also we already commented the divestment of Puertos y Logística, which is a onetime operating income in Arauco in this case. All of this is partially offset by higher financial expenses, once again related to both IFRS 16 and the higher level of debt.
Together with that, we have a drop in the profit of associates and joint ventures, which is particularly coming from our investment in Sonae, which is our European panel company, which has a one-off positive effect related to some insurance recoveries last year.
On Page 14, we are giving out some more information about our pulp division. On the bottom right corner, you can see that EBITDA coming from pulp has gone down to $199 million in the second quarter. This compares negatively, of course, with $405 million in the case of the second quarter 2018, which is probably the highest quarter that we have on record for this division, and also, compares negatively with the $246 million that we had in the first quarter of this year. And this stems from a 13% drop in volumes with respect to the second quarter last year and a 9% drop with respect to the immediately preceding quarter.
In terms of prices, the volume -- the prices are down by 16% and 2% -- 2.3%, respectively. In terms of costs, unit production costs are up by 5.6%, 4.7% for hardwood and softwood, respectively, and also 8.6% for unbleached softwood pulp. This is basically related to cost of wood, which basically means re-estimation of transfer prices within our divisions. In terms of costs in relation to the last quarter, the immediately preceding quarter, we are seeing costs are quite stable. They fell actually 1% in the case of bleached softwood and hardwood, and they rose 2% in the case of unbleached fiber.
On Page 15, a brief word on market for pulp. As you all know, probably this market has been deteriorating in terms of prices since October or November last year, when we reached very high levels of close to $800 for hardwood and close to $900 for softwood. Since then, we have seen several drivers bringing down prices, basically low demand, on the other hand, higher inventory levels, especially in -- on the side of suppliers. This environment has given way to some pulp producers, particularly Asian companies, which have been lowering prices in order to keep their market share. Same trends though softer than in China are being seen in Europe, where we also seeing a low demand, but with smaller decreases in prices.
You can see in the charts that we have -- that we are showing there, you can see that demand on a worldwide level has gone down by 3.8%. This is, of course, well beneath or well below what we are used to seeing in pulp markets, which is usually a growth for the world overall, growth of 2% to 3%. We now have minus 3.8%. This is basically driven by Western Europe and China falling significantly, offset to a certain extent by North America.
And in terms of inventories, as I mentioned, we have clearly levels that are above historical averages. In the case of hardwood, we are reaching 64 days. In the case of softwood, we are reaching 43 days.
Moving on to Page 16. We are showing some more graphs in relation to pulp prices. In particular, in the graph that we are showing in the bottom left corner, you can see the evolution of our realized price in China, which started, as I said, close to $800 for softwood and close to $730 for hardwood in November last year. And from there, they have fallen to the current levels that we are seeing, which are around $590 for softwood and $500 for hardwood. You can see a brief rebound around March and April when there were rumors of a softening trade war, but then the trade wars intensified again, and we have seen prices continue to go down since April.
The 2 other graphs show averages in China and in Europe, where behavior is pretty much in line with what we have just seen. For the third quarter, the outlook still looks very uncertain. There is still the low season going on in the Northern Hemisphere which usually means a weaker demand in this couple of months. We have seen some signals, although volatile and changing from one day to another, but we have seen some signals of the trade war between the U.S. and China intensifying over the last few weeks and this is critical to the behavior of pulp market. As I mentioned before, high level of inventories in general and especially on the side of producers and low paper demand. And all of this is intensified further by the Renminbi depreciation that has taken place over the last few weeks again in relation to trade wars and that puts additional downward pressure on pulp prices when measured in dollars.
Moving on to our wood products division, on Page 17. What we're showing here is an EBITDA of $75 million compared to $64 million last quarter, so up with respect to the first quarter 2019 but down with respect to the second quarter 2018. We are showing the prices and sales volumes as well of panels and sawn timber. It's probably worth to note that panels have gone up in the sales volumes by 8.1% year-on-year and by 6% quarter-on-quarter. And this explains to a certain extent the increase in EBITDA that we have shown with respect to the last quarter -- with respect to the first quarter of 2019.
On Page 18, we are showing some additional info regarding the behavior for wood and panel markets. Our first and most important market is North America where we have 56% of our sales. This market overall seems to be quite healthy with good trends in terms of demand and prices. All this is driven by housing starts that are quite stable for the last few years already at a level which is around 1.2 million units per year. In terms of particles, boards and MDF, we expect demand to remain positive. We expect some supply of particle boards to be reduced because of the shutdown of 2, at least 2 facilities from our -- one of our competitors, and we are also expecting some seasonality to boost demand for the following few months. In the case of remanufactured products, we're expecting stable demand as well because of seasonality, and we are also expecting less competition from China because of new tariffs and duties.
In the case of plywood, once again, healthy sales are expected during the following months, but we could see some increased competition because of supply coming from Brazil, Chile and other sources of imported production.
On Page 19, some more info about our main market in terms of wood and panels. In South and Central America, where we have 29% of our sales, our main market is Brazil. In Brazil, we still see a weak demand. We haven't seen any significant signals of recovery. Economy still seems to be quite low. We're also seeing some increased production of other Brazilian competitors. So all in all, some sources of pressure to the downward side on prices. All of this may be, to some extent, offset by some seasonal factors during the next semester. In the case of Argentina, of course, following the primary elections there, we are seeing a lot of volatility and instability. Of course, the depreciation here of the local currency plays a major role because it affects the margins when we recognize them in U.S. dollars in our accounting. So definitely something to monitor the exchange rate in Argentina, and of course, the behavior of demand following the final election in October.
In the case of Chile, stability in general. We are seeing quite positive outlook, stable demand in general. However, some slight oversupply in some of the products and some slowdown that we have seen in demand coming from construction as well. Asia and Oceania, which is 12% of our total sales, a lot of uncertainty there. These markets are very affected by the trade war between China and the U.S. So a volatile outlook and uncertain until we see this issue solved or at least more stable news on this issue.
In the case of Europe and the Middle East, which is a very small part of our production, 3% only. In general, we are seeing a weak, weak demand basically related to economic conditions there. That's it, basically, for forestry. We are now moving onto our fuels division.
On Page 21, we are showing some figures for our liquid fuels division, Copec. We are seeing a drop in net income basically because of lower margins. Operational income goes down and this stems from margins, which decrease in both Copec and Terpel. And this is explained, although commercially, the margins were quite good, they were affected by the effect of inventory revaluations, which we also called the FIFO effect and which relates to a scenario where oil prices have been on average declining. Together with that, we are seeing some lower margins coming from importing opportunities. All of this is offset by some good news, some good operational news. We have a good volume growth in Terpel in general and in oil markets in Terpel. We see an increased EBITDA in Mapco in the U.S., in general, [ stronger ] performance by Mapco over the last few quarters. And we're also seeing stronger volume growth in Chile.
In terms of nonoperating results, as in most of our subsidiaries, we are seeing a higher financial expense, in this case, relating basically with IFRS 16. And we are seeing this being partially offset by lower taxes because of the effect of the exchange rate on the accounting of the foreign investment. All in all, EBITDA goes down from CLP 121 billion to CLP 113 billion.
On Page 22, we're showing some operational figures. Market share is up with respect to what we achieved during most of last year. So it's up to close to 58%. This is last info we have as of May, 58% approx. And the reason for this recovery in market share basically has to do with some mining clients to which we are starting -- we have started to supply fuels since November or December last year. So these are quite important volumes that we are supplying to new customers in the mining sector in Chile. As a result of that as well and also as a result of growth in the gas stations channel, we are seeing volumes going up by 4.8% in Chile, quite healthy growth in terms of volumes, which is split into a growth of 8.6% in the industrial channel, having to do once again with mining customers mainly and 1.8% in gas stations.
Going forward, this is a stable industry and a stable market in general. We are usually able to achieve stability in margins, excluding volatility eventually coming from FIFO effects and also from importing margins. We believe we are well positioned in terms of market leadership. We have been strengthening our network, and we have opened some new gas stations in Chile. As a result of all this, as I said before, our market share is up to almost 58%.
In the case of Mapco in the U.S., interesting growth, 1.2
[Technical Difficulty]
Pardon me everyone, this is the operator. We have resolved the lines, please proceed everyone.
Sorry about that, we are back online here. We were talking about MAPCO which is basically focusing in operational efficiencies, margin stabilization, looking at the mix at convenience stores which has allowed it to gradually increase sales and also exploring possibilities of organic growth through new sales points.
On Page 23, we have some more information on Terpel. We have a net income decrease, which is basically related to lower margins and that in turn comes from once again the effect of inventory revaluation on operational figures. And this is a strong positive effect that we had in inventory revaluation in the comparable quarter last year. And this year, we still have a positive effect, but much less than what we recorded last year. So that's the main driver of the drop in operational terms in Terpel.
The growth in volumes is overall very healthy, and we are splitting it up there country by country. We can see a 4.3% growth overall, which is broken down as shown there: 5.1% up in Colombia, very interesting; 73% in Peru held by the incorporation of the assets of ExxonMobil; and 13% and 21% in the Dominican Republic. So overall, quite healthy growth in all of our markets.
In terms of nonoperational results, we are seeing stability. On one hand, we have higher financial costs, but that is offset by the fact that last year, we had some one-off expenses related to the acquisition of ExxonMobil. In terms of the contribution from our newly acquired ExxonMobil assets, which we are disclosing there as well on the bottom right-hand corner, you can see that this quarter we recorded a total incremental EBITDA of approximately COP 21 billion, which is approximately $7 million. On the year as a whole, so in the first semester as a whole, in the 6 months, up to June, we have recorded a total EBITDA from this new ExxonMobil assets of $18 million. This is, of course, lower than the figure we anticipated, which was closer to $50 million and to $70 million in the long term, but this has to do basically with one-off costs that we are facing in the first stages of absorbing this new business and they had to do basically with logistical challenges. We have had to reoptimize the supply logistics for the network. We are also working in optimizing the distributor network and that also has some setup costs. We have worked in inventory optimization and also we are seeing some very strong competitive reaction in some particular markets like Peru. So all in all, this first 6 months EBITDA is not very representative of a long-term EBITDA we expect to attain from the ExxonMobil assets. We're still thinking of $50 million to $55 million to be attained in the year as a whole for this new venture.
Moving to Abastible. On Page 24, we are giving some more detail. In the case of Abastible, we have a higher operating income and that is basically result of stable margins in general and also lower distribution costs, which basically take place in Peru. In Chile, in Peru and Ecuador, we are seeing high volumes and therefore, better operational results. In Columbia, we're seeing stable volumes and better margins. So all in all, a quite stable business, which is working very well.
In nonoperating terms, we have a higher income coming from associates and this has to do with one-off negative effect that took place in the second quarter 2018 and that had to do with the write-down of one of our associate companies called Sonamar. Less taxes as well. We have lower amount of taxes this year basically in relation to the effect of the exchange rate on our foreign investments.
Operationally speaking, on Page 25, what we see here are in general very stable volumes, growing at 1.4% in Chile, stable in Colombia, plus 2% in Peru and 2.5% up in Ecuador. All in all, these are quite healthy levels for this kind of industry. In the case of Chile, we have a positive outlook basically related to the bulk segment, where we have introduced some new strategic -- some new commercial strategies related to the offering of energy-efficient solutions to industrial clients. There is some housing growth in the country as well, which should boost the bottle markets and there is also good results from the LPG going to vehicles and to LPG acting as substitution for other sources of fuels as well, particularly firewood in the South of Chile.
In Columbia, we have stable volumes. Volumes have been pressured to some extent by basically natural gas smuggling, some smuggling coming from Venezuela. However, margins have increased a bit. In the case of Peru, we are seeing a recovery there. We went through some difficult months in Peru in the previous couple of years, especially related to the effect of informal sales in the market in general. We have been able to offset that to some extent by achieving interesting efficiencies. We have achieved interesting cost cuts in Peru and also new commercial strategies that have allowed for price optimization. And so the trend in Peru is definitely upward right now.
And Ecuador continues to be growing in a stable way as we have seen for the last couple of years. And this has to do basically with new industrial clients with the replacement of other sources of fuels and also in general with gaining market share in the bottled segment.
Moving on to Page 26. We are showing Sonacol, which is our pipeline division. As usual, this is a very stable company where growth is in general related to the volumes of fuels transported. In this particular case, we are seeing that net income and EBITDA are quite stable with respect to last year that is total volume transported . So no surprises there.
In the case of other investments, which we are showing on Page 28. A few words of some of the most relevant investments here are fishing vehicle Igemar shows a favorable result with respect to the previous year. This is basically explained by higher volumes in Orizon, which is our southern fishing division, which is consolidated in our balance sheet. In the case of our mining division Alxar, basically a loss related to the first stages of the Mina Justa project, which we are carrying forward in Peru with a 40% stake. These initial expenses related to SG&A and financial expenses.
Corpesca, which is our northern fishing division, shows, in general, weaker results, which are linked to a drop in revenues because of lower prices and volumes. Together with that, the company will split in 2. So there's part of the income, which is now registered from another company called Caleta Vítor.
Laguna Blanca, which is the parent company for Mina Invierno. Mina Invierno is a venture that we have in the South of Chile that operates a coal mine. Basically, it registered a loss, a quite significant loss this quarter and that is related to higher costs essentially because of operational restrictions. These operational restrictions have been imposed by environmental courts and have to do with the prohibition of the use of blastings. Over the last few days, we've had some news there. We had the final ruling by the environmental court, which basically confirms the ruling in the sense of the prohibition of blastings. Given that scenario, the company has announced that it will appeal that ruling in the Supreme Court. And in the meantime, operations will be paralyzed and some measures will be taken in order to bring down the costs. Unfortunately, we have to go ahead with some layoffs there. All that while we wait for the final ruling by the Supreme Court.
In the case of Metrogas and AGESA, which are 2 divisions related to natural gas, we are seeing stable results.
That is what we have prepared in relation to results for this quarter. Some new developments that we have announced or coming for due in the quarter are shown from Page 30 onwards.
We are progressing -- we are making progress in the MAPA -- sorry in the Valdivia project. This is the Dissolving Pulp Project that we are carrying forward in our Valdivia mill. As of July, the total progress is equivalent to 85%. Startup is expected for the end of this year. And just to remind you, this is a project that will allow the mill to have flexibility regarding the softwood pulp that is produced. So it will be able to switch from paper grade to dissolving pulp, which is another market where pulp is used for other final uses such as textiles.
On Page 31, we are giving some information regarding our MAPA project. In this case, the progress is 13%. Everything is going as planned. The earthworks that we are -- we had already started are on schedule and they show 60% progress. We have new stages now starting up, in particular, the civil and electromechanical works have started in July. This is a project that is now employing 1,300 people approximately, and we expect to peak at more than 8,000 people in August 2020. Everything is programmed and therefore, we continue to expect this startup of this line for the second quarter 2021, which is the time at which we will shut down the old line 1.
In the case of Mina Justa, which is shown on Page 32, once again, everything is going as planned. Progress at the end of March is more than 45%. This actually at the end of June, so this is the situation for the semester. 45% progress and everything within schedule and within budgeted CapEx. More than 5,000 people taking part in this process. Total CapEx, as we've previously commented continues to be around $1.6 billion and startup is expected for the end of 2020, so end of 2020, we should be starting up at Mina Justa. This is -- just to remind you, this is a venture where we have 40% of the shares. Controlling shareholder there is a Peruvian company called Minsur. This is a project located in the South of Peru, where we are expecting an average production of 150,000 tons per year for the first year and 115,000 in the total 16 years of expected operation.
And finally, on Page 33, just a brief thank you note. Our Investor Relations team here has been recognized with one of the top positions by the Institutional Investor magazine. So a good recognition for the hard work they made, and thank you all very much for -- if you voted for us. And also in an internal ranking here and internal contest, we have been proposed as finalists for the Alas20 contest and ranking in the 3 dimensions that I've listed there: corporate governance, sustainability and investor relations, all of which are dimensions that are extremely important for the company. We're making our best efforts to bring them to the highest standards. So these recognitions are very good and rewarding for the company.
With that, we're finishing the material that we have prepared for you, and we are opening up the floor for whatever questions you might have. Thank you.
[Operator Instructions] Today's first question comes from Thiago Lofiego of Bradesco.
Actually, it's Isabella here. I have a couple of questions. First, I'm sorry if you've mentioned this, I didn't quite catch it, but on the ExxonMobil integration, can we expect $70 million contribution already in 2020? Or do you expect it to be for 2021 only? And the second question regarding the Mina Justa project, have there been any resistance from local communities at all? And if you have an update on the licensing process, that would be great.
Okay. Thank you. Regarding ExxonMobil, as I said before, we have faced some costs in the initial development of this new venture. This cost relates basically to logistical adjustments due to some distribution optimization and also to some competitive reaction by the competition. It is still hard to say when we will be able to achieve the $70 million, but we definitely expect the figure to be above $50 million for this year already and then trending towards $70 million as we initially expected. It's hard to say because we cannot anticipate how competitors will be reacting or how quickly we will be able to optimize our logistics, but we continue to hold those $55 million or $50 million for this year and then trending towards $70 million.
Regarding Mina Justa, no surprises and no negative news so far. We have all permits in order there. And as we said, we are already at 45% progress. This project is relatively low risk, we think, in terms of contingencies. And we continue to expect total $1.6 billion figure for the CapEx and a startup in -- by the end of 2020.
And our next question today comes from Antônio Heluany of Bank of America.
So my first question is regarding pulp. You mentioned on the outlook for Q3 like a challenging outlook on sales. So I wonder how are you planning to reduce your inventories by 3Q and Q4? And second question -- and how are you seeing the competition potentially shutting down the mines with cost that we saw for [ exporting ] 480 in China? So this -- how does that compare to margin on cost producers? And my second question, just a quick one on fuels. How much was the impact on the inventory revaluation in the quarter?
Let me hand it over to Gianfranco Truffello for the question about pulp.
Okay. Yes, I mean, our excess inventory is not that high. It's probably -- we are 100,000 tons difference from March and that is like 1.4 month of production. Normally, we have a little bit above 1 month, so it's not significant. And we have already reduced about 25,000 tons in July -- the sale of July. So we expect to sell a little bit more than production during the rest of the year and to normalize the level of inventories probably at the end of the year. I mean, it's not a big amount, and we should be able to do it.
And regarding the shutdowns, we haven't seen any big shutdowns in hardwood, nothing announced for shutdown of the complete mill. Of course, there's this announcement of Suzano of reducing their production at a rate of 9 million tons instead of the total capacity. We should see -- we could see some reductions in local Chinese pulp producers that are not integrated, as they don't have plantation, so they buy the fiber from countries like Vietnam, Australia, even Chile. And those fiber prices -- chip prices are very high, so that translates into a wood cost that is probably close to $400. So probably they are variable cost. The marginal costs are above the price of pulp right now. So I mean, they should be losing money at this point. And if the situation continues, we could see some shutdown of capacity of local production in China. That capacity is relevant. It's about 7 million tons. So that could have an impact in the supply of pulp in the coming month. Although we will need to wait a little bit to see what -- if that happens. But of course, it's a concern even for the clients of pulp because they don't want to have a sharp reduction in supply that could make their prices jump up faster than could be manageable for them. So we will see what happens during the rest of the year.
I'm taking it back for the fuels question. Yes, regarding the inventory revaluation, as I said, we had a very high basis in the second quarter 2018, amounting to somewhere between $25 million and $30 million for the quarter, $25 million and $30 million, somewhere between those figures for the second quarter of 2018. And that compares with a positive effect of approximately $6 million to $7 million for the second quarter this year. So still positive, but much lower than what we achieved last year for this concept.
And our next question today comes from Marcio Sid (sic) [ Marcio Farid Filho ] of JPMorgan.
Gianfranco, I just had a couple of follow-up questions. I know we spoke this morning during Arauco's conference call as well, but I mean, the PPPC reported very strong softwood shipments to China in July, right? It was up by 50%, which was very surprising. So just trying to understand if you think, looking forward, this trend can continue or we are going to be seeing a reverse into more hardwood versus softwood? And just thinking about your inventories, was the increase more concentrated on the hardwood or softwood side? And lastly, can you just remind us what is the latest price, net price, in China you are seeing for August for both hardwood and softwood?
Okay. Regarding shipments of softwood, I don't have the exact information that you're looking, and probably the higher shipments of softwood could be because of the temporary reduction in the gap that we have seen between those fibers and probably clients are trying to use more softwood as it is of more higher quality and for some products that they can do that, they can change the mix of fiber. But I don't have more information to tell you what is the long-term trend on that. That is softwood. Regarding the -- your second question was about?
Prices.
No, no, we don't have news about announcement in August yet. I mean, we still haven't closed with clients, so we cannot tell you about prices in August. But it's around $500 more or less than we have seen in -- sorry, in China, more or less $500 for hardwood. And for softwood, it's a little bit higher, $560, $570, more or less.
Ladies and gentlemen, I believe this concludes the question-and-answer session. I'd like to turn the conference back over to Mr. Rodrigo Huidobro for any final remarks.
Okay. Thank you very much for the attention today. We expect to get back to you at some point during November for the results for the third quarter of this year. Thank you very much.
Thank you, sir. Today's conference has now concluded, and we thank you all for attending today's presentation. You may now disconnect your line, and have a wonderful day.