Brazil is top of the tree in tale that is no pulp fiction

Brazil is top of the tree in tale that is no pulp fiction:
Faster-growing wood and lower production costs are luring paper-makers from Europe and North America, writes Raymond Colitt

Financial Times, 21 June 2005, page 20


When executives from StoraEnso, the Scandinavian paper company, came to Brazil’s Bahia state in May to visit Veracel, the recently completed Dollars 1.2bn (Pounds 655m) joint-venture cellulose plant, their jaws dropped.

“In Finland it would take a tree eight times as long to grow that tall,” said Kari Vainio, vice-president for communications at StoraEnso, pointing at a eucalyptus plantation. One hectare in Bahia produces 50 cubic metres of wood a year, against 5 cubic metres in Scandinavian countries.

The launch of the Veracel plant underscored the emergence of Brazil’s pulp and paper industry as the world’s lowest-cost producer. It has also highlighted, to an industry battling with overcapacity and low prices, the allure of countries where trees grow faster.

Pulp production has grown rapidly in countries such as Indonesia, South Africa and China. But few can compete with Brazil’s production costs. At Veracel they are Dollars 120 a tonne, against Dollars 320 in North America and nearly Dollars 400 in Scandinavia, according to Agora Senior, a Rio de Janeiro brokerage.

As a result, operating profits at Brazilian paper companies averaged between 25 per cent and 35 per cent of sales last year, far more than the 4 per cent return by StoraEnso, the largest maker of paper and board.

It is the prospect of such returns that has encouraged investors to plough billions into new pulp facilities in Brazil. Over 10 years, output in Brazil increased 74 per cent to 9.4m tones in 2004, a trend set to continue.

Glauco Affonso, operations vice-president of StoraEnso in Latin America, said: “We expect hardwood pulp production in coming years to be moving from Scandinavia and North America to low-cost producers in the southern hemisphere.”

Another StoraEnso official said: “Were it not for labour unions at home, we would be moving all of our production capacity to countries like Brazil.”

StoraEnso has been in dispute with Finnish unions over use of outside labour and plans to keep mills running during public holidays in an attempt to cut costs.

While the Scandinavian industry struggles to improve profitability, Brazil’s producers are expanding rapidly. Suzano Bahia Sul, the country’s pioneering paper producer, is to invest Dollars 1.28bn to increase capacity of pulp and paper by 1m tonnes a year to 2.4m tonnes a year by 2008.

International Paper is considering investing Dollars 1bn in a green-field plant in Mato Grosso do Sul state, where it has 100,000 hectares of forest reserves.

Of the expected 8.2m tonnes of additional capacity likely to come on stream by 2008, 7m will be in Latin America and much of that in Brazil, says investment bank Smith Barney.

But setting up shop in Brazil is not easy. Inadequate infrastructure, red tape, inequality and environmental regulations are challenges for the big players.

The “landless movement”, a peasant lobby group, last year invaded Veracel’s property, demanding swifter land reform by the government.

In May this year an Indian tribe claiming ancestral land rights invaded the property of Aracruz, StoraEnso’s partner in Veracel.

Veracel has turned to the United Nations Development Programme for guidance on land reform and other projects. Veracel also works with several environmental groups on researching planting tropical
rainforest, which in southern Bahia had been almost destroyed by the late 1980s.

Zeila Piotto, Veracel’s environment and quality manager, said: “We are delving into uncharted territory; nobody knows whether you can plant a tropical rainforest.”

The company has had to invest about Dollars 26m in infrastructure, including roads and its own port. Jorma Kangas, project manager at Veracel, said: “There was nothing but trees when we arrived here.”

From Veracel the pulp is shipped hundreds of kilometres south to a deep-sea port to be sent to the US or Europe.

In spite of the transport difficulties the pulp that arrives in Finland is
cheaper than that produced at home.

In the long run low-cost pulp producers such as Brazil should capture market share. Higher-cost US and European producers, confronted by large amounts of cheap pulp threatening to flood the market, face a long struggle to cut raw-material and labour costs.

In a report Smith Barney said: “In our view the market will have a difficult time absorbing this capacity, and pricing will come under further pressure.” It is forecasting a price of Dollars 540 a tonne by the end of next year against Dollars 640 in the first quarter of this year.

Little wonder then that the big pulp and paper producers are thinking about expanding - in Brazil.