Paper

If you hear the word ‘Brazil’, what images spring to mind? Total football? Sexy samba dancing? Sun-kissed bodies lounging on Copacabana beach? Pulp? Shocking as that last suggestion might currently sound, in a few years’ time, pulp might be as closely associated with the country as those other distinctly Brazilian exports – at least according to the global forest, paper and packaging team at professional services organisation PricewaterhouseCoopers (PWC).

In a recent report entitled ‘Risks and Rewards: Forest, Paper and Packaging in South America’, the firm identified South America – and Brazil in particular – as a rapidly growing player in the global pulp market.
The reason behind its assumption is earth-shatteringly obvious: the continent has one of the richest forestry resources on the planet (21% of the world’s global forest area to be exact, totalling 832m hectares). It also has a favourable climate, fertile soil, abundant land and some of the lowest wood fibre costs in the world.

So why isn’t it already a major player? According to Clive Suckling, UK forest, paper and packaging leader at PWC: “Careless and often extremely wasteful exploitation of these forests due to issues such as growing populations, the spill-over of the region’s social inequalities, misguided policies and unchecked agricultural and timber harvesting practices have led to significant deforestation in most countries [in South America].”

Lack of protection
Despite government intervention through the introduction of new laws and regulations, which have seen legitimately harvested timber from native forests reduced, deforestation continues today though at a slower pace than in the past. According to Food and Agriculture Organisation of the United Nations data, during the period 2001-2005, Brazil had the highest level of deforestation in the world with an average annual net loss of 3.1m hectares – an area equivalent in size to Belgium. The problem primarily stems from a lack of resources to enforce laws protecting the forests.

However, hopes were raised in 2000 when the Brazilian government introduced a framework for sustainable forest management. Under the new programme, those licensed to harvest native forests must present plans demonstrating the sustainability of their activities. Problems still exist, but it appears as if the situation is not as bad as it once was.

The government has also introduced incentives to fuel investment in sustainable plantations to meet the region’s rapidly growing wood needs, with phenomenal results. In 1990, the plantation roundwood harvest totalled 66m cubic metres, but by 2000 this had grown to 100m cubic metres, and by 2006 to a whopping 156m cubic metres – the plantation area equalled around 5.7m hectares last year ranking Brazil in seventh place on the list of countries with the largest areas under plantation, with China currently top.

Brazil also has the largest area of certified forest in South America. In 2006, 1.6m hectares of the 3.1m hectares of forest controlled by the Brazilian pulp and paper industry had been certified through either FSC or the Brazilian Forestry Certification Programme (CERFLOR), which is recognised by PEFC. As in most parts of the globe, the cost and effort of achieving certification has hindered take-up by smaller companies with larger firms driving this growth.

While the return on investment argument for certification schemes may not stack up for some companies, where it does stack up is in the purchase of the latest processing technology. As the industry is relatively new, most of the equipment is state of the art and this has has enabled the country to create a competitively priced product.

In the final quarter of 2006, Brazil ranked second to Indonesia as the lowest cost producer of bleached hardwood kraft pulp, according to data from Resource Information Services Inc (RISI). (Chile came in third place). As a result of these low prices, Brazil has popped up on the radar of companies in Europe, North America and Asia. In 2005, Brazil exported $1.17bn worth of paper and paperboard representing 60% of South America’s total output. PWC’s Suckling believes that there is tremendous scope for growth of both exports and imports.

“With low annual per capita consumption of paper and board compared with developed countries, and rising incomes, domestic markets have room for substantial growth. Hence, if the region continues on its present course of economic progression and with the growth stimulus increasingly switching from export
markets to domestic markets, there will be a need to install more paper machines and converting capacity to meet local demand.”

At present, the key players in the South American markets are commonly local companies – there are currently roughly 220 companies engaged in pulp and paper production in Brazil. Major domestic companies like Aracruz, Klabin, Suzano and Votorantim Cellulose e Papel (VCP) lead the way on pulp, but a number of North American companies have also invested heavily in the region and more recently there has been a marked increase in European companies establishing a presence. The Smurfit Kappa Group has developed a pan-Latin American operation, and Norwegian firm Norske Skog has also entered the region thanks to an acquisition and is now the largest producer of newsprint in South America with operations in Brazil and Chile. Most of these companies have set up shop to serve domestic markets with their products but a recent trend has seen the likes of Stora Enso and Botnia recognise the opportunity to access the region’s low cost wood fibre to produce pulp for their own or their owners’ paper mills in Europe and Asia.

In addition to new mills and anticipated new pulp lines, it’s anticipated that further pulp capacity is to be generated thanks to improvements to existing production lines through investment in state-of-the-art processing equipment.

Suzano has a new pulp line scheduled to open later this year in Mucuri with an initial capacity of 1m tonnes per year planned, and improvements at Aracruz’s Barra do Riacho mill are scheduled to increase capacity by 0.2m tonnes per year by the end of 2007. In addition, VCPs intends to open a new pulp line in 2009 with an initial capacity of 1m tonnes per year.

Despite bullish moves from international firms into the region, that’s not to say that the area doesn’t carry risks. Brazil has been blighted by land invasions by social movement groups such as the Landless Workers’ Movement (MST), with Aracruz, VCP and Stora Enso all hit.

Economic uncertainty
A number of countries in South America have also experienced economic wobbles in recent years, which has caused many investors to rule the region out. Two recent reports bear these problems out. The last ‘Global Competitiveness Report from the World Economic Forum’ placed Brazil 66th out of 125 countries and in addition, the World Bank’s recent ‘Ease of Doing Business’ report ranked Brazil 121st out of 175 countries.

“In short, there are important risks and challenges to doing business in Brazil associated with institutional, infrastructure and broad economic factors,” warns Suckling. “These are factors which Brazil must overcome to lever its natural advantages and the vibrancy of its private sector to spur higher economic growth and to stimulate healthier domestic demand.”

Despite these reservations, Suckling predicts a bright future for the region. “Although there are obviously some serious challenges still to be resolved, especially in the areas of infrastructure improvements and land availability, South America occupies a very attractive position for both continued domestic and foreign investment.”

The above information is taken from PricewaterhouseCoopers’ report ‘Risks and Rewards: Forest, Paper and Packaging in South America’. To download a copy of the report, visit: www.pwc.com/fpp

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BRAZIL'S PULP RIVALS

Argentina
South America’s second largest country boasts around 33m hectares of forest including 1.2m hectares of plantations. The Argentine Forestry Association estimates that the current plantation rate could be as high as 50,000 hectares per year with sources suggesting that an additional 20m hectares could be made available. The country already has 30 pulp and paper mills with a combined pulp output of 950,000 tonnes per year. However, a hindrance to the sector’s growth is the mounting tension between Argentina and Uruguay over the construction of a large modern pulp mill on the Uruguayan side of the river bordering the two countries.

Chile
With one of the strongest economies in South America, it’s little surprise that Chile attracts substantial foreign investment and is close on the heels of Brazil in terms of cheap pulp prices. Native forests extend to around 13.6m hectares with around 2.1m hectares of plantations. The nation’s forest products industry is dominated by two companies: Arauco and Empresas CMPC. Both have expanded into other countries, primarily in Latin America. Despite stringent environmental standards, the nation’s pulp industry suffered a blow after two of Chile’s newest mills were accused of breaching water emissions standards.

Colombia
Despite boasting the third-largest native forest reserve in South America, the country’s pulp industry has shown little sign of development compared to others in the region. However, this means that there is significant scope for growth and this fact has caught the attention of overseas firms such as Smurfit Kappa, which owns 70% of Smurfit Kappa Carton de Colombia, the country’s largest paper company, and tissue companies such as Kimberly Clark.

Uruguay
The Uruguayan government has promoted forest plantations in the country by granting tax benefits to landowners since the late 1980s. It has also welcomed foreign investors, which has seen companies from Spain, Finland and the US – among others – take the plunge. However, there is an ongoing row with Argentina over the creation of a huge pulp mill located close to a major river crossing. Despite numerous reviews by international bodies looking at the impact of the mill, all have ruled in the mill’s owner, Finnish company Botnia’s, favour. Uruguay has a plantation area just under 1.5m hectares and
has an annual planting programme averaging 50,000 hectares.