With short fibre pulp now being sold for three or four times more than the commodity costs to make in Brazil, and with the price still rising, it is no surprise that the industry there is in a buoyant mood, writes Patrick Knight.
The long talked-of merger of the country’s two largest players, Fibria and Suzano, has finally come about, with Suzano agreeing to pay US$12 billion for the seven mills owned by Fibria. Suzano now becomes the world’s largest maker of short fibre pulp; the company owns 11 mills, with the capacity to make about 12mt (million tonnes) of pulp a year. This is 40% of the world’s total output of short fibre pulp which, following a steady rise in price in the past 12 months, is now sold for between US$750–1,200 per tonne, depending on destination.
Suzano will control 18% of total world short fibre pulp production, ahead of the share controlled by International Paper, whose mills can make 5mt (of the 7.5mt capacity of Indonesia’s ‘Paper Excellence’, which bid US$11.4 billions for Fibria’s assets). Paper Excellence, of course, is now the owner the Eldorado mill, which is adjacent to Fibria’s Novo Horizonte mill in Mato Grosso do Sul state, where a second line started up last year. A total of 300,000 tonnes was produced from Fibria’s new line in 2017, with 1.8mt to be made there this year.
Paper Excellence was prepared to pay much more for Eldorado than Fibria or Chile’s Arauco, which also bid. This is reportedly because the company, which has Chinese participation, was anxious to get access to Brazilian technology. Paper Excellence paid $2,800 per tonne of capacity at Eldorado, considered extremely high.
Some are surprised that theVotorantim conglomerate, owners of Fibria — a group formed following the merger of the mills owned by the VC company, with those of the Aracruz complex a decade ago — should decide to sell at a time when prospects for Brazil’s market pulp seem so good.
As well as being strong in pulp, however, Votorantim is the market leader in cement in Brazil, where it has more than 40% of the market. The company also mines bauxite and makes aluminium, as well as zinc and copper. It has recently sold its orange juice business, and is reportedly planning to invest in cement production in other countries. Perhaps it was wise to sell when the pulp price is so high. Demand from China, destination of 40% of the 16mt of pulp exported from Brazil last year, still continues strong. The average Chinese uses only 4kg of paper each year, most of it tissue, compared with the 24kg of each US citizen. So great potential still exists, as millions of Chinese move from the countryside to cities each year, and use more paper. Thirty-three new mills able to make tissue will start up in China in the next few months, and with world pulp stocks low, there was little resistance in China to the ten price rises which caused the price to rise by up 50% in 2017.
The price in Asia reached $750 a tonne, $140 per tonne more than it was a year previously. It has shot through the $1,000 per tonne barrier in the United States, and to $970 per tonne in Europe.
There had been some resistance to the sale by the JBS company of the Eldorado mill to Paper Excellence. Many hoped it would be bought by Fibria or Suzano and remain in Brazilian hands. It should be remembered that the fast growth of Brazil’s pulp industry of the past 40 years, was facilitated by low-cost finance made available by the National Development Bank, the BNDES. The BNDES identified pulp as being a commodity which Brazil could make and export at a profit, so decided to aid the industry. Beef, also produced by the JBS company was another commodity which has been helped by the BNDES. But several JBS directors have been prosecuted for financial wrongdoing in the past few years, after politicians and others were bribed, and two leading JBS directors have ended up in gaol. But the cash-strapped Brazilian government seems to have been prepared to overlook JBS’s misdemeanours, in its need for an inflow of foreign capital, to the detriment of the nationally owned sector which it previously defended so strongly.
One of the contenders for the presidency in elections to be held later this year, has strongly attacked the inflow of Chinese and other Asian capital into Brazil. Such investments have been concentrated in infrastructure projects and agriculture, and it is feared could eventually lead to the loss of control of key assets in agriculture and logistics.
With demand for pulp so strong, Suzano, and several other players, are planning to make major new investments. Suzano is considering duplicating two of its mills, at Imperatriz, located close to the Carajas railway in Amazonia, and at Mucurui, in Bahia state. The company has also recently taken over 90,000 hectares of eucalyptus forest owned by the Duratex company. Suzano owns the 400,000 tonne- capacity Limeira mill, in Sao Paulo state, and the extra forests could to supply a 1.5mt mill.
Klabin is to duplicate its recently built ‘Puma’ mill, one of the few able to make both long- and short-fibred pulp. It reported that several mills which now make long-fibre pulp, are considering switching mills to make the now more popular short-fibre pulp.
The Japanese-owned Cenibra company is to expand its mill in Minas Gerais state, where output could eventually rise to 1.3mt, while a third 1.8mt-capacity line may be added at the previously Fibria-owned mill at Novo Horizonte.
To ensure the market is not over- supplied, Suzano may close one of the elderly, relatively small and above average cost Aracruz lines, and some of its own high-cost capacity near Sao Paulo city, to ensure supply does not grow too much. Up
to 100,000 tonnes of high-cost production will be taken out of operation.
On the positive side, it is estimated that an extra 1.2mt of short-fibre pulp will be needed in China alone this year, and that prices could rise by an further 30% during 2018. This despite the fact that second line at the Novo Horizonte mill will near full capacity this year, and that the expanded RioGrandense mill, owned by Chile’s CMPC company, will also be re-started this year, adding 1.3mt to capacity.
As well as being used to make short- fibred pulp, eucalyptus wood has been used to make the charcoal needed by the iron and steel industry, and several million hectares have been planted to the variety in Minas Gerais and neighbouring Bahia states for this purpose in the past 30 years. But with demand for pig iron down sharply, as steel makers switch to electric furnaces which use scrap, rather than using pig iron as a main raw material, the pig iron price has collapsed, along with exports of what used to be a leading commodity for Brazil. A French company wants to sell 230,000 hectares of its eucalyptus plantation in Minas Gerais state, which would be sufficient to supply two or three new pulp mills.
As well as paper doing well, the rest of Brazil’s forest products industry has responded to the recovery in most world markets, and the renewal of demand from the construction industry. Production and exports of virtually all forest products, sawn timber, board, plywood and veneer have all been buoyant. The Swiss-owned ‘Precious Woods’ company, which owns 500,000 hectares of forest in Amazonia, as well as plantations in Gabon, and which exports 140,000m3 of 45 types of tropical hardwood a year, is to expand to meet growing demand. Precious Woods says that only 7% of all tropical wood is certified as renewable, but as public concern about sustainability increases, demand is growing strongly. The timber is placed on rafts in Manaus, then taken downstream to Belem, from where it is shipped abroad.
There is concern that the cutbacks to government spending and activities in the past three years, when the Brazilian economy declined by 6%, has meant that policing in the Amazon region has fallen, allowing illegal logging, as well as gold mining, to grow. With Brazil’s economy, as well as exports, increasingly dominated by mining and farm sector goods, the strong farming lobby has been almost completely unchecked, and protected areas, and Indian reservations, are under increasing pressure.