Pulp fiction? - getting the facts on the pulp and paper market

Several new pulp mills will start up Brazil in the next few months. But excess supply may cause prices to fall, particularly if China decides to buy less.

At first sight, all seems to be going well with the pulp and paper industry both in Brazil and neighbouring Uruguay.

Output is being stepped up at the brand new ‘Eldorado’ mill in Mato Grosso do Sul state, where the world’s largest single line mill started up at the end of last year.

Eldorado expects to churn out 1.5mt (million tonnes) this year, close to its capacity, and plans to take output to 1.7mt after de-bottlenecking.

Stora-Enso, a partner with Fibria in the Veracel mill in Bahia, will start up its 1.3mt mill in Uruguay in partnership with Chile’s Arauco company in mid year.

Towards the end of 2013, Brazil’s second largest pulp maker, Suzano, will start up a 1.5mt-capacity mill at Imperatriz in Maranhao state, the first of two mills Suzano plans to build in the north east.

Giant packaging company Klabin has made a start on a new 1.5mt pulp plant, to be built in Parana state at a cost of US$3.4 billion. Soon after Klabin’s new mill starts up, a new 400,000- tonne paper machine will start turning much of the extra pulp, to be made from a mixture of both long fibre pine and short

fibre eucalyptus pulps, blended into tough packaging paper. Chile’s CMPC company, which two years ago bought the 450.000 tonnes capacity Guaiba mill near Porto Alegre, Rio Grande do Sul from Fibria, is to push capacity there up to 1.7mt by 2015.

Eldorado says it plans to build a second and possibly a third line at its mill in Mato Grosso state in the next few years, although it remains to be seen whether this actually happens. The markets will decide.

All in all, the mills under construction or planned in Brazil and Uruguay, will produce an extra 6mt of pulp in the next 18 months. Last year, 8.9mt of the 13mt made in Brazil and in 2011, was exported.

The total world market for the short fibre pulp made from eucalyptus, Brazil’s speciality, now totals about 100mt. Demand is now growing by about 2% a year.

Analysts say there is not space for more than one large new mill each year.

If more than about 1.5mt of extra pulp comes on the market, which could happen in 2013, prices could tumble.

On the other hand, several high cost mills in Europe and North America have closed down in recent times, as has the 450,000 tonnes a year Jari mill in northern Brazil.

The Jari mill is to be re-built, and will produce about 250,000 tonnes of soluble pulp a year when it starts up again in a few years time.

Exactly what will happen in the next few years to the economy in China, now the customer for more than a quarter of Brazil’s market pulp, is a worry. Also unclear is whether the economies of EU members, which between them buy almost half of Brazil’s pulp and pay much more for it than the Chinese do, will recover any time soon.

These fears are delaying plans by Brazil’s largest pulp maker, Fibria, the company resulting from the merger of Aracruz and Votorantim four years ago, to build a second line at its Tres Lagoas mill in Mato Grosso do Sul.

The year 2012 was a difficult one for the Brazilian exporters. The average price of the pulp shipped last year, $526 per tonne, was 6% less than it had been in 2011.

The situation improved slightly towards the end of last year and at the beginning of 2013, when three price rises were forced through.

Because the Brazilian currency lost 14% against the US dollar last year, companies are now receiving more in local currency for their pulp than they did when the Real was stronger, which helps.

But although the weaker currency aids export sales, it also makes servicing the large borrowings the mills made to pay for the new mills much more of a burden. So a devaluation is a mixed blessing for the pulp industry.

The leading customer for the pulp made at Fibria’s ‘Tres Lagoas’ mill in Mato Grosso do Sul, International Paper, is considering building a second machine to make printing and writing paper there. But Fibria, whose financial position has not yet entirely recovered from the effects of hedging operations which went badly wrong back in 2008, continues to be cautious, and has not yet given the go ahead to an expansion at its Tres Lagoas mill.

Fibria executives suggest that a new round of mergers might make sense for Brazil’s pulp industry, as it would allow further economies of scale and synergies to be achieved.

Productivity continues to rise in Brazil’s forests, where more than 40 cubic metres of wood is added to each hectare each year, at the newest plantations.

This high yield compares with less than 20 cubic metres per hectare/year a decade ago, and is twice as much as anywhere else. But the cost of everything else in Brazil, labour, land, fuel, transport and chemicals have all shot up in the past few years.

As a result, Brazil is no longer the world’s lowest cost pulp producer, the crown having been lost to countries in Asia.

A study by the Poyry consultancy suggests that if technological advances continue, a hectare of forest in Brazil could produce an unbeatable 70 cubic metres of wood each year, but costs are expected to continue to rise.

The Suzano company, which has had difficulty raising the last tranche of the US $3 billions its new mill in Maranhao will cost, has been selling surplus assets, as has Fibria. Suzano has now shelved plans for a second, twin mill for the north east. The second mill, to be built in the state of Piaui, will also be located alongside the North-South railway, a branch of the Vale’s Carajas line. All Suzano’s pulp will be shipped from the port of Itaqui, where Suzano is building storage facilities.

The journey from Itaqui to Shanghai takes two or three days less than that from Santos, or from Aracruz’s Portocel. The shorter journey time helps explain Suzano’s enthusiasm for the north east, where another new company planning to make pulp in Brazil, Braxcell wants to build a new mill.

The first generation of modern mills in Brazil, such as the three lines at Aracruz, built in the 1980s, and 90s,Votorantim’s Jacarei and Suzano’s Muruci mill in Bahia, get wood from plantations about 50km from the mills. This cuts the cost of transport to a minimum.

But the new mills have to bring wood far further than that, while the two in Mato Grosso do Sul, have to transport the pulp they make 1,000km to Santos by train.

If the future is cloudy for the pulp makers, the difficulties facing the paper industry are equally, if not more severe at the moment.

Brazil’s 200 or so paper mills now make about 10mt of paper a year.

Brazil’s per capita consumption continues to be a relatively low 49kg a year, well below that of neighbouring Chile and Argentina, let alone countries in the EU or North America.

While two thirds of the 13mt of pulp now produced each year in Brazil is exported, only about 10% of the paper made in Brazil goes abroad. The great majority of that is sold to other countries in Latin America.

Even though each Brazilians read relatively few newspapers, magazines or books, the import duty on the newsprint and other papers needed for this purpose is kept extremely low. One result of this is that making newsprint in Brazil has never been profitable.

A decade ago, Brazil spent about $400 million on importing 300,000 tonnes of newsprint, as well 200,000 tonnes of paper of other kinds each year.

In addition, half a million tonnes was packaging paper, about half of it made by Klabin from a blend of short fibre produced in Brazil and long fibre, some imported.

A high proportion of the packaging is high value packaging for liquids.

Last year, about 1.4mt of paper were imported, less than half of which was really use for what may be described as ‘literary’ purposes. U p to half the paper imported was used to produce the colourful advertising inserts which now come with the newspapers and magazines sold in Brazil.

To discourage this trade, the import tax levied on the paper subject to duty has been raised from 14% to 25%, and any ‘non- eligible’ paper has to be labelled as such.

Much of what is imported comes from China, much of it made there from pulp imported by China from Brazil.

In the past 20 years Brazil has instigated 55 anti-dumping procedures against China at the World Trade Organization. But until now, China has felt it wise to co-exist peacefully with its trade partners, so has taken no retaliatory action.

But last year, the Chinese authorities claimed that the soluble pulp for making textiles they imported from Brazil, cost much more than the same produce was sold for in Brazil itself.

An anti-dumping action against Brazil is now under way, seen as a retaliation for the restrictions on imports of paper from China.

Demand for the various types of packaging paper made by Klabin and other companies continues to grow far faster than the Brazilian GDP, as consumer durables become more accessible to more Brazilians.

Demand for most types of paper has grown very little in the past few years, output having remained steady at about 10mt, with any increase being supplied by extra imports.

Although slightly more wood, and wood products were exported from Brazil last year than the 3.1mt of 2011, this was still just over half the 6mt exported in 2007 and some earlier years

Eighty per cent of the 10 million cubic metres of timber produced from Brazil’s forests each year is used on the domestic market, mostly for construction purposes, or for making furniture.

The United States used to be the leading market for Brazilian timber, and it remains to be seen whether the beginnings of a return to growth by the construction industry there will result in a growth in exports in the near future. About half of exports originate from the Amazon region, the rest comes from planted forests in the south.