Pulp mill expansions on hold - fears that possible overproduction will lead to price falls

The risk of overproduction and a consequent fall in prices, has resulted in two of Brazil’s three leading producers of market pulp delaying expansions.

Fibria, the company formed by the merger of Aracruz and VCP and now the world’s largest pulp producer, has postponed expanding its mill in Mato Grosso do Sul, while Suzano, which will start up its new 1.5mt (million tonnes)-capacity mill in the north east at the end of the year, has delayed making a start work on a second mill planned for the area.

On the other hand Eldorado, part of the JFS group, which also owns JBS, the world’s largest meat packing company and whose 1.5mt mill in Mato Grosso do Sul started up at the end of 2012, plans to start building an even larger second line there next year.

Eldorado will be aided by low-cost finance from Brazil’s National Development Bank, the BNDES. The new line, to make 2mt, would allow Eldorado to move ahead of both Fibria and Suzano to become the world’s largest maker of market pulp.

Suzano, which has postponed starting work on a sister mill to the new one at Imperatriz, in Maranhao state and located alongside the railway which links Vale’s Carajas mines, to the port of Itaqui, worries that a second large new mill in Mato Grosso do Sul will cause the price of market pulp to fall.

Cellulose prices are already under pressure following the start up of Eldorado’s first mill at the end of last year, and the start up of Suzano’s new mill, together with one being built by Stora-Enso and Chile’s Arauco in neighbouring Uruguay, could make things worse. About 1.5mt of additional market pulp is needed each year, to meet growing demand, but these mills will add more than that. On the other hand, some elderly mills in Europe, North America and Brazil itself, close down each year.

With the future of demand in key market China uncertain, many in the industry fear the world pulp price could fall to the point that no Brazilian company makes any money.

Suzano has suggested that because of this risk, the BNDES, which has lent pulp companies about $7 billion in the past few years, should step in and ‘organize the queue’ of companies planning new mills.

Fibria, which like all Brazil’s pulp makers depends largely on finance from the BNDES, says it favours further consolidation of Brazil’s still fragmented pulp industry. It probably has a merger of Fibra and Suzano in mind.

Eldorado’s sister company, JBS, has bought dozens of meat packing companies around the world, largely with finance from the BNDES. JBS is often criticized for using the funds to invest abroad, rather than in Brazil. But Eldorado executives says the companies themselves should be allowed to decide when they invest, rather than the Development Bank.

For some years, the BNDES has systematically sought to identify Brazilian industries which have the potential to compete on the international stage. Both the pulp and the meat industry have been singled out.

Without low-cost financial aid from the Bank, neither Brazil’s pulp nor its meat industry would be anywhere near the international force they have become today.

The prospects for Brazil’s pulp industry have improved greatly in the past few months, following the 20% devaluation of the currency, the real, so far this year.

The real rose by about 40% against the $US dollar and other currencies between 2004 and the middle of last year. This made exporting more difficult and cut profits.

During those years, the cost both of building new mills and operating them also rose sharply in Brazil, following sharp rises in wages, the cost of transport, and of land and energy.

Rising costs threatened Brazil’s previously unchallenged position as the world’s lowest-cost producer of market pulp.

If on the one hand, mills are benefiting from the weaker real, those companies which have borrowed in US dollars to fund their expansions, are having to pay much more for their loans.

The giant Klabin company, a leading exporter of packaging paper, made largely from pulp made from pine, rather then the 100% eucalyptus used by the other pulp companies, plans to spend about $2.3 billion on building a 1.5mt-capacity pulp mill in Santa Caterina state. But Klabin scrapped plans to raise $500 million in a rights issue recently, following little interest from potential investors.

Klabin, a leading supplier of the Tetrapak company, both in Brazil and abroad, also plans a new paper machine to transform much of the extra pulp into packing for liquids, demand for which continues to grow fast.

The future of Brazil’s pulp industry depends to a great extent on what happens to the Chinese economy, as China has been the leading single market for Brazilian pulp in the past few years.

EU members and countries in North America are still more important customers for Brazilian pulp than China. But demand in these areas has been static in the past few years.

The average Chinese citizen now uses only 2.7kg of paper each year and the prospect of this rising to close to the world average of about 20kg, is a major attraction.

Numerous paper mills have been built in China in recent years, but an increasing proportion of the pulp they need has to be imported. There is tremendous competition in China from grains and other crops for any spare land and above all, for the water needed for plants to do well.

Even if the cost of labour continues to rise in Brazil, the country continues to produce more wood per hectare of land each year than anywhere else, and there is no sign yet of these increase in productivity slowing.

The number of trees planted per hectare, all of them now cloned, has been increasing steadily in recent years. Rather than trees being allowed to re-sprout after a first cut at seven or eight years, previously the norm, stumps are being grubbed up, or herbicides applied, with new, higher yielding stock planted in its place.

Experiments are now under way with introducing a gene from other species of tree, which tests indicate can increase yields by a further 20%.

Close to seven million hectares of land are now planted with commercial forest in Brazil.

Almost half this is owned by the pulp and paper industry, with much of the rest owned by the iron and steel industry, which relies on charcoal for much of its energy. Brazil has only small reserves of coking coal, so has to imports much of its needs.

The varieties of eucalyptus used by the iron and steel industry have more energy potential than those needed to make pulp and paper.

A massive structure from UK company Rubb Buildings Ltd, is keeping a range of timber products safe and dry for Northern Ireland company Tradewood & Co.

Based in Belfast,Tradewood & Co needed to store a range of timber products — including doors, flooring and plywood — for distribution throughout Ireland and the UK. So it turned to major supplier of enclosed storage systems, Rubb Buildings Ltd. Rubb custom-built a massive structure; with a 332ft (101m) span × 312ft (95m) length, the Triple Link BVE provides a floor area of 9,595 square metres. On completion of the main structure the client added a 320m² mezzanine floor to provide office space.