A cross-section of industry observers examines the region’s fiber benefits, business conditions, and paper plans

Latin America Re-Emerges, Poised For Pulp Expansions

In the past two years, however, financial problems in key countries, notably Brazil, coupled with weak global markets for pulp and paper, have slowed down the investment binge. But with prices headed up for key commodity products, particularly for market pulp, and with some improvements in the health of key economies in the region, the prospect of resurgence in capacity expansions is again a topic of discussion.

To date only a modest amount of new capacity is confirmed. According to a recent report from Morgan Stanley, capacity additions in Latin America over the 1999-2001 period will total just 0.3% of global capacity. The largest gains are in containerboard, where an additional 415,000 tons are planned and in market pulp, where 173,000 tons of additional capacity is projected. However, the report notes that this level of investment shouldn’t be viewed as alarming and should not unsettle pulp and paper markets. It’s a much more modest pace of expansion than what occurred in the early 1990s. And coupled with the fact that Asian expansions are slowed to a crawl, this means that during the next two years global capacity growth is modest as well.

While there have been numerous proposed expansions in several countries, only a handful will get past the review of company management boards, the Morgan Stanley report concludes. In particular, it notes that of the seven major pulp expansion projects (those over 100,000 tpy), only two have a greater than a 50:50 chance of being implemented in the next couple of years.

Among the most likely, according to the report, are pulp projects by Aracruz (700,000 tpy), Bahia Sul (100,000 tpy), and VCP (400,000 tpy). CMPC, Veracel, and Arauco have also proposed expansions. In addition, Champion International has proposed a new uncoated freesheet machine, but the project is on hold according to various reports. Even if two of the probable expansions do go forward, it would increase global market pulp capacity by only 2.9%.

The expansion at Aracruz receives considerable attention since it is well known that the mill has already invested in certain infrastructure that makes the expansion easier. However, PPI This Week reports the company has strongly denied reports that it has given the green light for the proposed 700,000 mtpy pulp line project. The company has completed feasibility studies for the project, but supplier contracts and financing details have not yet been finalized. The Brazilian producer puts the total project cost at $850 million.

The following summarizes other projects currently underway in the region:

Riocell has started a $125 million project at its Guaiba mill in Brazil to boost pulp capacity by 70,000 mtpy to 370,000 mtpy by 2001.

Votorantim Celulose e Papel (VCP) is pushing forward with plans for a new bleached eucalyptus pulp line at its Jacarei mill in Brazil. The company’s board is to make its final decision on the new pulp project before the end of the second quarter. The company now estimates the project to cost $530 million, with startup in mid-2002.

Champion International is currently rebuilding the No. 5 uncoated free-sheet machine at its Mogi Guacu mill. The major rebuild, postponed last year, includes a new Voith Sulzer headbox and Speedsizer, as well as a new steam box. The $49 million project included an earlier rebuild of the No. 4 paper machine.

BRAZIL’S OUTLOOK IMPROVED. According to the Brazilian Pulp and Paper Producers Association (Bracelpa), the Brazilian industry is on the road to recovery. The industry had a trade surplus of $1.5 billion in 1999, a 58% increase over 1998. Pulp and paper exports in 1999 totaled an estimated $2.2 billion, up 14% over the 1998 level. At the same time, imports dropped sharply, down 25% to $797 million, owed partly to depreciation of Brazil’s currency.

The financial problems plaguing the region also led to a series of clashes over Brazil’s exports. However, agreements capping exports for products such as uncoated woodfree papers and newsprint to Argentina at 1998 levels were signed during 1999.

Trade is a key for many mills in North and South America. The U.S. is a major exporter of containerboard and pulp, while it imports uncoated free-sheet and hardwood pulp. U.S. imports of uncoated free-sheet from Latin America, mainly from Brazil, were off 9% through November 1999 at 127,000 tons. U.S. imports of chemical pulp from Latin America were down 4% through September, at 546,000 tons. Pulp imports from Brazil were running 6% ahead of the prior years level in 1999, totaling 523,000 tons over the January to September period.

U.S. kraft linerboard exports to Latin America were down 4.4% through November 1999 versus 1998 levels, at a total of 952,000 tons. Exports of U.S.-produced chemical pulp to the region were down 1.7% at 771,000 tons through November 1999.

A PRODUCER PERSPECTIVE. To offer some insight into the direction of a key Latin American producer, Pulp & Paper interviewed one of the region’s leading executives, Carlos Aguiar, CEO of Aracruz. Aracruz operates one of the largest pulp mills in the world, and in 1999 produced a record 1.26 million mtons of eucalyptus pulp. With one of the world’s lowest cost mills—the average production cost in late 1999 was $244/mton—the company has risen quickly to be a global pulp player.

Pulp & Paper: The global pulp market seems to be recovering at this point. What is your view of the overall pulp market and Brazil’s place in it, both in the short term and long term?

Aguiar: The market pulp business looks strong, particularly into the second and third quarter of this year. And I believe the current strength is expected to carry through to the end of the year and possibly beyond. Supply and demand are in good balance, and the slowing of capacity growth—with few major projects currently underway—bodes well for producers. However, we certainly have to avoid a run-up in prices similar to what occurred in 1995, and we need to monitor supply and demand closely to ensure this.

In terms of the market for Brazilian producers, our low-cost position—due to low wood costs—improves our global competitiveness. In particular, the devaluation of Brazil’s currency gave a boost to its already globally competitive position.

P&P: What has helped your company’s performance, and looking forward, do you have any plans to integrate some of your pulp operations into paper production?

Aguiar: The company’s business has been solid, with a strong market for our product in all areas of the world. As a percentage of sales, our shipments break down to 35% into North America, 40% into Europe, and 17% to 18% in Asia. The recovery in the Asian markets has certainly helped our business by improving demand. In addition, the integration into paper production by pulp mills in Asia has helped the market pulp market overall by reducing oversupply.

The strong demand in one grade in particular—tissue—has helped our company’s performance. Tissue is of one of our key markets because tissue producers favor the softness, absorbency, and good drainage of our eucalyptus pulp. As the use of high quality tissue—similar to that produced in North America—has spread to other areas of the world, demand for high quality pulp has grown as well.

As far as forward integration into papermaking, while Brazil’s mills, and our mill, are export-oriented in market pulp, we don’t see a compelling competitive advantage to integrate pulp capacity into printing and writing paper production. And given the size of a new paper machine, on the order of 300,000 tpy to 400,000 tpy, any such expansion would have to be partially export-oriented, since domestic demand couldn’t absorb such an increase.

P&P: What’s the outlook for the Brazilian economy?

Aguiar: Following our currency devaluation last year, everyone expected inflation to surge. However, inflation is under control, and it is expected to be only about 5% to 6% this year. Growth in Gross Domestic Product is expected to be 3% to 3.5%. Still there are some problems that need work, such as fiscal reforms, which are proceeding, but at a slow pace.

Brazil’s balance of payments after devaluation improved, and it was positive in January. So given these factors, the immediate future looks bright, and everyone is more optimistic now than last year. But the outlook also depends on financial conditions in the U.S. Talk of a plunge in the stock market has occurred, but we’ve been hearing that for five years.

P&P: What’s the outlook for paper stocks, and in particular, the stock for Aracruz?

Aguiar: In our case, following devaluation of our currency, our stock rose considerably, because it made our mill even more competitive. The devaluation provided a hedge for Brazilians. But in the last month, our stock price (ADR in the U.S.), which had been about $25, dropped to $21 to $22, mainly reflecting the overall weakness in pulp and paper stocks traded in North America.

I think that investors simply look at the growth offered by technology stocks and believe they are better investments. Our overall return to shareholders has been better than many competitors, and this year the return should approach the level it needs to be for such a capital-intensive industry.

A CONSULTANT’S PERSPECTIVE. While widely known for its fiber and the global export of pulp that comes from it, producers throughout Latin America are increasing their paper production as the various economies in the region strengthen. Longtime North American paper industry consultant Charles P. Klass, president of Klass Associates, works with a number of coated and uncoated paper producers in Latin America and talked with P&P about some of his experiences and perspectives on the region.

P&P: The news from the paper industry in Latin America typically centers around pulp because of the fiber resources from countries such as Brazil, Chile, Argentina, etc., and the exports that are coming from those countries. But how has the paper side of the business changed in the region?

Klass: One of the things that has driven the industry overall is the loosening of import regulations, particularly in Brazil. Prior to that change, local producers had a protected market. A few producers had improved their paper quality, driven by the desire to tap into demand from global markets. For example, uncoated free-sheet producers were able to develop a sheet that could meet high-end copier specifications, so when supply and demand worldwide was out of balance, we saw a lot of cut-size and uncoated free-sheet papers coming from areas like Brazil, but not a lot going in the other direction.

When the import restrictions were changed in Brazil, suddenly higher quality papers—coated papers and text and cover grades—began showing up, especially from European producers. But there are also Korean producers selling high quality coated papers into the market with aggressive marketing, just as they are doing in other areas of the world. My personal belief is that this has driven the upgrade to global quality with producers undertaking such things as double-coating projects, manufacturing film coated offset grades, etc.

In some of the more developed areas of Latin America, there has been a general upgrading in the types of papers used. The quality of printing has increased dramatically in the last decade or so. There is a large youth culture in some of the larger cities, with people much more attuned to color and fidelity. This pushes the need for high-quality graphic packaging and more advertising.

The same developments that began in Europe and spread to North America are now moving into Latin America, including double-coated and triple-coated grades. I won’t say that premium coated papers have become a commodity, but that market has become a track meet. When the high jump bar goes up, if you don’t get over it, you’re out of the running. There is a recognition that producers there really need to upgrade their equipment and their capabilities to compete.

P&P: When it comes to papermaking, what are some of the challenges that are being overcome in Latin American?

Klass: First, producers are getting better at using the local materials. For example, a couple of producers have recently installed onsite precipitated calcium carbonate (PCC) plants. Imerys is supplying locally made ground calcium carbonate (GCC) to producers that has excellent quality.

And there has been a challenge in learning to use the Brazilian clays, but the local producers of kaolin have made great strides in upgrading their product. For example, those clays have a little more yellow in them than those from Europe and North America. Some of that has to do with the kaolin ore, but probably more so in the way they process it. When the European imports came in, they had more of a blue/white shade, and therefore the printing didn’t look the same. Users found that their ads looked better on that type of sheet, so the market has shifted toward it. The clay suppliers have improved their capabilities and have met the challenge.

A second challenge is whether the local producers in Latin America can compete with the high quality sheets coming from other areas of the world. Those sheets generally include a base sheet made from a blend of Northern softwood and Northern hardwood. You can’t make exactly the same base sheet out of eucalyptus. But what you find is that the printers down there adapted very well to what was coming in from Europe, and they know how to run the local sheet. So if local producers can improve the surface quality—i.e., brightness, gloss, smoothness, ink receptivity, etc.—then the printers down there will run it and probably favor it. A lot of their challenge and an area where they are doing a great job is learning to make and optimize a base sheet based on the fibers they have.

Latin Americans have a fiber that has some pretty good bulking properties, and it typically has good formation. If you configure your paper machine right, you can make very good paper out of it. Producers there have gone from using fourdriniers to using top formers. They’re configuring their machines to get the most out of the fiber that they have.

P&P: What are some of the distinct advantages you see for Latin American producers?

Klass: Fiber is their best resource. If you look at the new pulp mills, they are huge and state of the art, and those producers go after the export markets. If you truly want to be the low-cost producer of bleached kraft pulp, you probably want to be located somewhere along the Amazon Basin or Indonesia, primarily because the wood costs are so low. The one thing that you can’t get over is the cost of fiber.

Critics talk about the fact that the local labor is cheaper, but that doesn’t mean much with a super-automated operation. The issue of lax environmental regulations is also a myth for most of the more developed countries. In Brazil, from my experience, producers face just as tough of an environmental situation as North American producers do. The rivers might not be as clean yet, but they are putting pressure on industries to clean them up. And if you build a new mill or expand down there, it’s going to have the best technology.

Process control technology is another area of great advancement for them. The application of process control technology has been very swift in the past five or 10 years. Yes, in some of the smaller countries there are small operations that installed second hand equipment from Europe or North America, but that’s not true of the real market leaders.

From an end product standpoint, they focus on their own markets. Then in an intermediate market such as market pulp, they take advantage of their resource and make a good product they can ship to the world. So I think you’ll continue to see a lot of fiber come from South to North, but in the foreseeable future, I don’t see as much paper coming from South to North, except during imbalances in supply and demand. Opportunistically, when they can make money on a product, you’ll see them shift to exporting that product.

A SUPPLIER’S PERSPECTIVE. From an equipment and services viewpoint, the promise of greenfield operations in Latin America has provided some hope that suppliers couldn’t necessarily get in North America or Europe. One company that has played a major role in helping establish the pulp industry in Latin America is Ahlstrom Machinery Corp., which has a regional office located in the Brazilian city of Curitiba. P&P interviewed Robert Curry, vice president sales, on his viewpoint of business potential in Latin America and the expected growth in the region in the next few years.

P&P: Several projects in Latin America are now either being finalized or are on the drawing board. What is the expectation for completion of these projects?

Curry: It seems that many of the pulp and paper producers have the idea to do some major expansions in the region. We see that as a very large potential peak in our business but wonder if all these projects can go ahead and will go ahead. But for the moment they’re all behaving in a very serious way.

Most of these are expansions, and the companies are playing it smart because they can use much of the infrastructure and can achieve the capacity addition at very competitive costs. For example, in the Aracruz project for which we’ve bid, existing infrastructure is a significant benefit—e.g., the wastewater treatment plant doesn’t have to be increased; the water supply is adequate; the woodyard is sized correctly with just some minor additions; and no new recovery boiler is necessary, although they will have to retrofit the three existing recovery boilers.

P&P: From both a business and technology standpoint, what are the benefits at some of the modern mills in Latin America?

Curry: First, especially in Brazil, there’s a good investment climate. While there is a belief that environmental issues don’t play as big a role in permitting Latin American mills, that isn’t true. Chile is probably more difficult when it comes to permitting because of aggressive environmental groups, but both countries have stringent environmental limits for their processes. But there is a desire to grow business, which makes some of these partnerships and mill expansions more possible.

An area where some Latin American producers are pushing the limit is in their business approach. In some of the projects we’ve been working on, producers have set some pretty aggressive cost targets—capital cost targets—for themselves, at typically less than $1,000/annual ton for market pulp additions.

Another thing they’re looking for is a much faster project delivery than in the past. For example, 20 months is not unusual. Producers also want a fast ramp up so that they can be producing salable product at peak tonnage faster than has been typical in the paper industry.

From a technology standpoint, there is certainly much talk about the low-cost fiber, but the benefit goes beyond just low cost. The pulp producers in Latin America have a very high quality pulp because it’s coming from plantations. It’s a consistent pulp, as well as high quality, which is very important in the pulp business. The Brazilian producers see themselves as world leaders of short fiber pulp, and I think they’ll continue to capitalize on that, because short fiber pulp prices are going up at a good rate.

But the producers aren’t resting on the fact that their fiber is low-cost. There is a continued effort to try to get the maximum yield out of the plantations and increased pulp yield in the cooking plants. In most of the processes, they’re constantly pushing the limits of equipment capabilities.