At a time of dramatic change, Klabin is developing a new strategic plan to face up to the challenges of the future

by Patrick Knight

Klabin focuses on its strategic assets

B etween 1993 and 1997, Brazil's domestic paper consumption grew by more than 10%/yr and paper production increased by 1.2 million tons to 6.5 million tons. These impressive growth statistics have tempted several leading industry players, which had previously regarded Brazil as a place to avoid, to get in on the action. For Brazil's biggest pulp and paper company, Klabin, this influx of foreign companies and the changing demand patterns in Brazil have prompted it to look at the different components of its business and make plans for the future.

To add a degree of uncertainty, any changes will have to be made at a time when prices are lower than usual, principally because of turbulence created by the Asian crisis.

To guide the company through the uncertain times ahead, Klabin has appointed a new chief executive, Josmar Verillo, who was previously in charge of Klabin's main production complex at Monte Alegre in Parana state. Verillo is now busy putting the finishing touches to his strategic plan for the company, which will celebrate its centenary next year.

Verillo is seeking to identify the main strengths of the company, which produced 1.03 million tons of pulp and 965,000 tons of paper in 1997. He must decide where investments should be concentrated, where joint ventures are a better option and which businesses it should dispose of.

This could be a difficult decision, bearing in mind the diversity of Klabin's operations. The company is number one in most packaging materials markets, including kraftliner, packaging paper and corrugated boxes, and it is the sole manufacturer of liquid packaging and carrier board. It is also the leading producer of tissue and newsprint and is Brazil's second largest pulp producer.

Before any decisions could be made on future strategy, however, negotiations had to be completed with Kimberly Clark (KC). These discussions led to KC taking a 50% stake in the recently formed Klabin Tissue company.

This joint venture could be a model for others to come. Klabin has come to realize that it will not be able to raise all the capital needed to keep up with fast growing demand in all the areas where it is active. This made the approach by KC particularly welcome.

Many KC brands will be introduced, particularly in the "away from home" sector, where Klabin had not been active. The new Klabin Tissue partnership means the company will be able to meet demand in this extremely fast growing sector, without tying up capital needed in its other priority businesses.

Complex business

At the top of the "core businesses" list are most activities connected with the company's complex at Monte Alegre. Most of Klabin's pulp is produced there, as well as kraft and liquid packaging papers and all the company's newsprint. According to Verillo, Klabin has also developed the finest forest base in the world over the last few decades, in terms of both yield and genetic material. Typical annual growth rates at the Monte Alegre site are about 28 m for pine (now mostly of the Taeda variety) and 50 m for eucalyptus.

A $220 million investment program was recently completed at the site resulting in a 100,000 ton increase in output of pulp - 50,000 tons of which was TCF (totally chlorine-free). Klabin has now begun a new round of investments. A new on-machine coater is to be added to the mill's largest paper machine, PM 7, which is an 800 ton/day machine initially built in 1978. This will replace PM 7's existing off-machine coater, allowing production of liquid packaging to be increased.

The new coater is scheduled to start up in July 1999 and will apply two white coats on one side and starch on the brown side. Once the new coater is working, attention will turn to PM 4, which is already fitted with an on-machine coater. This machine currently makes thinner grades, but will be modified to make liquid packaging and carrier board.

The extra output from PM 7 will mainly be used to meet the steadily growing demand from international packaging group, TetraPak, which is aiming to make five billion containers in Brazil this year and is in the process of building its second Brazilian factory near to the Alegre mill. The investment will also allow Klabin to make more carrier board, which had to be imported until Klabin started producing the grade last year. Folding board production will also be increased.

Verillo explains that demand for these products has been growing at between 10-20%/yr in Brazil for a number of years, as consumers drink more long-life milk and fruit juice and switch en-masse from using returnable glass bottles to using non-return bottles and cans. At the same time, more items needing folding boxboard, such as breakfast cereals and detergent, are being used.

The technology and raw materials needed to make carrier board and liquid packaging are similar. Each of the paper grades use a blend of long and short fiber pulp, which are both made at Monte Alegre. Although the investment needed for developing carrier board from scratch might not have been justified, the fact that Klabin has been making increasing quantities of liquid packaging for Tetrapak, made this a very attractive area for Klabin.

Exports go

Heavy investment will continue to be made in the corrugated box sector which is another of Klabin's main businesses. More than 60% of Klabin's boxes are destined for the food and beverage industries, where growth has often been double the country's average in the past four years. Demand for boxes has increased by more than 40% to 400,000 tons/yr in the past four years, and in order for Klabin to keep pace it has had to spend $30 million to increase capacity.

As domestic demand for corrugated boxes and other types of packaging grows, Klabin's exports of kraft papers will fall. The company used to ship more than 200,000 tons of kraft paper to Europe, but it believes these exports will soon end. According to Verillo, it costs up to $100 to transport each ton of kraft paper to Europe where it is sold for about $400/ton. Accordingly, this process is not very profitable and does not fit in with Klabin's new strategy of adding more value.

Despite Klabin's plans to stop exporting kraft paper, it does expect to export more liquid packaging and may also sell carrier board to other countries in the region. The end result is that the amount exported by Klabin will fall, but export earnings could remain at a similar level, as more value is added.

Klabin already supplies all the liquid packaging used at Tetrapak's plant in Argentina, where more than a billion cartons are made each year. But the company has aspirations to become one of the company's select number of suppliers in parts of the world where transport costs from Brazil are as low as from other suppliers.

In the longer term, the end product could be cheaper to produce in Brazil because of the low cost of wood. But for now this benefit is offset by high financial, energy and transport costs and high taxation.

See saw

The Monte Alegre mill is also looking at building sawmills adjacent to the site. The timber products emerging from these would be exported to the USA. Up to 400,000 m of wood, surplus to Klabin's own requirements, will soon become available at pine forest plantations in Parana, where a total of 136,000 ha have been planted. Klabin plans to process the wood in a similar way to Chilean producers. The logs will first be sent to a patio, where the high value "core" of each tree is processed into planks, flitches, moldings and other products, while offcuts are then forwarded to the pulp mill.

Klabin's forests have been inspected and certified by the Forest Stewardship Council, which means timber products will be able to carry a seal confirming that they are made from wood grown in sustainable and environmentally sustainable forest.

A partner for this project is now being sought, and the project should start to make a significant contribution to Klabin's earnings in two or three years time.

Low priority assets

The direction being set by the new chief executive for some of Klabin's other operations is not exactly clear. For example the future of the 115,000 ton/yr "Bacell" specialty pulp mill at Camacarai, Bahia state, has still to be defined. Klabin hopes that another partner will appear to take a shareholding in the project and perhaps take it in a new direction. An existing partner, Lensing, had wanted to become more vertically integrated, but a change to its philosophy has left Bacell less central to its plans.

Another project, now relatively low on the list of Klabin's priorities, is the Riocell pulp mill near Porto Alegre. Klabin itself does not take much pulp from Riocell, preferring to buy most of its additional needs from producers closer to its tissue and other mills.

According to Verillo, Riocell is one of the world's lowest cost producers of market pulp. He claims it will become even more competitive once debottlenecking is complete, pushing up output from a little under 300,000 tons/yr to 370,000 tons/yr.

Other changes at the mill include the end of dissolving pulp production. The small PM at the mill, which previously made basic printing/writing paper, is now making niche products - including papers for Klabin's bag and envelope plant in Argentina.

Another of Klabin's businesses with a large question mark over it is newsprint. Some 700,000 tons of newsprint were consumed last year and Klabin is Brazil's leading producer, with 150,000 tons/yr produced on a machine at the Monte Alegre mill.

The Brazilian constitution states stops taxes from being charged on newsprint, whether it is imported or made domestically. But numerous and heavy social security costs continue to be levied on newsprint made in Brazil. This leaves domestic newsprint some 20% more expensive than imported newsprint.

Consequently there is almost no incentive for Klabin, or anybody else, to make newsprint and this is demonstrated by soaring newsprint imports in recent years to meet rapidly rising demand. As Verillo points out, by 2000, close to 80% of Brazil's newsprint needs will be imported.

Some newspapers are upset about this situation. They are obliged to hold large stocks in case of supply difficulties and they claim to face problems of inconsistent quality. They would like the law changed - a situation which the government is aware of. But altering the constitution is not easy.

According to Verillo, Klabin has considered ending its newsprint production. It would instead use its PM 6 to make a more profitable product. In today's tough and competitive environment, says Verillo, this option can no longer be ruled out.