Latin America: Fiber provider or paper producer?

by James McNutt

VIEWPOINT

Latin America is a well-known exporter of market pulp grades, but the region relies heavily on paper imports. As the new century approaches, a questionmark hangs over the Latin American pulp and paper sector. At issue is whether Latin America will remain a fiber provider or take a more active role in paper production.

Fiber force

The region is well blessed in terms of forestry resources. South America holds the world's largest hardwood stock, with 45% of the total standing inventory. But this vast natural resource will not play a significant role in the development of Latin America's forest products sector. The industry's future lies with a new and evolving fiber resource based on fast-growing plantations.

South America's soil and climate provide an excellent environment for some of the best fast-growing trees in the world. With over 40% of global fast growth plantations, South America is emerging as one of the main fiber supplying regions of the world.

The lion's share of these plantations is located in Brazil. The country lays claim to roughly 73% of South America's fast-growing hardwood resources and 39% of the softwood plantations. Chile accounts for 37% of the fast-growing softwood plantations, but just 9% in the hardwood sector.

Annual expansion rates of these plantations are evenly balanced in sub-tropical countries such as Brazil, Uruguay, Argentina and Chile. Tropical countries such as Colombia and Venezuela are beginning to show attractive growth potential as well. Chile has the most rapid rate of expansion at present. In terms of newly generated annual wood production, South America is enjoying expansion rates of 7-8 million m3/yr. If these growth rates are kept up, the region will become one of the primary sources of fiber in the future. Within a decade, annual sustainable cutting potential in the world is set to exceed 300 million m3, half of which will be found in South America.

Turning to the next step on the value chain, South America is a net exporter of both bleached hardwood and softwood kraft pulp. But it is a very different story in the paper sector, where the region imports significant amounts of all paper grades, especially newsprint and corrugating materials.

Behind on the paperwork

Latin America accounts for 6% of global paper consumption, but only 5% of the world's production. Brazil is responsible for nearly half of the region's production, with Mexico accounting for 26%. In terms of paper production versus demand, only Chile and Brazil are minor net exporters. As a whole, the region needs 3.3 million tons/yr of net imports. Mexico relies most heavily on imports, followed closely by Argentina.

Paper demand in Latin America is showing high growth rates of around 4.2% per year. Coated mechanicals and coated woodfrees account for a small percentage of the total consumption, but these grades have rapid market growth rates of 7%/yr. With 60% of the region's population, Brazil and Mexico are the countries that are set to dominate Latin America's growth in paper demand. It is estimated that net new demand in the region will reach 11 million tons/yr by 2010. If Latin America aims to be self-sufficient on the paper side, new production of 14.3 million tons/yr would have to be put in place by 2010. An average of one million tons/yr of new production up to 2010 will cost some $1.5 billion/yr in investments.

In terms of paper machine size, Latin America also lags behind the rest of the world. PMs have remained small in the region, leading to higher imports of value added grades which are produced on larger, more efficient machines in other parts of the world. If Latin America is to become self-sufficient in paper production, machine sizes will need to increase significantly.

In the 1970s, Indonesia trailed behind Brazil on the size front. But Indonesia has since made significant progress in machine sizes, leaving Brazil in its wake.

Along the fiber chain

Latin America has the opportunities and strengths needed to advance from being a fiber provider to becoming a major paper producer. Economic performance in the region is expected to bounce back in the mid-term and local markets are forecast to make good progress going into the next century. Free trade developments in the area and the "pull" of the world's export market will also encourage Latin America to branch out more on the paper side.

But at the same time, some critical problems and weaknesses must be addressed and accepted. The mix of economic turbulence, currency instabilities, high capital costs and political uncertainties are major obstacles to the region's development. With the exception of the US market, Latin America is also at a disadvantage in comparison to the new, larger Asian capacities on the logistics front. Added to that, the small and fragmented nature of Latin America's paper industry continues to hamper progress.

Despite these problem areas, Latin America has great potential as both a fiber provider and paper producer. The key is finding the right keys.

James McNutt is the president and CEO of Jaakko Poyry Consulting (North America). This article is taken from a speech given at PPI's First Latin American Congress in Sao Paulo, Brazil