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The Brazilian pulp and paper industry is slowly regaining its confidence as many major expansion plans are put back on the drawing board
By Patrick Knight
Brazilian producers look before they leap
To expand or not to expand, that is the question. As the chiefs of Brazil's main companies gather round boardroom tables to discuss major expansion plans, the rest of the industry waits nervously on the outcome of these all-important meetings.
If the main Brazilian companies all get the go-ahead for their planned pulp expansion plans and new partners are found for Stora Enso to build its Veracel greenfield mill, an extra two million tons of market pulp could be added to Brazil's output by the end of 2002. This would take total market pulp production in Brazil to a heady 10 million tons, with close to five million tons available for export.
Aracruz has to decide whether or not to take the plunge with a third line
But as the industry emerges from five years of poor to non-existent profits, it is questionable whether producers are ready to dive into projects that could threaten their current prosperity. The chief executive of Klabin, Josmar Verillo, is worried that such a massive capacity increase in Brazil might spur companies in other pulp producing countries to push up production levels as well, notably in Asia. In a bid to hold on to the market share they have carved out for themselves in the past few years, Asian producers may also opt to expand, potentially causing prices to tumble again.
Likewise, the main exporters in the Brazilian pulp and paper industry are anxious to maintain their share of the international pulp market and are under pressure to expand. Even if other countries do follow suit with expansion plans, the Brazilians believe that many of the mills that have closed their doors in North America in the past few years are unlikely to start up again. The expenditure needed to meet higher environmental constraints cannot be justified in many cases. Another factor playing in the Brazilians' favor is that it may not be easy for mills in Asia to get hold of the capital needed for expansions.
Producers are also optimistic about the outlook for the domestic market. The Brazilian economy is expected to grow by at least 3% this year, compared to less than 1% in 1999. Domestic demand is also set to strengthen this year, following a slowdown in 1999 due to price rises. The cycle of high prices is expected to last for some years yet though, while the government wants the industry to generate as much foreign exchange as possible.
These are just some of the issues that the chief executives of Aracruz, VCP, Klabin, Cenibra, Suzano and Stora Enso, are mulling over at the moment. Final decisions on many of the expansion plans are expected by the end of this month.
VCP plays a larger part in pulp
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It doesn't take a genius to work out that logistics is becoming increasingly important in the pulp business. The fact that VCP's Jacarei mill is less than 100 km from the port of Santos is part of the reason why the Votorantim company is virtually certain to give the go-ahead for the company's new expansion plans. The project will cost $530 million and add 50% to VCP's market pulp output, taking capacity from 800,000 tons/yr to 1.2 million tons/yr.
VCP's chief executive, Raul Calfat, says that the wood that will be needed for the new line is already available. The company's plantations located adjacent to the mill also benefit from high rainfall on the coastal strip. This explains why VCP is concentrating most of its investment efforts on this mill for the time being, rather than the company's site located 300 km inland.
In line with other Brazilian companies, VCP has decided to focus on its core businesses over the past few years. According to VCP, its greatest strengths lie in market pulp, coated paper and printing/writing grades.
For this reason, VCP was happy to dispose of its share in the Salto specialty paper mill to its partner Arjo Wiggins at the end of 1999.
Salto produces banknote paper for the Brazilian and Argentinean mints, as well as a wide range of other security papers. Since the company is now entirely owned by Arjo Wiggins, the new owner plans to transfer technology to the mill, which it was previously reluctant to adopt in Brazil.
Output at the Salto mill will be raised from 16,000 tons/yr to 24,000 tons/yr through machine speed increases. A fourth machine is also likely to be added. Arjo Wiggins plans to step up its activities in Latin America, where it sees great potential for growth.
Meanwhile, VCP now has the capacity to make 175,000 tons/yr of woodfree coated paper, following the startup of new coating equipment. This explains why Brazilian imports of this grade fell significantly in 1999 and will be lower again this year. VCP is also seeking to add value to the printing/writing papers produced at its second largest mill, located at Luis Antonio in upstate Sao Paulo. Voith Sulzer is optimizing the mill’s printing/ writing PM 2 in October. The rebuild will allow more of the paper produced at Luis Antonio to be packaged in smaller sizes than the standard 500 sheet packs, adding further value.
More than 20,000 tons/month of cut size papers will be made at Luis Antonio by the end of this year, with VCP planning to export 40% of output. Output of rolls is gradually being reduced.
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Bridging gaps in Brazil
The global mega-mergers that have occurred in the past few months will also have an impact on companies in Brazil. For example, Stora Enso (which now owns Consolidated Papers) is planning to build a new 750,000 ton/yr greenfield mill in Bahia state. Meanwhile, UPM-Kymmene and International Paper are vying to snap up Champion, which already owns two mills in Brazil.
Champion has various projects planned for Brazil, and presumably, these will all have to be re-examined by the company's new owners. The plans include a greenfield mill in Mato Grosso state, where the company has been planting trees for more than a decade. Champion also owns pine plantations as well as a chipping plant in the state of Amapa in the Amazon region, and the company is now planting eucalyptus in this area as well. This location is several days sailing time nearer to Europe, North America and Asia than the mills in the south of the country. Setting up a greenfield mill in this area is therefore an attractive option.
Klabin and Norske Skog have also struck a deal on a newsprint joint venture called Norske Skog Klabin. The move will eventually allow Klabin to exit the newsprint business and focus more on board. Norske Slog has also got hold of 52% of Pisa, following its acquisition of Fletcher Challenge Paper. On top of that, the Jari mill has finally changed hands. The Caemi group has spun off the mill to the Orsa packaging company. But some mystery surrounds the Jari deal and Orsa may not prove to be the definitive resting place for the company.
Canada's Tembec also put in a bid for Jari and may in the end get control of the mill. With pulp prices at current levels, the Brazilian outfit is actually making some money this year. At the same time, a change at the top of Brazil's National Development Bank (BNDES), which has provided low-cost finance for many of the Brazilian mills, may mean another change at Jari as well.
Scaling up
On the topic of consolidation, Aracruz's chief executive, Carlos Aguiar, has emphasized that Brazilian companies need to be making at least three million tons to achieve sufficient economies of scale. Aracruz's latest plans for a third pulp line would take the company’s capacity to about two million tons.
Aguiar's words were probably aimed at the CVRD mining and logistics company, which continues to search for a way to achieve further synergies between Cenibra and Bahia Sul. CVRD has large shareholdings in both companies, but Cenibra is also 48.5%-owned by a group of Japanese papermakers and 41% of Bahia Sul comes under Suzano's control. Suzano is busy expanding pulp capacity itself. The company plans to increase pulp production at its Sao Paulo mill by 80,000 tons/yr, taking the total to 500,000 tons/yr.
On the Japanese side, Cenibra's part owners have a right to 50% of the mill's 750,000 ton/yr output at a discounted price. In an attempt to calm the worries of the Japanese, a mission was recently invited to examine the Bahia Sul mill. They expressed concern that Bahia Sul's large debt might be a burden to the merged companies. But following restructuring measures, Bahia Sul's debt now weighs far less previously.
In addition, if the pulp price continues on its current high for another three years, the company's problems will all be in the past. The mill had the misfortune to start up just as the pulp price plunged. Bahia Sul also cost far more than predicted, illustrating the difficulties and risks involved in building a greenfield mill in an isolated part of a country as large as Brazil.
CVRD has said that, if absolutely necessary, the company would buy out the Japanese shareholders. Going forward an alliance with another foreign investor may be a possible solution. Since CVRD was privatized almost three years ago, the company has proved adept at forging strategic alliances with foreign groups - for example in its previously loss-making aluminum interests.
If Cenibra and Bahia Sul were to be merged, not only would Aracruz like to be part of the new group, VCP would probably like to get in on the action too. VCP's chief executive, Raul Calfat, also shares the opinion that the Brazilian industry must consolidate in order to survive. Calfat believes that fewer players will result in more price stability, bringing benefits to all players.
Although VCP is not a giant in global terms, the company has the backing of the extremely powerful Votorantim minerals and metals processing group - Brazil's largest privately owned company. Like CVRD, the group is sitting on a huge pile of cash. As a result, VCP can use its own resources to pay for expansion plans, a luxury few other companies can afford.
This makes all the difference in Brazil as economic instability, and the associated high interest rates, often cancel out advantages such as relatively cheap land and the phenomenal accrual rates for wood.
Push to shove
Clearly, there are a number of changes in store for Brazilian players, including possible capacity expansions and ownership changes. Any capacity changes should not take too long to filter through to the markets, with decisions pending on many major investment plans.
On the restructuring side, it may take some more time for companies to change hands. But the question remains whether even the largest of Brazil's predominantly family-owned companies will manage to remain independent. What resistance will the companies put up if a Scandinavian or North American giant decides to make a generous offer for its assets? Many companies may find it hard to resist the temptation of linking up with a world leader and grabbing a piece of the global action.
Monte Alegre moves ahead with expansions
Klabin continues to expand in its core areas
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Latin America's largest integrated company, Klabin, continues to concentrate on its core businesses of packaging and tissue. In particular, the company has its sights set on the fast growing board sector. Klabin continues to form strategic alliances and acquire additional tissue capacity, particularly in parts of the country far from its mills in Parana and Santa Catarina states.
The purchase of Bacraft from Suzano at the end of last year takes Klabin Tissue a step nearer its goal of controlling 35% of the tissue market. Klabin Tissue is an alliance with the US giant, Kimberly-Clark.
The recent newsprint joint venture with Norske Skog also solves several problems at once for Klabin. The deal will allow Klabin to exit the newsprint sector, which it recognized as a non-core business. According to Klabin's chief executive, Josmar Verillo, the newsprint industry is only an option for the very largest players nowadays.
Norske Skog also plans to build a new state-of-the-art machine, very close to (or actually on) Klabin's industrial complex at Monte Alegre in Parana state. When the new machine comes on stream, Klabin's existing 130,000 ton/yr newsprint PM will be freed up to produce more board instead. Verillo anticipates this process will take three years.
Over the past four years, demand for packaging, folding board and liquid packaging board has grown by 15% per year in Brazil and this situation looks set to continue. This has put Klabin in an extremely fortunate position, as it is the only company which makes both the softwood and hardwood pulp used to produce these grades. All the other packaging board used in Brazil has to be imported. In fact, Klabin's biggest problem lies in meeting demand for these grades.
A planned rebuild of PM 4 at the Monte Alegre mill will allow the machine to produce packaging board instead of kraftliner. Output will be increased by 50,000 tons, although this increase is already spoken for in terms of extra demand. To avoid using extra pulp, high quality wastepaper will be incorporated into the middle layer of some of the company's board grades, using off-cuts from its box plants.
But when the existing newsprint machine starts to produce packaging grades, more pulp will be needed. According to Verillo, the company plans to use chemi-thermomechanical (CTMP) pulp to make up the shortfall.
Raising levels at Riocell
Klabin has also started basic engineering work on an expansion at the Riocell pulp mill in Rio Grande do Sul. A recovery boiler that has been on site for several years is to be rebuilt, allowing 70,000 tons/yr more pulp to be produced at this mill. The move will take total output to 370,000 tons/yr.
At the same time, Riocell will stop output of unbleached pulp, meaning that an additional 120,000 tons/yr of bleached pulp will be available, mostly for export. Verillo estimates that the project will cost $120 million.
Klabin will export some 30% of its production this year, mainly pulp and kraftliner, as well as a small amount of tissue. Following an increase in domestic tissue prices, which brought levels close to international prices, demand for Klabin's premium grades fell slightly last year, leaving a small surplus.
With prices of all products higher this year than in 1999, exports should generate 30% of the company's income, in line with volumes, rather than the 25% that exports contributed last year. But even if Klabin wanted to export more, says Verillo, the company lacks the spare capacity as all of its mills are working at 100% capacity.
Healthy competition
According to its strategy, Klabin is within sight of achieving a 35% market share in both packaging and tissue. Verillo feels this target is necessary for the company to hold its own against large international competitors that he expects will come to Brazil sooner or later.
Perhaps surprisingly, Verillo adds that more competition in the packaging and tissue sectors will be welcome. Competition of the right type will reduce the number of smaller players in the market. At present, these outfits are the bane of Brazil's packaging and tissue companies' lives as many of them avoid paying taxes.
Such companies would come under great pressure if some of the world's giants were also present in Brazil. But Verillo says that the well established Klabin company, which celebrated its 100th anniversary in 1999, has little to fear from additional competition.
The company's huge forest base in the states of Parana and Santa Catarina makes Klabin very competitive and a low cost producer. A newcomer to the market could not easily duplicate these resources.
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