In the last few years, South America's pulp and paper industry has been grabbing market share from both Western Europe and North America. Established producing nations like Canada, United States and Finland will unquestionably face mounting competitive challenges from the South American industry, many of which are building large new state-of-the-art mills to supply market pulp to a voracious Chinese economy. Many of these mills are joint ventures with Nordic forest-product companies. The object lesson, at least as it applies to the Canadian industry, is a further need to drive down the costs of production while wringing greater efficiencies from more dated equipment.
China is the unquestionable driving force for much of this activity and shift in global production and consumption in the $400-billion (US) global forest-products industry. Many large Nordic companies such as UPM, Stora and NorskeSkog have made major investments in China, hoping to capitalize on the continued appetite for paper in Asia. For example, by 2010, analysts predict that China will need 70-million tons of paper per year, almost one-third more than its total consumption in 2004.
As it now stands, less than one-third of paper and paperboard production is export-based. "This trend will change as the industry globalizes and more pulp production comes on-line in South America to be channelled into Asia," says Robert Barnden, global leader of forest and paper for PricewaterhouseCoopers in Stockholm.
To be sure, South America will feed many of the new machines in China. For example, in the next few years, new machines are expected to come on-line in Uruguay (Mets Botnia in Fray Bentos), Brazil (Suzano mill in Mucuri), and Chile (CMPC in Santa Fe), whose combined increased capacity will more than double South America's annual pulp production to 12-million tons. Brazil is already producing 4.8 million tons a year of pulp, ranking it as the world's third-largest producer of pulp behind Canada and the US. (See sidebar: Brazil's pulp projects.)
Brazil, Argentina, Uruguay and Chile form the leading quartet of South American pulp and paper producing nations. The region is forecasted to grow at an annual rate of almost 4.0% until 2010 -- making it, along with Eastern Europe and Asia, the leading region of growth in the coming decade.
"It is probably not an understatement to say that the industry is facing a structural revolution, which has not been seen in modern times," Barnden says. More so, while South America produced only 5% of the 339-million tons of paper globally, this figure is expected to increase significantly in the upcoming years. As PricewaterhouseCoopers reports, "Over 60% of global capacity additions between 2003 and 2008 will be in South America."
Even so, much of this news ought to come as no surprise when one considers the competitive advantages the South American industry currently holds. For example, the region holds more than 25% of the world's total forests -- most of it hardwoods -- or about double the combined forests of Canada and US. Among its natural advantages are a harvest time of seven years for eucalyptus, which has a high annual yield of between 45 and 50 cubic metres per hectare. South America, previously an exporter of chips and logs, is now using the fibre domestically to feed its pulp machines.
As with all emerging regions, South America faces growing pains. For example, the Brazilian government's taxation policies, notably its taxation on investment, and its deep-seated bureaucracy, act as a major impediment to investment and trade. As well, it has to develop a monetary policy to deal with exchange and interest fluctuations of its currency, the real [ed. note: at publication, the exchange rate was one Canadian dollar to 1.97331 Brazilian reals].
To its credit, the government of President Luiz Inacio Lula da Silva has been implementing some badly needed changes. (See sidebar: Brazil leads the way.)
The other story
Such is the good news. Although many mills are modernizing in South America, supplying well-paying jobs and a better way of life to local residents, environmental watchdogs contend that a number of prominent mills have been dumping effluents into the rivers on which these mills operate. The controversy is as old as industrialization itself -- how the waterways, the life-blood of communities -- should be best used.
Despite providing badly needed jobs and money to the region, a problem exists with the pulp mills in Argentina due to the age of the mature mills. The pollution problem from these mills stems from the use of older technologies. Simply put, these older mills in Argentina are not equipped with the cleaner technologies common to industrialized nations like Canada and the US. Local residents have for the most part remained silent of the problem, mainly because of ignorance or fear of losing their jobs.
A recent demonstration held in front of the Finnish Embassy to protest against the installation of a new mill being built by Metsa-Botnia (of Finland) was the first of a kind in the history of the embassy. "Argentina has a strong protest culture, so we have been expecting this. However, it is very rare that a demonstration is held against Finland, particularly one relating to environmental issues," noted Ambassador Ritva Jolkkonen in a recent article of a Helsinki newspaper.
Such explains some of the issues that companies face in investing in South America. Even so, many foreign companies are making investments in the region, hoping to reap the benefits, despite the obstacles. The Nordic companies have a good presence in South America. Unlike the Nordic nations, which have signed joint-venture deals with South American forestry companies, Canadian forest-products companies have been noticeably absent from South America.
Still, much was made of Canada's trade mission to Brazil in November 2004, led by Prime Minister Paul Martin and International Trade Minister Jim Peterson. With Brazil as Canada's 16th-largest export market and 15th-largest trading partner, Export Development Canada has stated that it is ready to continue being a catalyst in helping both Canadian and Brazilian companies grow their trade, investment, and business relationships.
"Canada is targeting Brazil as a key country in the emerging markets strategy it is developing," Peterson said. "Brazil is the gateway to South America and the mission has allowed us to build bridges for the long term."
One Canadian company that has benefited from a long-standing relationship with a South American company is Montreal-based Groupe Laperrire & Verreault. In a recent deal, GL&V signed a contract with Chile's Empresas CMPC, which operates forest-products companies in Chile, Argentina, Peru and Uruguay. GL&V has agreed to supply CMPC with water and wastewater facilities for four mills, including the 780,000-tonne/year mills in Nacimiento, Chile, a $745-million (US) project scheduled to come on-stream in September 2006.
To a great extent, all roads lead to China. China has about 15% of the pulp market, currently insufficient to feed its growing appetite. Such is good news for South America and any other nation supplying its needs. Still, China's growth, now considered a beneficial link to South America's growth and future prosperity, could possibly result in an over-dependence on the Asian market. With new pulp capacity additions in China of about one million tons by 2007, China's future dependence on foreign fibre or pulp might be temporary. As Barnden of PwC puts it, "A possible growth of the Chinese industry might reduce world pulp demand, possibly triggering a price drop."
Brazil's pulp projects
Brazil has invested in two major eucalyptus pulp-production projects within the last few years, n otably the Aracruz mill in Veracel and the Suzano mill in Mucuri.
Aracruz Project in Veracel: Aracruz Celulose, the world's leading producer of bleached eucalyptus pulp, recently inaugurated its third production line, Fiberline C, thereby increasing the company's total annual production from 1.3 million to two million tons. This makes it the largest single-line bleached eucalyptus pulp mill in the world, with an annual output of 900,000-tons.
The $921 million project*, announced in May 2003, marks the largest industrial sector investment in Brazil of the past few years, according to Aracruz's president and CEO, Carlos Aguiar. "The pulp industry is essentially an exporting industry and consequently is a strong generator of foreign exchange earnings for the country, with a net positive balance of the greatest importance for today's economy," Aguiar said. He added that the company had made "the lowest investment per ton of pulp in the world."
The Veracel project was a 50-50 joint venture between Stora Enso Oyj and Aracruz Celulose SA, which is the world's largest producer of bleached eucalyptus kraft market pulp. The neighbouring plantations have a high annual yield of over 50-m2/hectare. This, combined with a suitable land structure and good geographical location, enables highly cost-effective pulp production. The plantations are located about 40 km from the mill, and the mill is about 60 km from the harbour.
The vast majority of the mill's output will be used outside Brazil, notably in Stora Enso's mills in Europe, US and Asia. The low-cost, high-quality eucalyptus fibre will be ideally suited for fine paper production.
Suzano Project: Suzano Bahia Sul Papel e Celulose S.A. (Suzano) has plans for a new $1.5 billion bleached kraft pulp line at its existing Mucuri mill, located at the southern tip of Bahia state. The new line will increase the mill's pulp production by one million tons/year, using eucalyptus as raw material. Start-up is scheduled for the third quarter of 2007, with full production capacity expected in 2009.
*All currency has been converted from US to an approximate Canadian value.
Brazil leads the way
The largest and dominant nation in the region is Brazil, the only South-American nation that derives its language and culture from Portugal. Brazil's annual economic rate of growth is an impressive 5.1%. With a landmass slightly smaller than the US, at 8.5-million square kilometres, Brazil covers nearly half of South America and is the continent's largest nation, according to Time Almanac 2006. Its total population is about 186 million people, 2.1-million of whom live in the capital, Braslia. The largest city, So Paulo, has 18.8-million inhabitants residing within its metropolitan boundaries. Brazil's labour force is 79 million.
The currency is the real. Brazil's GDP was reported at $1.72 trillion in 2004, for an estimated per capita income of just over $9,000. (By comparison, Canada's GDP was $1.15-trillion, but per capita income stood at $36,276 in 2004.) Its chief trading partners are the US, Argentina and Germany.
The country is a federative republic, currently headed by President Luiz Inacio Lula da Silva, head of the leftist Workers Party, who has been in power since January 2003. The president, widely known by the name Lula, became Brazil's first working-class president. Time Almanac 2006 states that Lula pledged to increase social services and improve the lot for the poor, while recognizing that a distinctly non-socialist program of fiscal austerity was needed to rescue the economy. The president's first major legislative success was a plan to reform the country's debt-ridden pension system, which operated under an annual $23 billion deficit.
As is common in many nations, emerging or developed, Brazil has suffered its share of political scandals involving corruption, the most recent in 2005. "An unfolding bribery scandal led to the resignation of several high government officials," Time says. "Lula issued a televised apology in August, and promised 'drastic measures' to reform the political system."
*All currency has been converted from US to an approximate Canadian value.