The case for Brazil
September 1, 2008 By Pulp & Paper Canada
One of the great success stories in the last few years has been Brazil becoming a pulp and paper powerhouse. Equal credit goes to visionary owners pouring money into new mills and plant modernizations…
One of the great success stories in the last few years has been Brazil becoming a pulp and paper powerhouse. Equal credit goes to visionary owners pouring money into new mills and plant modernizations as to the tree scientists who tinkered with a fast-growing hardwood tree originally from Australia, eucalyptus, which now produces an abundant fibre supply, the envy of the world.
The geography is easy to understand. Brazil, an Amazon nation, is South America’s largest country, blessed with a huge landmass, a rich ecosystem, and an ideal climate for growing its prime source of fibre for pulp production– Eucalyptus urograndis — a genetically enhanced eucalyptus species that grows to maturity up to seven times faster than any of Canada’s softwood trees — about two centimetres a day. The result is that mills can harvest a eucalyptus tree in as little as six years in some cases.
Brazil churned out 11.9 million tons of pulp and 9.0 million tons of paper in 2007, making it the world’s sixth largest pulp producer and the 11th largest paper maker. The industry exported $4.7 billion US in pulp and paper products, contributing $3.4 billion US to Brazil’s trade balance in 2007 (see sidebar, Economic facts). It expects to become the world’s fourth-largest pulp producer by the end of 2008, capitalizing on its average annual growth rate of 7.6% and on a world hungry for eucalyptus-manufactured pulp.
More than 90% of the country’s pulp and 50% of its paper is exported to the emerging economies of China and India, as well as to Europe. One of the reasons for exporting is that Brazil’s per capita paper consumption is 41.2 kg per year, lower than the world average of 58 kg per year, and substantially lower than Canada’s 277.4 kg per year.
Unlike other emerging nations, Brazil’s advantage lies elsewhere. “Contrary to some misconceptions, it has little to do with Brazil’s labour costs, which form a small factor in the productivity difference between Canada and Brazil,” says Craig Campbell, leader of PricewaterhouseCooper’s performance improvement practice for the global forest and paper industry, in Vancouver. “The biggest reason that Brazil is profitable is its forests and what it has done to improve its yields.”
To be sure, much can be said of its biggest asset, a modified high-yield eucalyptus species that matures in seven years instead of an average 45 years for a comparatively low-yield Canadian species like western Douglas fir, or 90 years for eastern spruce (Picea mariana).
When you take into account the importance of sustainability–the environmental motto of the 21st century– the advantage that Brazil holds becomes abundantly clear.
“It’s true that one of our advantages is that we can harvest the trees much quicker than other countries,” says Elizabeth de Carvalhaes, executive president of Bracelpa, the Brazilian pulp and paper association. “The industry has done a lot of scientific experimentation to select the best clone of the tree to improve and increase productivity.”
De Carvalhaes notes that “Brazil is the first country in the world to introduce fibre from eucalyptus, a short fibre that is used for printing and writing grades.” Brazil also has vast stands of pine trees (Pinus spp), from which it annually harvests 30 cubic metres per hectare. The pine trees offer the long fibres necessary for food-packaging grades.
But it’s chiefly about eucalyptus. Scientists have spent the past 20 years refining eucalyptus for pulp production. By fusing the best attributes of two species of eucalyptus, they have produced a new species that is resistant to disease, pests and drought. A fast-growing tree, it produces high-quality fibre for papermaking. A tree reaches harvest age in about six and a half years.
There are 1.7 million hectares of planted eucalyptus and pine trees in Brazil and 5.0 million hectares of managed forests. “These planted forests are located in the south and southeast regions, far from the Amazon rainforest,” de Carvalhaes notes, referring to an environmental policy of sustainability that ought to deflect criticism from reasonable environmental groups.
A balanced approach
In its environmental policy, Brazil has balanced production needs with environmental sustainability, having two million hectares of internationally-certified forests to its credit. There’s more environmental kudos for Brazil. The 1.7 million hectares of planted forest dedicated to pulp and paper production represent a miniscule 0.2% of the country’s total land area of 851 million hectares, well below that of other emerging nations like India and China. In such nations, the planted forest equates to between 4-10% of the countries’ landmass.
Through the combined use of scientific planning, rotation and genetics, Brazil’s foresters have doubled the annual yield of eucalyptus to 40 cubic metres per hectare in the last 10 years, and have the potential to reach 50 cubic metres per hectare in the next few years. This is significantly higher than the yields of eucalyptus in South Africa (20), Portugal (12) and Spain (10). By comparison, the annual yield for a Douglas fir is seven cubic metres per hectare. Other northern species in Canada, Finland and Sweden have by comparison similarly low yield percentages, in the single digits.
There’s no doubt that eucalyptus plays a large role in Brazil’s success. Yet, competition between various markets has pushed costs upward for some fibres, notably for open-market pulpwood and wood chips (see sidebar, Pulp wood costs rising in Brazil).
Any rise in fibre costs is always a concern for forestry companies. “The key factor determining a company’s global cost competitive position remains its raw material base and the cost of available wood resources,” says Wood Resources International, a leading forest industry consulting firm in Bothell, Wash. “Wood costs account for between 40% and 50% of the production costs for pulp manufacturing, and 65% to 75% of the total production costs for sawmills.” That being said, labour costs have little bearing on the competitive advantage that Brazil enjoys. “There’s a misconception among the general public that labour costs factor into the equation,” says Campbell. “But its effect on competitiveness is marginal.”
Wages, however, remain significantly lower than the average $65,000 salary that unionized Canadian mill workers pull in each year. By comparison, Brazil’s papermakers make about $8,000 a year. The Brazilian pulp and paper industry is similar to the Canadian one in many ways: it employs 110,000 people who work for 220 companies spread out in 450 municipalities in five governmental regions. Some notable companies include Aracruz Celulose, Klabin, Jari Celulose and Votorantim Celulose e Papel (VCP).
Although Canada and Brazil share some similarities in terms of how important the industry is to the balance of trade, large gaps appear when it comes to investments. The Brazilian industry invested about $6.5 billion US between 2003 and 2007, and expects to invest another $9 billion US between 2008 and 2012 — bringing total investment to more than $15 billion US in less than 10 years. All investments come from private sources, and none of it from government coffers.
Aracruz Celulose, the world’s largest producer of eucalyptus pulp, plans to invest $1.8 billion US to expand the company’s Guaba mill in Rio Grande do Sul. The work will get underway this year, and once completed, will increase the mill’s total annual capacity to 1.8 million tons of bleached eucalyptus kraft pulp.
As Carlos Aguiar, Aracruz’s president and CEO puts it: “Through this impor- tant investment we are increasing Aracruz’s total production capacity to nearly 5 million tons annually, in line with our sustainable growth strategy.” The new line will come into operation in August 2010, incorporating modern environmental technology that will translate into
lower water consumption and reduced atmospheric emissions and effluents, as well as improved standards of heat and energy efficiency.
Votorantim Celulose e Papel (VCP) plans to invest $1.5 billion US to build a new pulp mill in Trs Lagoas, which will have an annual production capacity of 1.3 million tonnes of bleached pulp. About 80% will be shipped abroad via rail from Trs Lagoas to the Port of Santos. The rest will be sold on the domestic market, part to International Paper’s paper mill in Trs Lagoas. The plant is scheduled to go online in May 2009, and achieve full capacity in 2010.
Veracel 2: Aracruz and partner Stora Enso plan to invest $1.5 billion US to add a second line to the Veracel plant in Bahia, with an annual capacity of 1.4 million tons. It is expected to come online at the beginning of 2012.
One of the most contentious and oft-discussed issues in many emerging nations is land use, and how best to share it between the various stakeholders: forestry, renewable resources and agriculture. “In Brazil, we really do not have that problem, since Brazil’s government has planned well for the future,” de Carvalhaes points out.
The bulk of the land is set aside for agriculture, thereby ensuring a steady food supply. Food production has 72 million hectares of land at its disposal, representing 8.5% of Brazil’s total landmass. Less than 1%, or 5 million hectares of managed forests is dedicated to pulp and paper production.
For many people, the debate centres on renewable resources and how they might encourage farmers to grow crops for ethanol production rather than for food supply. In contrast to many other nations that produce ethanol from corn, wheat and other crops, Brazil uses sugarcane to produce ethanol as a biofuel. Sugarcane production uses 6.9 million hectares, half of that dedicated to ethanol production (0.4% of landmass), which Brazil has been producing for more than 25 years. “In this case, Brazil is some steps ahead of many countries,” de Carvalhaes says. “We have increased productivity in all these areas, increasing the productive use of the land.”
That being the case, de Carvalhaes adds that the debate on the food versus fuel does not apply to Brazil, since it has 110 million acres of arable land in reserve that the government can decide be set aside for use in the production of agriculture foodstuffs, biofuels or pulp and paper products. “We can increase the production of both pulp and paper and of biofuels without jeopardizing the food supply,” she says. “Planted forests do not compete with traditional agriculture. So the food supply is secure.”
Even so, Brazil does face some challenges. Businesses in Brazil have to contend with a number of problems, including cumbersome tax regulations, inefficient government bureaucracy, and corruption. Brazil has become less competitive in the last few years, says the World Economic Forum, a Swiss-based institute.
In its recent Global Competitiveness Index, Brazil ranked 72nd out of 131 nations for 2008, whereas it was 66th out of 121 nations in 2007, placing it somewhere in the middle of the pack. The top-tier countries include Canada (13), Sweden (4) and the United States (1).
However, Bracelpa’s de Carvalhaes points out that such rankings have little merit when one considers what Brazil has achieved in the last 10 years: arable land stability, energy and water self-sufficiency and a sustainable environmental policy, including sequestering carbon towards reducing greenhouse gases (see sidebar, Carbon credits). “When you consider that the price of oil is over $135 a barrel, that Russia is putting a tax on wood, and many European nations can’t get logs, and we have a long-term policy on environment and land use, then we are satisfied that we are progressing properly.”
The news is good for the South American country. Brazil is a pulp and paper powerhouse, and Canada has a lot to learn from its neighbours in the southern hemisphere. Canadian companies, as usual, are slow off the mark. There is no Canadian presence in Brazil, and few, if any Canadian executives are thinking about joint ventures or partnerships with Brazil, preferring to stay closer to home. This is a loss of opportunity, says Campbell of PwC: “Canadian companies can learn a lot from the Brazil model.” PPC
The economic facts
• Brazil has a population of about 192 million, residing in a land area of 8.5 million sq. km, making the Portuguese-speaking nation slightly smaller than the US. The nation ranks as the world’s 10th largest economy at $1.2 trillion US , and the largest in Latin America, accounting for one-third of the region’s GDP.
• According to the CIA World Factbook (2007), Brazil’s economic indicators are as follows:
• annual real growth: 5.4%;
• GDP: $1.838 trillion (purchasing power parity); and
• per capita GDP: $9,700 (purchasing power parity).
• Brazil’s economy grew 5.8% in the first quarter of 2008, the fastest for this period of the year in more than a decade, adding to speculation the central bank will raise interest rates further to curb demand and cool inflation, reported Emerging Markets Weekly, a foreign-exchange publication based in Barcelona, Spain.
• Domestic spending fuelled growth. Household consumption rose 6.6% in the first quarter from a year ago, the 18th straight quarterly gain, the national statistic agency said in Rio de Janeiro. The last time first-quarter growth topped this year’s rate was in 1995.
Klabin, the biggest producer, exporter and recycler of paper in Brazil, was the first Brazilian company to become a member of the Chicago Climate Exchange, or CCX, in June 2005. Many others have since joined. The CCX is an international market for the exchange of carbon credits.
The CCX brings together companies that are voluntarily seeking to reduce greenhouse gases, or GHGs, one of the noted causes of climate change. For the participants, the goal for GHG reduction is 1% per year between 2003 and 2006, totalling 4% in Phase I and using as a reference average fossil emissions between 1998 and 2001.
Phase II, recently approved, covers the period between 2007 and 2010, with the additional commitment of a 2% reduction for its members. One project that the company notes toward that goal is the Carbon Sequestering Project: 9,683 hectares of forests that were in a degraded state in 1989 and 1990 now have sustainably managed forests.
Pulpwood costs are rising in Brazil
Brazilian pulp mills had to pay 8% more than the previous quarter for open-market pulpwood and wood chips in the fourth quarter of 2007, reports Wood Resources International of Seattle, Wash.
“Increased competition for smaller pine logs between pulp mills, energy producers and the wood panels sector has pushed prices to new records, averaging almost $100/odmt in the 4Q,” the consulting firm notes. Less than four years ago, pine pulpwood prices were just over $20/oven-dry metric ton.
The pulpwood market in Brazil has gone through a major transformation; from previously having had some of the lowest conifer fibre costs in the world, to being close to the global average, Wood Resource Quarterly recently reported.
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