Chile’s Wood Pulp IndustryBy By Tom Azzopardi
Over the past five years, Chile’s wood pulp companies have invested heavily in new capacity but, as both the industry and its trees reach maturity, new growth challenges are looming.
Chile’s forestry industry is built on an enduring comparative advantage - the favorable soil and climatic conditions that mean rapid tree growth and high yields. But it wasn’t until the 1970s that local companies, encouraged by a program of government grants and tax breaks, started large-scale planting of the radiata pine that now covers vast swathes of southern Chile.
By 1995, Chile had 1.7 million hectares under forest plantations, up from just 300,000 hectares in the mid-1970s. And, as these plantations began to mature, wood pulp plants followed, raising output from 800,000 tonnes in 1990 to 2.6 million tonnes by 2000 and 3.2 million tonnes last year.
Chile was not alone in developing a forestry industry during this period. A similar phenomenon, also boosted by state support, was seen in Brazil, which is now South America’s largest pulp producer. Output there climbed from three million tonnes in the early 1980s to six million tonnes in the mid-1990s and 10.4 million tonnes last year.
According to the UN Food and Agriculture Organization (FAO), Brazil was the world’s fourth largest pulp exporter by 2004, after Canada, the United States and Sweden. And Chile had reached fifth place. “That’s a remarkable achievement for a small country like Chile,” says Carlos Marx Carneiro, chief forestry officer at the FAO’s office in Santiago.
It is also an achievement that has served Chile’s export earnings well. Unlike Brazil, where around half of the country’s pulp output is consumed domestically, Chile produces almost exclusively for export.
Last year, Chile exported pulp worth US$1.2 billion, up from half that amount in the mid-1990s. And there is still plenty of room for growth.
Even now South America accounts for only around a tenth of international wood pulp output. As a result, Chile’s pulp producers - unlike its copper companies - can afford to increase their output without worrying about the impact on international prices.
And that is precisely what the country’s two pulp companies have been doing. Celulosa Arauco y Constitución, the forestry arm of the local Angelini industrial group, recently started pulp production at its US$1.4 billion Nueva Aldea industrial complex in southern Chile’s Region VIII where, once the new plant reaches full capacity in mid-2007, it expects output to reach 856,000 tonnes a year.
Similarly, Empresas CMPC, controlled by the local Matte group, is poised to start operation of a new 780,000-tonne production line at its Santa Fe plant, also in Region VIII. This project, with a cost of US$745 million, is the largest investment ever to be undertaken by CMPC.
Together, these investments will lift Chile’s pulp capacity by 50% to almost 4.8 million tonnes in 2008. And that is not all - the expansion also represents an important shift in the type of pulp that both Arauco and CMPC are producing.
Traditionally, Chile has focused on long-fiber pulp, made from radiata pine, while Brazil has specialized in the short-fiber variety, made mostly from eucalyptus. But Chile is now also diversifying into short-fiber pulp, due partly to the faster growth of eucalyptus trees which take half the time of pine to reach maturity.
In the late 1990s, Arauco modified a production line at one of its early plants so as to be able to use eucalyptus, but has since taken the process a stage further. At its Valdivia mill, which started operations in February 2004, 40% of the plant’s total capacity is devoted to short-fiber pulp and, at Nueva Aldea, the split is 50/50.
Moreover, CMPC’s new production line at Santa Fe will be devoted entirely to short-fiber pulp. As a result, once the production line is fully operative, the company’s mix will shift to 60% short-fiber and 40% long-fiber as compared to 70% long-fiber and 30% short-fiber at present, says André Bergoeing, a senior analyst at Larraín Vial, a local investment bank.
Not to Everyone’s Taste
But the industry’s expansion has not been an altogether smooth ride. As a high-profile dispute between Uruguay and Argentina has recently shown, pulp mills and the alleged affects of their effluent on waterways can raise fierce public opposition.
And Chile has been no exception. In late 2004, several hundred black-necked swans died in a bird sanctuary downstream from Arauco’s recently-inaugurated Valdivia plant, and many more emigrated. As a result, the plant was temporarily closed and, today, is still operating at 80% capacity, pending a new effluent-disposal system, possibly through a pipeline to the coast.
It could be four years before the plant is operating at maximum capacity, estimates Bergoeing. At Arauco, Charles Kimber, corporate affairs and marketing director, admits that the company will be hard pushed to present a new environmental impact study by the agreed deadline of April 2007 because the company’s attempts to take the necessary measurements have met with violent resistance from fishermen where the pipeline would reach the sea.
So are environmentalists in Chile and elsewhere in South America right to target the industry? At the FAO, Carneiro does not think so.
Chile’s pulp mills are among the most technologically advanced in the world, he says. They use tertiary effluent treatment that returns water to its source in close to its original state, putting them on a par with the environmental standards that prevail in Europe and the United States, he maintains.
Carneiro also dismisses environmentalists’ claims that the huge forestry plantations which feed Chile’s pulp mills have a negative impact on bio-diversity and soil quality. Forestry plantations are no more intensive or unnatural than wheat fields or fruit orchards, he argues, adding that, in Chile, some native forest was felled to make way for plantations but most occupied tracts of land eroded by decades of intensive crop-farming.
Moreover, in late 2003, Arauco and CMPC signed a pioneering agreement with local and U.S. environmental organizations on the protection of native forest. Under this agreement, both companies undertook not only to protect the native forests they own but also to refrain from acquiring land that was converted from native forest to pine or eucalyptus after 1994.
The pulp industry also has a strong track record on the use of renewable energy, a priority for the Chilean government, caught between high oil prices and dwindling gas supplies. By burning waste material, Arauco is, for example, able to power its energy-intensive plants and sell 110 MW of electricity to the local grid.
According to Bergoeing, the industry’s environmental problems are the result of a failure to communicate adequately with local authorities and communities. At Arauco, Kimber admits this was the case with the Valdivia plant, but says the company has learned its lesson and is spending a lot more time on community relations.
Land at a Premium
But, despite extra environmental costs, Chile’s pulp industry remains extremely competitive. Radiata pine reaches maturity in just 20 to 24 years, compared to between 50 and 100 years in the northern hemisphere, including southern California from where the species originally hails, while eucalyptus trees are ready for harvesting in 12 years, a fraction of the time of their hardwood equivalents in Canada or northern Europe.
Today, long-fiber pulp fetches close to US$700/tonne in northern Europe against cash costs in Chile of around US$300/tonne, says Arauco´s Kimber. As a result, local producers enjoy very healthy operating margins while their competitors in the northern hemisphere are struggling, due not only to less hospitable growing conditions but also to ageing plants.
But, despite its advantages, Chile’s pulp industry faces a constraint on its future growth - the trees to feed its plants. After its recent investment spurt, new pulp plants won’t be needed for another decade until new plantations reach maturity, says María Teresa Arana, head of research at the forestry industry association, CORMA.
That view is confirmed by Gonzalo García, secretary general of Empresas CMPC. Beyond the expansion at Santa Fe, CMPC will be concentrating on improving the performance of its existing plants, rather than boosting capacity significantly, he reports.
Moreover, doubts exist as to whether pulp producers can, in fact, substantially expand their plantations in Chile. According to Bergoeing, following Arauco´s recent purchase of 40,000 hectares from Forestal Bio Bio, there are no more major plantations on the market and little land left that is suitable for planting.
Remaining plots are either too inaccessible, too small or too distant from the nearest sawmill to be considered in an industry which relies heavily on the proximity of plantations, processing plants and ports to keep a lid on costs. And other sectors such as fruit growing and, further south, beef farming are also looking to expand, putting pressure on a limited supply of land.
The remote and wind-swept Aysén region of the far south could represent a final frontier for the country’s forestry industry, Bergoeing suggests. But it remains unclear whether that region’s tricky geography and icy climate would permit the development of plantations.
The cost of land is also an important consideration, says Carneiro. Plantations in Chile now cost US$1,500-US$2,000 per hectare against just US$400 a hectare on the other side of the Andes, he estimates.
It is not surprising then that many expect that the next step for Chile’s forestry giants will be to expand in other Southern Cone countries. Both have, in fact, already established a foothold in northeast Argentina where a subtropical climate, flat expanses of land and broad rivers provide ideal conditions for the pulp industry.
In 1996, Arauco acquired the Alto Paraná forestry company in the Misiones province, which includes a 350,000-tonne pulp mill and 233,000 hectares of plantations. In addition, the company owns plantations in Uruguay and Brazil.
Similarly, CMPC has around 100,000 hectares of plantations in northeast Argentina and has long been reported to be considering the construction of a pulp plant there. But so far neither CMPC nor Arauco has taken the plunge of expanding their investments in Argentina.
At Arauco, Charles Kimber says that both Argentina and Uruguay still lack the downstream network of mills and processing plants that allow forestry companies to exploit their reserves as efficiently as they do in Chile. But, according to André Bergoeing, political concerns lie behind their hesitancy.
Especially in a long-term business like the forestry industry, Argentina does not at present inspire investors with the necessary confidence, he argues. “Can anyone say what the rules are going to be even in five years´ time?” he wonders.
But northern hemisphere pulp companies are increasingly looking to South America in a bid to reduce their production costs. In May last year, Finnish-Swedish Stora Enso joined forces with Aracruz, Brazil’s largest pulp producer, to start operations at the Veracel plant in the state of Bahia, and the partners are now considering the addition of a new production line at the 900,000-tonne facility.
Uruguay has also attracted the interest of international players. Finland’s Botnia, Europe’s second largest pulp producer, is currently building the Orion mill, with a production capacity of one million tonnes, in Fray Bentos in western Uruguay. Stora Enso has also expressed interest in the construction of a pulp mill in Uruguay and, although Spain’s ENCE has abandoned its original plan for a plant in Fray Bentos, it has indicated that it will look for alternative sites within Uruguay.
Joint ventures between Chile’s pulp producers and international companies to develop projects in the Southern Cone are, of course, possible. Along these lines, Stora Enso and Arauco are currently talking about possible joint ownership of the saw mill and forest operations of Brazil’s Arapoti forestry company, which Stora Enso recently acquired from U.S.-based International Paper for some US$ 420 million.
But, meanwhile, it is becoming increasingly clear that the natural advantages and low production costs that underpinned the growth of South America’s forestry industry are up for international grabs. And that poses a key challenge for Chile’s pulp producers if they plan to expand in neighboring countries.