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Money that grows on trees – Brazil’s economy is crumbling but its giant pulp firms are booming

Post on March 24, 2016, 2:23 pm by the-victoria-law-group 0 Comments

LOOK north from atop the 120-metre (390-foot) bleaching tower at the Horizonte 1 pulp mill, and all you see is plantations of tall, slender eucalyptus trees. They stretch from the factory gate, across the gentle undulations of Mato Grosso do Sul, a state in Brazil’s centre-west, all the way to the horizon. “That’s our competitive advantage,” explains Alexandre Figueiredo, who is in charge of production at the plant. Its owner, Fibria, is the world’s biggest producer of “short-fibre” cellulose pulp, which is used to make such things as newsprint, nappies and banknotes. (“Long-fibre” is used for high-grade paper and packaging.)

As its name suggests, Mato Grosso do Sul (roughly, “southern thick bush” in Portuguese) has vast expanses of cerrado, or tropical savannah, a chunk of which was long ago turned into farmland, some of which has more recently been planted with eucalyptus. Most of Fibria’s 568,000 hectares of plantations lie within 200km of its mills. Eldorado, a rival with a mill on the other side of Três Lagoas (a city of 115,000 that is fast becoming Brazil’s cellulose cluster), needs its lorries to drive only a bit farther. No other firm in the world has such ready access to its raw material. Add the balmy climate and rich soils of Brazil’s south and centre-west—where, as Joe Bormann of Fitch, a credit-rating agency, puts it, eucalyptus “grows like a weed”—and it is easy to see how Brazil has conquered 40% of the global short-fibre market.

Investment in technology is paying off, too. In the late 1990s Brazilians introduced a fast-growing eucalyptus variety that can be harvested after just seven years, compared with the two decades or more it takes to grow pine, the main source of cellulose pulp in the northern hemisphere. Next door to Horizonte 1, Fibria is building a high-tech nursery with technology devised by Dutch flower growers. Eldorado pioneered the use of drones to map the topography of its woods and optimise planting and harvesting.

Pulp producers are also thriving thanks to the storm that is sucking life out of much of the rest of Brazil’s economy. From his vantage-point, Mr Figueiredo waves towards the only clearing in the arboreal landscape: an unfinished Petrobras fertiliser plant a few kilometres away. Construction stopped in 2014, when the state-controlled oil giant emerged as the locus of a multibillion-dollar bribery scandal that may yet topple Brazil’s government (see article). That is in stark contrast to the frenetic activity directly below him, where a second, 8.7 billion reais ($2.4 billion) production line is taking shape that will more than double Horizonte 1’s current annual capacity of 1.3m tonnes, once it is completed in late 2017.

Recession and political upheaval have brought Brazil’s currency, the real, down by three-fifths against the dollar since 2011. That is a boon to pulp producers, who export nearly all their output. Standard & Poor’s, another rating agency, reckons that production costs in dollars dropped by $50 per tonne in 2015; another $40 per tonne was saved on maintaining mills. UBS, a bank, calculates that for every 10-centavo decline against the greenback, Brazilian producers’ earnings rise by $15 per tonne.

Read The Economist here:

http://econ.st/1Rz0NPD

Presented by Miami International Business Attorney

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