Feasibility Study on Investment in Brazilian Paper and Pulp Industry

Feasibility study for investment in the Paper and Pulp industry in Brazil An overview of Brazil Brazil is the largest country in South America. It is the world’s fifth largest country, both by geographical area and by population, with over 192 million people. It is the only Portugese-speaking country in South America. Brazil is the largest national economy in Latin America.

It is the world’s sixth largest economy at market exchange rates and seventh largest in terms of purchasing power parity, as per the International Monetary Fund and the World Bank. Brazil has a mixed economy with abundant natural resources. The Brazilian economy has been predicted to become one of the five largest in the world in the decades to come. It has large and developed agricultural, mining, manufacturing and service sectors, as well as a large labour pool. Brazil’s current GDP is estimated to be $2. 294 trillion and Per Capita GDP $11,769

The Paper and Pulp Industry in Brazil Brazil is the largest producer of paper and pulp in South America. On the world stage, it is the 4th largest producer of pulp with a production of 13,315,000 tonnes and 9th largest producer of paper with 9,428,000 tonnes (2009). Brazil’s Pulp & Paper Production Source: Bracelpa Brazil is predominantly a tropical country. As a result, the soil and climate in most regions of Brazil are favourable to forest growth. The main geographical areas in the paper and pulp industry are the states of Sao Paulo, Parana and Santa Catarina.

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Furthermore, eucalyptus trees in Brazil have short growing cycles (approximately 7 years), compared to 10-12 years in Chile and 25 years in the United States. Thus, production of wood in Brazil requires less time and a smaller growing area when compared to Europe and North America, resulting in higher yields. Industry Overview- 222 companies spread in 539 municipalities, located in 18 states. - 2. 2 million hectares of planted area for industrial use. - 2. 9 million hectares of preserved forests- Total certified forest area: 2. 0 million hectares- Exports 2010: US$ 6. billion- Trade Balance 2010: US$ 4. 9 billion- Taxes: R$ 2. 2 billion- Investments: US$ 12 billion in the last 10 years- Jobs: 115 thousand direct jobs (industry 68 thousand, forests 47 thousand) and 575 thousand indirect jobs. | Source: Bracelpa, March 2011 Macro Environmental Analysis Political & Legal environment The Foreign Direct Investment regime in Brazil has been fairly liberal and foreign capital is viewed with sympathy by the large majority of political currents and parties, who see it as a source of employment and modernization of the economy.

The 1990s saw a host of path-breaking liberalisation reforms in the Brazilian economy. Certain investment policies were formulated in the 90s to attract more FDI in to the country. The Central Bank of Brazil simplified the registration procedure for FDI inflows. This led to a decline in the administrative costs associated with the entry of FDI inflows into Brazil. A series of constitutional amendments were enacted within 1995 and 1996, which helped remove constitutional distinction among national companies and foreign companies.

In 2002 Investe Brazil was set up to promote investments in Brazil. Despite a formally well functioning business environment, corruption and bribery are still serious obstacles to doing business in Brazil, especially in business dealings with the government. Multiple corruption scandals have emerged over the years, involving politicians and bureaucrats taking kickbacks from companies in exchange for awarding public contracts. The levels of bureaucracy and lack of transparency in rules make Brazil a difficult country to do business in. Economic Environment

The paper and pulp industry is one of the mainstays of the Brazilian economy. The Brazilian paper and pulp sector is comprised of nearly 200 companies. Most companies in this sector are privately owned. Foreign-owned companies account for about 6% of the output. Therefore, there is great scope for foreign investors to enter into Pulp & Paper Industry in Brazil. Latin American Pulp and Paper Producers Composition in 2010 In recent years, there has been a marked increase in paper consumption in Brazil, which is an important indicator of the economic development of a country.

Between 1997 and 2008, the average annual rate of paper consumption increased by approximately 3% per year, reaching 9 million tons in 2008, according to estimated figures from Bracelpa. Improvements in the purchasing power of Brazil's citizens have led to growth in the newsprint market (up to 18% in 2009). In the same year, 21% of paper and board and 33% of pulp production was exported. Brazil’s paper industry has potential for growth in both the domestic and export markets. Domestic consumption has huge growth potential, because per capita consumption in Brazil is still low when compared with other developed nations.

Consumption of paper and board in Brazil is close to 44 kg per capita. Furthermore, differences are enormous between the north and south-east parts of the country. In Western Europe, consumption of paper and board is 173 kg and in North-America 333 kg per capita. Social Environment Brazil has skilled labour in abundance. Minimum wages in Brazil are way lower in comparison to other nations. Brazilian legislation is, however, relatively inflexible and outdated in relation to labour costs, making things complicated. A continued shift towards a wealthier population has been apparent in Brazil since 2004.

There has been significant growth in the populations’ real disposable income. Strong consumption (Household consumption above 60%, Government consumption close to 20%) has been supporting Brazil’s growth profile over the past two decades. Formal job creation increased from 1. 2 million jobs in 2009 to 2 million jobs in 2010. The cost of living in Brazil is approximately 30% lower than in the UK and Europe, and for those with a foreign income there is a guarantee of value for money. Technological ; Natural Factors

Brazil’s high technology and natural advantages in forestry make it one of the world’s lowest-cost producers of pulp, and in the last 20 years Brazil has become an important pulp exporter. Brazilian exports of high quality papers to Europe are growing in volume, and expected to increase in the near future. This growing market is truly attractive and one can grab the share in this market by setting up a new industrial venture in Brazil. However, this industry sector is very competitive for reasons like state-of-the-art mills, sound management and well-established plantation forestry technologies.

Furthermore, availability of raw material is not a problem in Brazil as there is huge availability of good quality raw materials required for extracting and manufacturing pulp and paper. By analyzing the rotation and yield comparison of different pulp species in different countries, it is found that Brazil has the best rotation (years) and yield (m3/ha/year). This shorter maturing period also enables Brazilian producers to expedite the process of genetically improving the Eucalyptus species utilized Species| Country| Rotation (years)| Yield (m3/ha/year)| Eucalyptus| Brazil| 7| 44| Eucalyptus| South Africa| 8-10| 20|

Eucalyptus| Chile| 10-12| 25| Pinus spp| Brazil| 15| 38| Pinus spp| Chile| 25| 22| Pinus spp| New Zealand| 25| 22| An association named ABTCP - Brazilian Paper and Pulp Technical Association – is currently one of the most important associations worldwide in its segment. It was established with the purpose of technically qualifying the paper manufacturers in Brazil, in order to raise basis for a sustainable industry. In addition, technological development in the paper ; pulp industry has been supported by the research efforts of major producers and by financing from BNDES, the Brazilian Development Bank.

Opportunities The paper and pulp sector in Brazil is fast becoming the third largest in the world. The financial crisis of 2009 affected the Brazilian pulp and paper industry greatly. Brazil ultimately postponed its investment programmes. However, with the economy showing signs of recovery and emerging market’s increase in demand, those programmes have resumed Over the next seven years, an estimated US$20 billion is going to be invested in the nation’s forest base and in the construction of new mills. 10 new plants are due to be built in Brazil by 2020. At this moment pulp production is at 13. million annual tonnes, by the end of 2017 this is expected to reach 20 million annual tonnes. Also, during the same period, planted forest areas are predicted to grow by 25% and paper production will rise from 9. 3 million tonnes to 12. 5 million tonnes. This has all come about through the new global scenario in the pulp and paper sector. While the international financial crisis reduced global consumption, prices and raw material demand in traditional markets it also opened up opportunities to expand sales in growing markets, in particular China and India.

Challenges The pulpwood market in Brazil has gone through major transformations. From a point where it had the lowest conifer fibre costs in the world, it now is close to the global average. Any rise in fibre costs is a concern for forestry companies as the key factor determining a company’s global cost competitive position remains its raw material base. Brazil also faces a strong challenge as businesses in Brazil have to deal with a number of problems, which includes bulky tax regulations, inefficient government bureaucracy, and corruption.

Brazil has become less competitive in the last few years as a reason of this. Conclusion The Brazilian paper and pulp industry offers enormous potential to potential investors. The industry, with its advantage in terms of rotation, is expected to grow substantially in the coming few years with various investment programmes being in the phase of implementation. There is the challenge of a complex bureaucratic environment but the long term benefits outweigh the costs. FDI is thus recommended.

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