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A big question mark for Brazilian containerboard market participants right now is the impact the Rio Grande do Sul floods will have on demand in the country. Although hard to estimate, especially amid reduced gross domestic product (GDP) forecasts, we still believe that the floods will have a somewhat limited impact on the demand for paper products across 2024, as negative effects should be counterbalanced by positive, one-off consequences.
The consensus is that the GDP growth forecast of 2% for Brazil is likely to be cut by 0.3-0.4 percentage points, as Rio Grande do Sul accounts for approximately 6.5% of the country’s GDP, but with higher shares for both industrial production (around 8%) and agriculture (around 13%). According to some estimations made by the federal government, the state, which is home to 10.8 million people, will need approximately $10 billion for reconstruction. Several pulp and paper mills were directly or indirectly affected by the tragedy.
It should be noted that after other similar catastrophes around the world, the average GDP of the country affected was cut was around 1.5 percentage points, according to estimations made by economists for the Valor media group.
So, what does this mean for paper products consumption? To facilitate our explanation, we will discuss it over two time periods: the short term (the next 1-3 months) and the medium term (the next 4-12 months).
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In the short term, we expect operating rates at existing mills in the state to drop, reducing production and the consumption of raw materials. However, other mills around Brazil may be able to temporarily increase operating rates to offset the production losses at Rio Grande do Sul’s mills. This is particularly true given the state’s lower importance in the country’s capacity share.
The state is home to CMPC’s Guaíba mill, which can produce 2.3 million tonnes of pulp annually and accounts for roughly 7.9% of the country’s total pulp capacity. There are also at least seven tissue producers located there, accounting for 90,000 tonnes per year or 3.7% of Brazilian tissue capacity and around 77,000 tonnes or roughly 3% of Brazil’s total printing & writing paper capacity. Finally, there are about 107,000 tonnes of containerboard capacity installed and 24,000 tonnes of other industrial packaging papers, representing 1.7% and 0.9%, respectively, of the country’s capacity.
So, at first glance, the tragedy should have little impact on the production side, regardless of the grade analyzed. However, the consumption of paper products by the local industry will fall, as manufacturers have partially or totally halted their lines amid the disaster.
The major impacts on packaging paper consumption will be from containerboard, although this is mostly produced outside the state, and the animal protein and food sectors, which are reporting double-digit losses and losing production as animal feedstock is being rationed at the major beef and poultry farms. Exports are also expected to drop in the short term, reducing the consumption of packaging paper.
However, the consumption of containerboard is also expected to sharply increase in the short term, as people around the country demand boxes to send donations to the affected regions, increasing the demand for cargo transportation. It is hard to assess which way the net effect on consumption — and shipments — of corrugated boxes will swing in May and June, given the two opposing forces.
Looking out 4-12 months from now, it is easier to expect that demand for paper products will grow faster than the average pace, despite the expected drop in GDP for the period. First, we can assume that a significant part of the packaging and paper inventories held by the local industry will be lost due to the floods. Therefore, the simple fact that economic life will return to normality is enough to foresee an abnormal — one off — increase in demand for those products, which are likely to be supplied by states unaffected by the tragedy given the low capacity share in Rio Grande do Sul. And this should be valid for all industries and business activities, not just major packaging and paper consumers.
Second, we can also assume that many businesses and people will have to replace part of their assets — goods, machinery, furniture and even appliances — due to the floods. The increase in demand for those durable goods should support the production of these items elsewhere in the country, thus stimulating the consumption of paper products, especially packaging, to transport them down to Rio Grande do Sul.
Third, from a political perspective, 2024 should see high expenditures from the government as municipal elections are scheduled to take place. Usually, election years are characterized by increased spending on advertising, flyers and even promotional goods distributed to increase public approval. Despite government expenses being limited by austerity laws, tragedies such as this one are often a reason to declare emergency situations and to spend beyond the government budget. So, the incentives for the government to increase expenditures are higher than normal given the tragedy plus the elections.
However, the income lost by many people will be negative, as they are likely to rely on credit to restore their homes and replace durable goods, which will probably limit normal daily demand in the medium term due to increasing debt levels.
Our preliminary conclusion for the consequences on demand from the tragedy that has hurt Brazil’s Rio Grande do Sul is that opposing forces — those supporting demand and those reducing it — should occur together in the short term, offsetting one another and making this essentially a zero-sum situation. Any one-off gains from the reconstruction will likely be immediately offset by a sharp drop in demand caused by higher consumer debt levels.
From an industrial perspective, we believe the gains from replacing damaged paper products inventories in the short and medium term will be offset by production losses in the short term, with one force offsetting the other. Therefore, we have not revised our demand forecast for Brazil shown in the latest Latin America Pulp & Paper Forecast for 2024, which is for growth of 1.7% for containerboard, 1.5% for other industrial packaging grades, and 2.7% for tissue and a decline of 2.1% in printing & writing papers. For total shipments of corrugated boxes and board assessed by Empapel, we still forecast an increase of 4.2%.
Risks to our analysis are mostly related to the inflationary impacts caused by the crop losses in Rio Grande do Sul. The state is the top Brazilian rice producer and an important fresh food grower. Those items are usually quite sensitive to supply shocks and factor heavily in consumer budgets. Therefore, a sudden price increase for food could lead to a reduction in purchasing power nationwide, limiting the consumption of paper goods elsewhere in Brazil.
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