Pulp growth, ESG challenges and paper transformation with Walter Schalka

We invited our 2022 Latin American CEO of the Year winner for a deep dive into the growth and transformation in the pulp and paper sector, as well as the challenge ahead for sustainability in the current market conditions.

Suzano CEO, Walter Schalka, is the winner of our Fastmarkets Latin American CEO of the Year 2022. Selected by a panel of independent industry experts, Schalka will be receiving the award at the conference on Aug 9 in São Paulo. In this exclusive interview with Fastmarkets, the executive talks about the challenges arising from the pandemic and what to expect for the future of Suzano.

Latam CEO of the Year 2022 - Walter Schalka, Suzano

Supply risk management has become preponderant in the post-pandemic world. What can Suzano’s customers expect from now on from a company that was already so big, getting even bigger?

Suzano continues to look to the ‘paper grade’ pulp market as a business that still has potential for future growth. We will continue to invest in this business and we believe demand for other applications of pulp will continue to grow quickly.

We have characteristics that are very important for our customers: first, the flexibility and the alternatives that we have for production are immense. We don’t have a single factory; we have several, with the flexibility to operate.

In logistics, we have several terminals at ports here in Brazil and in other parts of the world, allowing us to provide a high level of service. The company also works with exclusive ships for its exports - another competitive differential.

We want to improve that even further in the future and make a difference for our customers, reducing their needs for working capital while reducing supply risk. We are able to operate with consigned volumes at customers’ mills, giving an absolute guarantee of supply for them. For some of our customers, pulp is no longer part of their stock because supply is fully managed by Suzano.

The size of a company cannot make it lose agility, but instead it obligates it to have a set of initiatives that makes it different from other players.

Only a company that has the flexibility and multiple alternatives that we have can offer this. We accumulate several differential advantages, providing a level of service that is difficult to replicate. Meanwhile, we also keep investing in product differentiation with innovation and development of technologies.

There is no end point in pulp growth; there is no determination that Cerrado, our latest expansion project, is our last. Suzano continues to invest in its forestry base growth, a fundamental condition for eventual new investments.

In your view, could this rise in commodity prices begin to destroy the new demand that was being diverted to the pulp and paper sector?

We have a very clear view that we prefer low volatility and I do not think the volatility of prices that we have in the market is adequate. Because of that, we have convinced some of our customers to have a different price policy, because volatility does not help them or us.

When prices go up, consumption may fall - maybe not in tissue, but in other applications, it happens. If we can avoid volatility, we can better predict costs for customers.

A group of customers has already adopted new models, with different types of operations, sometimes including ranges with a ceiling and minimum price. This allows them to have a better forecast of results. But other clients have not adopted this. The negotiation goes around a pure commodity and therefore, responds to the dynamics of supply and demand with natural volatility. In this case, we have to sell pulp to them at the price the market determinates.

We are open to all nature of clients - customers who want a fixed price with longer payment terms, and others that want to work with lower volatility and a price range between minimum and maximum, using the Fastmarkets FOEX index as a base.

There are many models and it will depend on the client’s desire. We will not force any model of pricing; the clients need to say what they need. Many clients still use the traditional system of a fixed discount for a limited period, with a floating price following the price indices, but this model does not help reduce volatility.

Does Suzano remain optimistic about the additional growth in pulp consumption due to “fossil-to-fiber” and “fiber-to-fiber” demand?

Structurally speaking, we see significant growth in the medium and long-term demand for pulp. Each day we have clients and end users knocking on the door looking for plastic replacement, or new alternatives using pulp or lignin. We are very comfortable with our long-term strategy. In the short run, the market has its usual volatility that depends on the economic situation; now we are facing a situation in supply and shipping that will not be permanent.

What is your view about what ESG means today, with the pandemic, the war in Europe and the crisis in the price of commodities and energy in mind?

When we look at the E and S letters [in ESG], I believe that society will need a shock. In the same way that a war caused a shock to the energy supply in Europe and many people returned to using coal, the moment will come when they realize the climatic crisis and events related to it will accelerate and we will have to take even more emergency action. The chance of this happening increases every day.

In the social area, we need urgent action to reduce social disparity. It is not possible to accept that children who were born in a poor family will have much less opportunity than others from wealthy families. We also know that women represent 50.5% of society in terms of the number of people, but they don’t have a representation of this magnitude in the business world. We also need to address the racial issue which structurally permeates the society.

Global decarbonization projects will have to accelerate. We are very influenced by the situation and the moment we are living, and the financial system will have to learn that they need to be an instrument of this process. I have been very clear with financiers that they are being hypocritical in the ESG area because the first thing they ask me is about return on invested capital and dividends, while they should be asking how the company is building for the future.

In Suzano’s view of sustainability, what has changed after two years of a pandemic? What is Suzano looking at in 2022?

First of all, we are intrinsically on the right side of the equation because Suzano can reduce its own carbon emissions. but also greatly increase carbon sequestration or fixation. The latter does not include only planted trees, but the recovery of native forests. We need to recover more native forests, not only for industrial and commercial exploitation, but to increase carbon sequestration.

Philanthropy is cool but it doesn’t solve the problem; we need to find a structured action and assure education for the next generation.

We also need to look at the issue of inequality in society generating income for people in the community. On the matter of diversity, we have goals for successive approximation of women in the company’s leadership and that is also taking place for the black people that need a greater representation in the company. In addition, we need to respect the LGBT community and people with disabilities.

The company is learning that it has responsibilities that go beyond our fence. In the past, a company would look only for productivity and efficiency, but we are changing this business model. This is still valid, but we need to understand and address the fragile parts of our society and help them to reach another level.

Like many, Suzano also began investing in new packaging products after the pandemic. Is Suzano also a packaging company today?

Suzano will adapt to society’s conditions and the society is changing and we anticipate these changes when necessary. We believe very much in the paper area and if Suzano’s paper business was an independent company it would be one of the largest 50 in Brazil. When we compare it to pulp it may seem smaller, but the paper unit has the potential to grow even more and we will continue to invest in it.

We do not rule out the possibility of making new projects scalable. We have done this with tissue before and today we are leaders in the north and northeast regions of Brazil, as well as in Rio de Janeiro and Espírito Santo states. Our tissue business started from scratch four years ago and we are strengthening competitive differentials with it.

In the packaging market, we do not have the intention to enter and leave the market to be opportunistic. Suzano does not move for the maximization of short-term results; what we want is to create a long-term horizon for the company.

An example of that is what is happening with pulp now: even though we could make more money in the spot market, we are not selling any tonnages to clients without contracts, because I am not looking to results only for the quarter.

Flexible packaging will be a mega market - not only for Suzano, but for the sector as a whole. When plastic cups end, [paper cups] will also become a huge market; [the same applies to substitutes for] other disposable products made of plastic. We start production with a small size, but we are prepared to become big with these products.

This interview is also published in PPI Latin America, the industry’s most trusted pulp and paper news and price reporting service for Latin America. Sign up and get the latest market intelligence and insights now.

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August 8-10, 2022 | Renaissance Sao Paulo Hotel, São Paulo, Brazil

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