Pulp producers move to add tissue capacity in Brazil while smaller mills face cost pressures

Integrated and non-integrated paper producers see very different futures in the Brazilian market as former set to expand while the latter faces further cost challenges

Easy access to pulp and the possibility of recovering state taxes are motivating pulp producers in Brazil to advance plans to add new tissue paper capacity in the country. While integrated pulp and paper producers move to consolidate their lead in the market, small-size mills that depend on purchasing market pulp continue to face strong cost pressures, Fastmarkets understands.

Potential for new capacity and consolidation

Suzano, Bracell and CMPC Softys are the main companies that could move forward with adding new capacity and consolidating the tissue industry in Brazil, according to market participants.

Suzano announced on Thursday June 30 its plans to add a 60,000-tonne-per-year tissue paper machine (PM) next to a conversion plant in the city of Aracruz, in Brazil’s southeastern Espírito Santo state. The company is awaiting approval from governmental authorities to monetize credit from state taxes.

Bracell confirmed last March its intention to build a new tissue mill in the region of Lençóis Paulista.

Orders with machine suppliers have not yet been placed for Suzano’s or Bracell’s projects, Fastmarkets has learned.

Other non-integrated producers have recently started up new equipment. The machines had been ordered prior to the Covid-19 pandemic, however, and have been installed at some delay compared with initial plans. There have not been many new project announcements by smaller producers since the onset of the pandemic, reinforcing expectations that growth projects will be led mainly by large integrated producers.

Projects concluded recently include Damapel’s new 25,000-tpy tissue PM that started up in June.

Anin Papéis also installed in its Guarulhos mill a new 20,000-tpy tissue PM from supplier Metal Service last April, Fastmarkets has learned. A previously announced project by the same company in the city of Tres Lagoas has not moved forward.

Prior to being acquired by CMPC, Brazil’s Carta Fabril had plans to add a new 60,000-tpy PM at its Piraí unit, in the state of Rio de Janeiro. CMPC recently told Fastmarkets that the project is no longer part of the company’s roadmap.

Why bring in more new capacity with the current utilization rate?

The announcements for new capacity by integrated pulp and paper producers come at a time when utilization rates in the industry are not high. According to Fastmarkets’ Latin American Pulp and Paper Forecast, tissue utilization rates in Brazil remain under 70%, compared with an average of approximately 75% for the entire Latin American region.

Despite the challenging supply and demand scenario, integrated pulp and paper producers see room to gain market share as well as benefit from tax recovery.

Because of how the system for collecting state taxes in Brazil works, companies that are commodities exporters tend to accumulate tax credits. Market participants in the pulp industry have calculated that, in order to monetize such credits, all pulp producers in Brazil should have at least 10% of their sales made in the Brazilian domestic market.

“Having a tissue mill is a very interesting way to monetize such tax credits,” a source said.

Brazilian pulp exports are on the rise due to recent capacity increases and new projects under construction. This means that companies will need to increase domestic sales as well, if they want the tax benefit.

Cost pressures continue to build

Non-integrated tissue producers remain concerned about the health of their profitability margins due to high costs of pulp and the impact of exchange rates.

Producer sources said that they have been trying to increase their usage of white recovered paper to replace pulp, but supply has been limited because recovered paper availability is affected by the secular decline in demand for printing and writing (P/W) papers.

A scenario of growing capacity by integrated producers and tight margins for non-integrated producers tends to foster market consolidation, Fastmarkets consultant for tissue Esko Uutela said.

“It is possible that many smaller players will rethink their expansion plans as they have to take into consideration the impact of pressing costs for fiber, energy and transport,” Uutela said.

Aside from organic growth, market participants believe large integrated producers will continue to look for mergers and acquisitions. Bracell, Suzano and CMPC are also seen as candidates for such opportunities.

Esko Uutela, Principal of Tissue at Fastmarkets will be sharing his outlook for the tissue industry at the Forest Products Latin American Conference, running August 8-10. Join Uutela to find out more about what lies ahead for the tissue industry in Latin America and beyond.

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