Tissue integration accelerates in Brazil as pulp producer buys company

Brazilian bleached kraft and dissolving pulp producer Bracell confirmed on Friday January 13 that it has signed an agreement to acquire tissue producer OL Papéis, noting that the deal is aligned with its intention to start producing tissue in Brazil and expand its operations in the country.

The deal follows several other acquisitions that have taken place in the Brazilian market recently. These transactions are further integrating this market, making the competition landscape tougher for small and medium-size companies that depend on market pulp.

“This acquisition reinforces Bracell’s strategy to continue expanding its businesses and investments in Brazil,” the company’s head of tissue operations, Sérgio Montanha, said.

The assets of OL Papéis are located in Feira de Santana and São Gonçalo dos Campos, Bahia state, and in Pombos, Pernambunco state, both in northeastern Brazil.

Capturing significant tissue paper market share

Fastmarkets estimates that the company can produce 58,000 tonnes per year of tissue paper. OL also produces diapers.

“OL Papéis has a significant market share in the Northeast, a region that accounted for 17% of the toilet paper volume sold in the country in 2021,” Montanha added. “Its operations, both manufacturing and brands, will complement Bracell’s presence in the country, along with its assets in the Southeast.”

Bracell, which is owned by Singapore-based RGE Group, did not disclose the terms of the transaction.

Before closing, the agreement must receive approval from Brazil’s Administrative Council for Economic Defense (Cade); that process may take 60-90 days.

Bracell also reaffirmed in a note that it was continuing with plans to invest in a tissue factory next to its pulp mill Lençóis Paulista, São Paulo state. The industrial site is home to its two new flexible kraft and dissolving pulp (DP) giant lines, known as the Star project. The project, which started operations in 2021, has a combined flexible capacity of 2.8 million tpy of bleached kraft pulp or 1.5 million tpy of DP.

The new tissue factory will be designed to produce 240,000 tpy of paper, with start-up scheduled for 2024.

Higher integration of paper mills

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.

As Fastmarkets has previously reported, this tax benefit has incentivized pulp producers to integrate their mills with tissue assets.

For Bracell, “adding paper production lines at the site will be extremely helpful, allowing the company to take advantage of a tax return program offered by the Brazilian government for exporters,” Fastmarkets tissue economist Esko Uutela wrote in the World Tissue Business Monitor.

Another option for local pulp producers to use these “export credits” is selling a large volume of pulp in the domestic market, but that is already difficult due to higher integration of paper mills and the limited number of participants.

Bracell adding 240,000 tonnes of new tissue capacity will have a major effect on the already very competitive Brazilian tissue market, Uutela added.

“Softys has grown through acquisitions to become the largest player, and Suzano will clearly take the second position when the deal with Kimberly-Clark has been completed,” Uutela said.

Softys, the tissue arm of Chilean group CMPC, has acquired Carta Fabril and Sepac in recent years.

In addition to building its own tissue lines, Suzano announced its acquisition of the Brazilian assets of multinational Kimberly-Clark in October 2022. The company, which is the world’s largest bleached eucalyptus kraft (BEK) pulp producer, also has plans for higher integrated capacity in its Aracruz site.

If, after completing the OL Papéis acquisition, Bracell moves forward with its plan to start up four new paper machines, the company will be able to dispute the leadership of the Brazilian tissue market in the coming years.

“The market will have seven large tissue machines integrated with hardwood pulp, giving advantages in not only fiber but also energy, as pulp mills produce surplus energy which can be used for paper machines rather than sold to the national grid. This will mean that tissue prices can be dictated by integrated players,” Uutela said.

For smaller and medium-size producers, this scenario of tightening competition will likely reduce margins, which could be fatal for companies directly competing in the mass market for toilet paper and toweling.

“Mill closures and/or bankruptcies of tissue suppliers are possible,” Uutela said.

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