Lush Profits

Looking for something solid, with out-of-this-world growth? Check out these stalks in the woods of Brazil

By David Berman
Globe Investor Magazine,
September 18, 2008
Photograph Courtesy Stora Enso

Canada’s pulp and paper industry is in deep trouble. For one thing, people aren’t reading the printed word like they used to. Then there is the Canadian dollar. Yet there is still money to be made in pulp and paper, and Brazilian com­panies are doing it. Indeed, while Canadian firms languish, their counterparts in Brazil have been on a tear.

The Brazilian industry has a more dependable source of raw material in the eucalyptus trees that grow like weeds in the bikini-friendly southern climate. While a Canadian hardwood needs 60 years to mature, a eucalyp­tus can be ready for pulping in just seven years. “Brazil is the No. 1 place in the world to grow eucalyptus,” says Brian McClay, an industry consultant at TerraChoice Market Services in Montreal. “It’s grown in Portugal, Spain, New Zealand and China, but it does best in Brazil.”

By investing in efficient, state-of-the-art mills that are two to four times bigger than Canadian mills, Brazil has become one of the cheapest paper manufacturers on the planet. (Cheap labour also counts for a lot.)

It’s not so surprising, then, that Brazil’s share of the global hardwood pulp market ballooned to 31% in 2008 from just 11% in 1990, helped along by greater acceptance of eucalyptus as it continues to narrow the quality gap. Now, the Brazilian industry is gearing up for a period of con­solidation that could lead to even greater efficiencies, if not global domination of the market in the years to come.

Shares in Aracruz Celulose SA, the country’s biggest exporter of eucalyptus pulp, have returned 50% over the last two years (to the end of July) in response to an explo­sion in the company’s sales and profits. Suzano Papel e Celulose SA, the second-largest supplier, has returned 180% over the same period. And Votorantim Celulose e Papel SA, in the number-three position, has seen its shares return 67%. (All three stocks trade in New York as American depository receipts.) These stellar returns are by no means short-term blips, either, because the share prices of all three companies have climbed steadily for the past five years—in sorry contrast to their Canadian cousins. Wit­ness the withering 98% plunge in Tembec’s share price since 1999, and giant AbitibiBowater’s 70% decline over this year to the end of July.

Clearly, when it comes to pulp and paper, Brazil isn’t sharing our pain.