Presented to the World Forest Institute Conference
"Brazil’s Forest Industry: Resources, Trade, Investment, Environment"
November 6 & 7, 1996
Portland, Oregon
Brazil is not alone in its development of a forest industry based on plantations of fast growing species. The other members of MERCOSUR, with the exception of Paraguay, have been rapidly expanding their forest plantation base in recent years. While the focus of my presentation will be in comparing and contrasting the forest resources and forest industries of Brazil, Chile, Argentina, and Uruguay, I think it is important to first have an appreciation of the extremely diverse geography of this region.
Argentina is a large country, the second largest in Latin America, but Brazil has three times the land area that Argentina does. Chile is a long country: if laid end to end it would reach from Portland to New York. However, Chile averages only 110 miles wide --- so it contains less than one-tenth the area of Brazil. And of course Uruguay is tiny in comparison – Brazil has 48 times the land area of Uruguay. In total, Chile, Uruguay and Argentina have less than ½ the land area of Brazil.
Brazil has the fifth largest population in the world, with over 161 million people. That is 4.5 times the population of Argentina, 10 times the population of Chile and about 50 times the population of Uruguay!
Chile has a very strong economy, but Brazil’s Gross Domestic Product is about 13 times larger. Having a large domestic market has been a great help in the development of the forest products industry in Brazil. Chile has had to rely much more heavily on the international markets for sales of its forest products.
Brazil’s total exports are also larger, 2 to 3 times larger than Argentina’s in 1994. However, Chile’s exports represent a much larger share of the economy. In Chile in 1994, exports were equal in value to more than 20% of the GDP, compared with less than 10% in the other countries.
When it comes to native forests, there is literally no comparison between Brazil and the other 3 Southern Cone countries. This chart shows only what is classified as "productive", or commercial forests. Of course, not all of this area is really available for logging, certainly it isn’t all economical to log, and it is difficult to compare statistics between the countries, as each has its own way of classifying its forests. But the scale is about right--- there are well over 300 million hectares of productive native forest in Brazil. Around 18-20 million hectares of Argentina’s native forests are classified as "productive", compared with only about 7.5 million hectares in Chile, and only about 600,000 hectares in Uruguay. Almost all of these native forests are hardwood species, and in Brazil the native forests are predominantly tropical hardwoods. There are no tropical forests in Chile.
I won’t spend much time on the native forest industry. The issues raised by environmental groups regarding logging in the tropical rain forest have been covered by other more qualified speakers here today. In Brazil, the native forests produce some high quality, high value lumber and plywood products. Let me just mention that in Chile the situation is quite different. In Chile, the native forest supplied only about 16% of the wood used by the forest products industry in 1995, and of that about 74% was used to produce wood chips which were exported to Japan. There are vocal environmental groups both in and outside of Chile who are opposed to logging in the native forests, although since virtually all of the logging occurs on privately owned lands, this harvest is unlikely to be curtailed for political reasons.
In all four countries, most of the new industry developments and forecasts are based on the extensive areas of plantations which have been developed with the aid of government incentive programs. Brazil and Chile have close to the same area in conifer plantations, 1.4-1.6 million hectares. In Chile, almost all of the conifer plantations are Radiata pine, while in Brazil Southern yellow pine (Pinus taeda and P. elliottii) is most common. In Brazil, there is also a substantial area of caribbean pine, and more than 100,000 hectares of Araucaria angustifolia , commonly known as Parana pine. Argentina has over 300,000 hectares of mostly Southern yellow pines, and Uruguay has about 30-40,000 hectares of the same species.
With hardwood plantations, the story is completely different. Brazil has ten times the area of eucalyptus plantations that Chile has, even if we include only the "productive" plantations in Brazil. Brazil has roughly 3 times the area of eucalyptus plantations of the other 3 countries combined. As with pine, the species of eucalyptus planted is not the same in all countries. In Chile, Eucalyptus globulus is by far the most common species planted, with E. nitens also planted in areas with frost problems. E. globulus is also planted in some parts of Uruguay and Argentina, but E. grandis is probably more common. And in Brazil, a multitude of species of eucalyptus have been planted, but E. grandis, E. saligna and E. urophylla are the most common.
In 1994/95 the harvest from pine plantations in Brazil was just under 27 million cubic meters, compared to a pine harvest of 18.5 million m3 in Chile. The harvest was much less in Argentina and Uruguay. There has been some discussion that the pine harvest in Brazil may level off, or even decline in the next decade, due to a decrease in planting there after financial incentives for plantation establishment ended in 1986.
In Chile the opposite has happened: planting has continued strong until recently, and the harvest is forecast to almost double over the next 15 years. I have seen no reliable forecast of pine harvest in Argentina and Uruguay, but most industry people expect the pine harvest to increase substantial over the next 5-10 years.
The harvest of eucalyptus in Brazil was estimated at 67 million cubic meters in 1994/95, although 53% was used to produce charcoal. The total volume is expected to expand to 80-95 million m3 over the next 4 or 5 years, and then jump to almost 120 million m3 in 2002, after which time the harvest will decline.
The harvest of eucalyptus is also expected to increase in Chile and Uruguay, and most likely in Argentina also, although the volumes are so small in comparison to Brazil that I had to put them on another chart.
The eucalyptus harvest in Chile is expected to increase from just over 2 million m3 in 1995 to more than 7 million m3 in 2003-2004. In Uruguay, a similar expansion is expected to occur, but given the area of plantations, I suspect that this forecast is slightly optimistic. In any event, there is no question that, given the expansion in plantation area in the last 5 years, the harvest of eucalyptus will greatly expand in these countries, although the volumes will be well below Brazil’s.
Brazil’s production of pine sawnwood is greater than the total volume produced in the other 3 countries combined. According to recent forecasts, this volume is expected to increase to 7 million m3 by the end of the decade.
Chile exports a much greater percentage of their sawnwood production, and in fact much of what is considered "domestic consumption" is further processed and exported as finished lumber, blocks, edge-glued panels, moulding, etc.
The U.S. imported more softwood lumber from Brazil than from Chile in 1995, but we imported more than 6 times the volume of moulding from Chile that we did from Brazil.
Brazil produces about twice the volume of pulp of the other 3 countries combined, but Chile produces slightly more long-fibre pulp than Brazil does. Both of the major producers in Chile have announced plans to build new pulp mills, one long fibre and the other short fibre, but no definite date has been set for these projects. Brazil will continue to dominate the region in this industry in the future. Just the announced expansion in capacity in Brazil is equal to the total production of pulp in the other three countries. Brazil’s expansion in pulp capacity is expected to be about 3 times the volume of new capacity developed in Chile over the next 5 years.
Surprisingly, Chile exports almost as much pulp as Brazil does, or at least they did in 1995. This is due to the fact that very little pulp is consumed domestically in Chile, while about two-thirds of Brazil’s pulp production is utilized by domestic paper mills.
Total paper and paperboard production in Brazil is 3.5 times the volume produced in the other 3 countries combined. And in Brazil, 80% of production is consumed by the domestic market. Exports from Argentina and Uruguay are negligible, but about 1/3 of Chilean production is exported.
There is one sector in which Chile is the clear leader in South America: log exports. Last year, at least in the first half of 1995, there was a strong international demand for pulplogs, both conifer and hardwood. All 4 countries exported significant quantities of pulplogs last year, but only Chile exported substantial volumes of sawlogs, more than 1.6 million m3. Battistella has exported some sawlogs from Brazil to Turkey this year, and there have been a couple of shipments to Korea in the past, but this business is tiny in comparison with Chile’s on-going trade with South Korea. Roughly 9-10% of Chile’s pine harvest is exported in sawlog form.
Chile is also the major player in the region in the wood chip export industry. In 1995, Chile exported more than 4 million green metric tonnes (gmt) of woodchips, mostly to Japan, but also some to the USA, Korea and Taiwan. Brazil exported about 800,000 gmt, to both Japan and Europe, and Argentina exported about 80,000 gmt to Japan. (Note: the Argentina chips were exported by a Chilean company.)
Wood-based panel production is much greater in Brazil than in the other 3 countries. Particleboard and hard fibreboard production is greater, and plywood production is also very important in Brazil. In Chile, the first pine plywood mill is currently being built by Arauco, and in both Argentina and Chile the plywood industries based on native hardwoods are in very tough shape. The only area where Brazil has been deficient is in production of medium density fiberboard (MDF)--- Chile is the leader there, with 3 world class facilities, and the principal producer in Argentina is the Chilean company MASISA. Duratex should soon have an MDF plant in Agudos, Brazil, and I will be very surprised if more facilities aren’t built in Brazil very soon.
Aside from the relative size of the industries in different sectors, another key difference is in the concentration of the forest industry in those countries. For example, in Chile the top three companies own more than 50% of the industrial plantations. In Brazil and Argentina we estimate that the top 3 landowners control no more than 10-15% of the industrial plantations, and perhaps slightly more in Uruguay.
In Chile the top two producers accounted for 75% of pulp production in 1995. In Brazil, the top two producers accounted for only about 32% of total production. There are certainly some very large players in the pulp industry in Brazil, but no one is as dominant as Arauco and CMPC are in Chile.
One of the reasons for interest in Uruguay and Argentina, despite their relatively small industries, is that both have the potential to greatly expand the area of plantations. Land costs are highly variable, and when you see comparisons of land costs between countries you have to question whether agricultural land is involved, but the key point of this chart is that, without question, bare land costs in Chile are much higher than Brazil, Argentina or Uruguay. This is why a number of Chilean companies and individual investors are moving to establish plantations in Argentina and Uruguay. And with the government incentive programs offered in Argentina and Uruguay, if your main interest is establishing new plantations and growing timber, you have to consider these areas. Chile’s plantation subsidy law has expired, but I am told that it is likely to be renewed again very soon, for all landowners.
Another difference between Brazil and Chile is the emphasis on different export markets. We’ve already discussed how Brazil has a much stronger domestic market. Europe and the U.S. are the dominant pulp export markets for Brazil, but Asia is a much more important pulp market for Chile.
For lumber exports, the U.S. and Argentina are the most important markets for Brazil. For Chile, Japan is a very important market, but primarily for the lower grades such as packaging lumber. The Middle East is also very important as a market for low grade lumber. For higher value products, such as moulding, components for doors and windows, furniture, edge-glued panels, etc., the U.S. is by far the most important market for Chile--- 75% of the "value-added" lumber products exported from Chile go to the U.S., (percentage based on value).
Other key points:
In Companies from Chile have been aggressive in expanding to the other Mercosur countries—Argentina, Uruguay, and now I understand Terranova has signed a joint venture agreement with CVRD in Brazil. And just recently, the Chilean company Arauco purchased Alto Parana, the largest market pulp producer in Argentina. In contrast, I can think of no investors from Brazil moving into the other countries. Chile thus seems to be moving to become more of a regional power in the forest products industry, while Brazilian companies concentrate on developing the industry in their own country. n Ports and Infrastructure - one of the major impediments to industry development in Argentina and Uruguay is the lack of good, deep water ports and an efficient transportation system within the country to move forest products to the ports. Chile has tried to attack this challenge by encouraging the private sector to develop ports and highways, and improve the rail system. Brazil has a number of excellent deep water ports, but faces challenges in both the operation of those ports (i.e. private vs. State, union problems, etc) and in the long distance to the ports that wood products must travel in many cases.
In Geographic concentration - In Chile, the forest products industry is heavily concentrated in the area just to the north and south of Concepcion. In Brazil, there are concentrations of forest plantations, but these areas are spread out over a much wider area than in Chile. n Wood costs - others have talked today about Brazil’s advantage in low wood costs. Again, it is hard to compare equivalent examples, but over the last couple of years pulpwood costs have been lower in Brazil than in Chile. Sawlog prices are also higher in Chile, partly because of the availability of the export market.
In conclusion, how can we characterize these four countries’ forest products industries?
In Uruguay is still very much a forest products power of the future--- an estimated 3 million hectares of land available for planting, land very fertile by most standards. The volumes of wood which will be available in the next five years will expand rapidly, and the challenge will be to bring in the processing facilities when the most likely markets will be for export only.
In Argentina is currently much farther along in developing its industry than Uruguay, but is still a good 10 years or so behind Chile and Brazil. Improvements in the river transportation system will help to make them much more competitive, assuming economic problems can be overcome. Fletcher Challenge has made a small move into this country, but it appears that the Chileans may be leading development here, speeding up the process greatly. Both Uruguay and Argentina represent opportunities to "get in early", that is, to become a part of the forest products industry while it is still in its early stages, implying the opportunity for greater long term profits. n Chile has a sophisticated, well developed forest products industry. Much better located relative to the expanding Asian markets than the rest of the Mercosur countries, and with species that have become well known thanks to the efforts of the New Zealanders and the Chileans. The very high degree of concentration in the Chilean industry is a problem which has restricted development, and this is likely to change only very slowly. The lack of a domestic market has also been difficult, but it has forced the Chileans from the beginning to be competitive in the international markets. I believe they have done a much better job developing their processing industries than New Zealand, for example, which has roughly the same area of radiata plantations and the same annual harvest, but in New Zealand log exports are 3 times the volume of Chile. Probably the biggest negative for North American investors is that Chile is now considered "over-priced", or mature--- that is, because of the perception of Chile as a stable country, a safe place to do business, and with a well-established forest products industry, purchasing timberland or mill facilities has become much less attractive in terms of the expected financial returns.
In Brazil is the giant in the region, both in terms of forest area and total production. In addition, there is much more value-added production in Brazil than in the other countries. For example, a much greater percentage of pulp production goes into paper and paperboard production in Brazil. Also, furniture production is much larger--- the value of furniture exports from Brazil is 10 times that of Chile. For foreign investors, Brazil’s forest industry seems to represent a compromise between a country like Chile (considered "over-priced", or offering less attractive financial returns, at the present time) and Argentina or Uruguay (considered great opportunities "in the future"). At least on the solidwood side, Brazil seems to be poised to enter a period of very rapid expansion now, it has timber resources available now, and judging by the interest in this conference, the perception by North American companies seems to be that the time for entering the industry in Brazil is now!
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