Brazilian Paper Industry to Reduce the Production of Pulp
According to the Brazilian paper industry, the sector is currently facing a severe downfall in the prices of cellulose pulp. Two main elements seem to be responsible for this: first, the great increase in the offer of the product in the Brazilian market; second, the valorization of the Brazilian currency before the US dollar in the past few months.
Based on this, Brazilian paper companies are advocating an adjustment in the pulp production. Until 2019, several new plants of pulp will be delivered in Brazil, increasing the offer of the product in the market and, consequently, dropping the prices even more dramatically. For that reason, big paper companies, such as Suzano, uphold that the industry adjust prices by controlling the offer, since it cannot control the demand.
The strategy, although bold, seems to be a bit retrograde and not in line the country’s reality, somehow recalling the coffee policy implemented in the 30’s, when tons of coffee bags were bought to be burnt as a strategy for increasing the price of the commodity and ensuring revenues for the producers. Of course, this strategy was not successful. Neither would be a similar one for the paper sector.
Brazil is currently facing a significant increase in its demand for paper, and therefore, for pulp, as well as other relevant paper producers, such as Europe, Asia and North America. Artificially increasing the price of cellulose would deepen the inflationary setting in which Brazil currently lives in and would not be of any benefit to the economy in general, only for the companies controlling the resources.
In order to solve the problem, two strategies could be pursued. The first one regard improving investments in the paper sector in Brazil, in order to increase the country’s productive capacity and allow the Brazilian industry to meet the country’s increasing demands on paper. Studies estimate that by 2026, the country demand for special kinds of paper will increase in almost 300%, while the national industry only has the capacity of supplying less than 1/5 of this amount. The second strategy comprises the already tradicional way out through exports. Although the Real is more evaluated than it was a few months ago and pulp prices have dropped, the Brazilian currency still is less more undervalued than it was 2 years ago and the global demand for pulp still increasing, especially at a time where China and other asian countries are fiercely entering in the global paper market. In this regard, to control the offer of pulp as a way of manipulating prices does not seem the be the best alternative for an industry that has the capacity of improving itself and taking advantage of the new international setting.