November 22, 2018

Engaging Southern America in World Production Chain

Geraldo Affonso Ferreira

Geraldo Affonso Ferreira
Partner/Tamaroli Inc

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For the last five years, at least, we all have been seen an unstoppable investments wave in new tissue machines in the whole of Asia, led by China.

Such a move, no different from other industry but especially on our pulp and paper industry, is the sign of the typical race of who moves faster to discourage others to follow.

However, such strategy that is largely applied in the pulp sector, and was also the case in coated paper and paperboard, does not seem to have brought the expected results the companies leading such move were expecting. But this is a discussion for another day.

As a result of that, you see today, the world and China in particular, with an over-capacity of coated paper, paperboard and also tissue.

Tissue paper is the newcomer to the “Obese” market club. The statistics show that China’s tissue production capacity exceeds 30% their present consumption and their operation rates are already on the low 70’s%, which is critical, to say the least.

Considering the projections of new capacities in the next five years, the situation will not be easier despite the per capita consumption growth.

Being part of the “Obese” Club, and as any over weighted individual, they have to find ways to lose fat and weight, and that will be either merging to each other (consolidation), shutting down inefficient plants (government support), and finally searching for new export markets while increase share on the ones they are already present.

Such inevitable moves might scary most of the world tissue manufactured outside China, particularly the western world, and especially the South American market, led by Brazil, to whom, 10 years ago, tissue export in large scale was just unthinkable. Therefore, they could never fell threat by overseas suppliers and besides that, Brazil has the second world largest import duty for paper imports (15%), only behind India.

But now the game is in another level, the production scale in China has reached a level where their cash cost against Brazil and South American suppliers is substantially lower and adding to that the logistic cost in China being less than half of what Brazilians and its neighboring countries faces, it is inevitable to have Chinese tissue manufactures focusing this part of the world for their export, simply because, it is one the few areas in the world with a great consumption growth potential for the next decade at least.

Taking the above into consideration, the huge import duty protection will not be enough to stop China’s entering South America, and I doubt any country would dare to enter into a dumping threat dispute with China, considering the representativeness of this Asian country on the economy of all South American countries.

As I have been saying for almost 10 years, to face the Chinese development wave you have three alternatives: Entrench, Adapt or Transform your self.

The only option I highly don’t recommend is the first one.

Saying that, why not find opportunities in adversities?

The opportunities I see for the South American tissue industry is to engage in the world pulp and paper production chain.

China is already the destination of more than one-third of all pulp produce in South America, while the Asian country is the largest single overseas supplier of writing and printing paper to the region that supplies them pulp. Thus, for writing and printing papers, to a certain extent, both regions are engaged on the world production chain already.

Such engagement can happen with Brasil, as an example, that is responsible for 60% of the South American market, by having their tissue producers developing commercial partnerships with Chinese suppliers to sell their over capacities through their main assets, which are the market experience, expertise and knowledge, distribution infrastructures and credit facilities. Competitive advantages, that is incomparable to any other alternative that Chinese producers could ever have.

On the other hand, Brazilian producers could locally develop and create new markets with high value-added products, which are not there yet, as well as enlarge their present ones of high commodities.

That will save them from a substantial initial investment in new machines, the headaches of the new equipment learning curves and price erosion due to a sudden new volume trying to find a marketplace.  

Considering that such overcapacity in China may balance by the early 2020’s, and since the Brazilian pulp and paper association has an excellent relationship with the central government, they could present a project to reduce temporarily the import duty for tissue, enabling the local producers to create and develop markets for later on to install new machines, phase out from the imports, and avoiding disruption of market price.

It is definitely a challenge but it is feasible, as long as our tissue manufactures switch their mindset more to a commercial driven than to production view only.  

Comments? You can contact me directly via my AdvisoryCloud profile.


"Engaging Southern America in World Production Chain" originally appeared in Tissue World Magazine - Oct 2015.

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