How will the Brazilian floods hit the pulp and paper industry?
One of the major issues facing participants in the Brazilian containerboard market at the moment is the impact of the floods in Rio Grande do Sul on demand in the country. Although difficult to estimate, especially in light of the downward revision of gross domestic product (GDP) forecasts, we still believe that the floods will have a limited impact on demand for paper products in 2024, as the negative impact should be offset by a positive outcome. The industry consensus is that Brazil's 2% GDP growth forecast could be revised down by 0.3-0.4 percentage points, as Rio Grande do Sul accounts for around 6.5% of the country's GDP, but has a higher share of industrial production (~8%) and agriculture (~13%). The federal government estimates that the state, which has a population of 10.8 million, will need about $10bn to rebuild. Several pulp and paper mills were directly or indirectly affected by the tragedy. It's worth noting that, according to estimates from economists at Valor Media Group, the average GDP of affected countries fell by about 1.5 percentage points following other similar disasters around the world. So what does this mean for paper product consumption? For ease of explanation, we will discuss this in two time frames: the short term (next 1-3 months) and the medium term (next 4-12 months). Short-term impact: more difficult to assess In the short term, it is expected that existing mills in the state will experience lower start-up rates, which will reduce production and raw material consumption. However, other mills across Brazil may be able to temporarily increase their start-up rates to offset the loss of production at the Rio Grande do Sul mill. The state is home to CMPC's Guaíba mill, which has the capacity to produce 2.3 million tonnes of pulp per year, or about 7.9% of the country's total pulp capacity. There are also at least seven household paper producers there, with annual production of 90,000 tonnes, or 3.7% of Brazil's household paper capacity; printing and writing paper production of about 77,000 tonnes per year, or about 3% of Brazil's total capacity; and boxboard capacity of about 107,000 tonnes and other industrial packaging paper capacity of about 24,000 tonnes, or 1.7% and 0.9% of the country's capacity, respectively. Thus, at first glance, the tragedy should have had little impact on the production side, regardless of the type of paper. However, the consumption of paper products by the local industry will decline as manufacturers partially or completely stop production during the disaster. The main impact on packaging paper consumption will come from containerboard, although this is largely produced out of state, and the animal protein and food industries, which have reported double-digit losses and production losses due to rationing of animal raw materials for the major beef and food industries. Exports are also expected to decline in the near term, thereby reducing packaging paper consumption. However, consumption o...
- May 20, 2024