How will the Brazilian floods hit the pulp and paper industry？
How will the Brazilian floods hit the pulp and paper industry？
May 20, 2024
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 of containerboard is also expected to increase significantly in the short term, as people across the country will need cardboard boxes to send donations to the affected areas, thus increasing the need for goods transport. Considering the two opposing forces, it is difficult to assess how the net impact on corrugated box consumption and shipments will change in May and June.
Medium-term impact: demand growth to be above average Looking ahead to the next 4-12 months, it is easier to expect demand for paper products to grow faster than average, despite the expected decline in GDP over that period. Firstly, we can assume that a significant proportion of packaging and paper stocks held by local industry will be lost to flooding. The simple fact that economic life will return to normal is therefore sufficient to foresee an unusual one-off increase in demand for these products, which, given Rio Grande do Sul's low share of capacity, is likely to be supplied by states unaffected by the tragedy. This should apply to all industries and business activities, not just major consumers of packaging and paper.
Second, we can also assume that many businesses and individuals will have to replace some of their assets - goods, machinery, furniture and even appliances - as a result of the flooding. The increased demand for these durable goods should support the production of these items elsewhere in the country, thus stimulating the consumption of paper products, especially packaging, for transport to Rio Grande do Sul.
Third, from a political perspective, government spending should be high in 2024, with municipal elections taking place as scheduled. Typically, election years are characterised by increased spending on advertising, leaflets and even promotional items to increase public recognition. Although government spending is limited by austerity laws, tragedies such as this one often justify declaring an emergency and spending beyond the government's budget. As a result, there is a higher than normal incentive for governments to increase spending given the tragedy and the election.
However, the loss of income will be negative for many as they may rely on credit to restore their homes and replace durable goods, which may limit normal day-to-day needs in the medium term due to rising debt levels.
In summary: Opposing forces will cancel each other out Our initial conclusion on the consequences of the tragedy in Rio Grande do Sul, Brazil, on demand is that opposing forces - those that increase demand and those that decrease it - should co-exist and cancel each other out in the short term, making this essentially a zero-sum situation . Any one-off gains from redevelopment are likely to be immediately cancelled out by a sharp fall in demand due to rising consumer debt levels. From an industry perspective, we believe that the gains from replacing damaged paper product inventories in the short to medium term will be offset by short-term production losses, which will cancel each other out. As a result, we have not revised our demand forecast for Brazil shown in the latest Latin American Pulp and Paper Forecast 2024, which is for containerboard to grow by 1.7 per cent, other industrial packaging grades by 1.5 per cent, and household paper by 2.7 per cent, but for printing and writing paper to decline by 2.1 per cent. For total shipments of corrugated boxes and board, as assessed by Empapel, growth of 4.2% is still forecast.
The risks we have analysed are mainly related to the inflationary impact of crop losses in Rio Grande do Sul. The state is Brazil's largest producer of rice and an important grower of fresh foods. These commodities are usually very sensitive to supply shocks and represent an important part of consumers' budgets. As a result, a sudden rise in food prices could lead to a national purchasing
