Brazil pulp giant sees good times ahead as China demand soars

The recovery in the pulp market is likely to continue for at least a couple more years, led by soaring demand in China and a lack of major new plants, according to one of the world’s largest producers.“The fundamentals for the next three years, they are very strong,” Marcelo Castelli, the chief executive officer of Fibria Celulose SA, said in an interview on Tuesday at Bloomberg’s headquarters in New York. “Asia as a whole, especially China, is growing like hell.”Fibria is the biggest supplier of pulp made from hardwood. It harvests eucalyptus trees in several Brazilian states and exports the raw material to Europe, North America and Asia, where it’s used in toilet tissue and printing paper. While demand in developed markets is typically stable, it’s racing ahead in Asia due to the region’s expanding middle classes.China’s efforts to curb pollution by restricting waste-paper imports and shutting older, dirtier industrial plants should mean higher demand for Fibria’s virgin fibre and a tighter market overall. Globally, pulpmakers need to expand capacity by about 6mn metric tonnes over the next four years to keep up with rising demand, Castelli said.In Fibria’s view, the industry will struggle to meet that challenge. After adding almost 13mn tonnes of new capacity since 2013, no major expansions have been announced since Fibria’s 7.3bn-real ($2.3bn) Horizonte 2 project was completed earlier this year. It sees no new factories will come on line until at least 2020.Not everyone is so bullish. Analysts at Banco Santander SA and Credit Suisse Group AG have lowered their ratings on Fibria in the past week and argued that pulp prices, after rising more than 40% this year, are likely to drop as supply normalises following a series of supply disruptions.For now, the supply and demand dynamics in pulp mean Fibria finds itself in a sweet spot, with an expanding cash flow and room to cut debt quickly. It plans to return some of the extra cash to shareholders and also use it to expand capacity, chief financial officer Guilherme Cavalcanti said in the interview. It’s already weighing a new expansion project in Brazil’s Tres Lagoas municipality, while also seeking consolidation opportunities.This year, Fibria has publicly discussed the merits of buying other companies, including Eldorado Brasil SA, which subsequently agreed to be acquired by another rival. It’s also interested in Suzano Papel & Celulose SA, its biggest domestic competitor. Fibria would still like to see industry consolidation, according to Castelli.“This is not a taboo,” he said. “We do believe that this step is going to create huge value to shareholders.”