Economics

Real’s fall clears path for Brazil efficiency gains

There are some industries in which Brazil is so naturally competitive it almost seems unfair to foreign rivals. One such sector is pulp and paper, which took off after the introduction of non-native eucalyptus trees. These thrive in Brazil’s tropical and subtropical climate.

Whereas a hectare of forest in Europe produces between 7 and 10 cubic metres of wood a year, and 18 cu m in Chile, in Brazil the same area can yield 50 cu m, according to Ibá, the Brazilian tree industry association.

“No country in the world can deliver wood for various uses, no matter whether it is for pulp and paper, panels or flooring, as fast as Brazil can,” says Elizabeth de Carvalhaes, Ibá president.

Brazil’s competitiveness in pulp and paper is a combination of nature’s bounty and strong investment. Production of pulp, the key ingredient for paper, rose 8.8 per cent last year compared with 2013.

The industry has also invested heavily in innovation and research and development, adapting the introduced eucalyptus to Brazilian conditions and building state-of-the-art processing plants in ever bigger sizes to create economies of scale.

The sector is an island of promise that could point the way for Brazil’s wider industrial base as it struggles to compete in a world with ever more integrated supply chains.

Brazilian industries that compete in global markets, such as pulp and paper, have one thing in common: they are subject to less government intervention and fewer controls than other sectors, such as telecommunications, oil and gas and mining.

Although the government has invested heavily in pulp and paper through its development bank, BNDES, the main companies are listed on the stock market and operate in an open market. They have been affected by the weaker commodity cycle and declining economic growth in China, but are benefiting from a sharp fall in Brazil’s currency, the real, against the dollar.

Ilan Goldfajn, chief economist at Itaú Unibanco, the bank, says the fall in the real, which is at near 11-year lows of more than R$3 against the dollar, makes it a good time for the government and industry to begin trying to reduce trade barriers and protection in Brazil.

With a depreciated real, he notes, domestic industries have a competitive advantage. The weaker currency gives them room to breathe while they improve efficiency. Such a process should result in a more competitive industrial base and cheaper goods and services for Brazilian consumers, helping curb inflation, he adds. “This is the moment when we should start opening the economy and dismantling the last legs of tariff protection and reducing local content measures,” Mr Goldfajn says. “The weaker currency gives us room to do it with less trauma.”

Such a move should be accompanied by a push to conclude more trade agreements with other countries, he says. Brazil is trying to reach such a deal with the EU, but this has been held back by its partners in South America’s regional trade bloc, Mercosur.


Mr Goldfajn says the country’s complex taxation system needs to be fixed. Companies say that in Brazil they employ more lawyers than elsewhere just to cope with tax compliance. Environmental licensing procedures also need to be speeded up and simplified, he adds. “The issue is not to lower standards but to be able to produce a simple ‘yes’ or ‘no’ [to projects] much faster.”Mr Goldfajn says a more open economy will naturally adapt better to global business cycles. Losses in productivity will be offset by declines in the value of the currency. “The problem of the past 15 years was we had booming commodities and a boom in capital inflows, meaning industry could not get a break from the strong exchange rate,” he says. “It looks like this is over and capital flows will continue but not in the same way as in the past.”

A sign of how the free market favours the brave is that pulp and paper companies are attracting attention again, even though times are difficult for Brazil in capital markets.

After a period in which the industry has faced high costs in the form of soaring wages and land prices, as well as overcapacity, analysts are starting to back the sector again. Credit Suisse is upgrading its rating on pulp and paper companies, citing their rising cash flows and the benefits of the weaker real.

“The real has depreciated significantly and should continue to do so; and . . . commodities prices have fallen sharply, reducing exporters’ margins,” the investment bank said in a note. “Few sectors will benefit from this tough scenario, [but] pulp and paper is definitely one of them.”


SOURCE : Financial Times

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