Votorantim, Aracruz: Global Economy Specialization

Includes: ARA, VCP
by: Jeffrey McLarty

Pulp producers who farm eucalyptus and profit from the plant’s unique 7 year cycle as opposed to those producing from hardwood’s cycle, which lasts decades, are starting to reap the benefits. This is because of the global economy’s specialization of the producers.

Apparently it’s really easy to grow in Brazil, and almost impossible to grow it in North America. North American pulp producers are going to have an increasingly harder time competing in a global economy because the turn over of their trees is not quick enough.

Adding the fact that mainland China apparently has a huge pulp shortage, Brazilian pulp producers are not only going to keep benefiting from the growth in Brazil, but also the wobbling growth in China.

One more point of interest is that North American’s growth rate of consumption of pulp is unsustainable, without imports. Talk about right place at the right time, perhaps that’s why Votorantim (NYSE: VCP) has chosen to sell off their paper business to make more capital investments and bring on more capacity for pulp production. Of course, this is no surprise to the industry and everybody is bringing on more capacity.

Companies that operate in the space include Votorantim, a pure pulp play. Be wary of the valuation ratios and one time cash-flows in the past, and Aracruz (NYSE:ARA) which has the biggest market share stake at 27% of the global demand.

Disclosure: No position, and I certainly have no expertise in the field of plants.

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