FMN Supplement -- Latin America – Trading, Investment & Paper Opportunities

Today, Latin America is one of the fastest growing markets in the world. Extending from Mexico down to Argentina and Chile and incorporating the largest democracy in the Latin world – Brazil – Latin America is becoming a fertile ground for foreign investment. Mexico, Central America and South America make up a greater portion of the western hemisphere and more than half of its people are under 20 years of age.

Between 1984 and 1995, Latin America’s population increased more than 22 percent, growing from 390 million to 493 million people. Just less than two decades ago, only a handful of Latin American countries enjoyed freedom of the press. Countries such as Brazil, Chile and Argentina were ruled by military dictatorships. Today, government policies in these countries focus on enhancing education, training and employment using market driven instruments.

Latin nations with a long history of high and hyperinflation and failed stabilization efforts are now taking the power to set monetary policies from government officials. Monetary policy is instead set by currency board systems based solely on market forces. At the same time, trade barriers among Latin nations continue to fall. According to World Bank projections, the rate of growth in Gross National Product for Latin American countries, which averaged 3.4 percent in the 1990s, will reach 6.3 percent over the next ten years. Yet, only a few Latin American countries have the infrastructure necessary to meet their increasing paper needs.

Paper and Paperboard Consumption

Over the last two decades, paper and paperboard consumption in Latin America has increased two and half times and annual per capita consumption has risen to about 70 pounds. According to the Latin American Confederation of Pulp and Paper (CICEPLA), between 1991 and 1995 paper consumption in Latin America grew at an average rate of 5.9 percent per year, while production grew at 3.3 percent. Because of high consumption and low production, paper imports increased to 25 percent.

CICEPLA is made of pulp and paper companies representing Argentina, Brazil, Colombia, Chile, Ecuador, Mexico, Peru, Uruguay and Venezuela. Together, CICEPLA nations export pulp and paper in excess of 2.7 million metric tons.

Brazil is the major paper producer in Latin America, with an output of 5.856 million metric tons, representing 48 percent of the region’s total production. Mexico follows with three million tons, and Argentina produces one million tons of paper and paperboard products. Also, these three countries produce 81.5 percent of Latin America's paper and paperboard, and 83 percent of its printing and writing paper.

According to CICEPLA’s statistics, 4.6 million metric tons of recovered paper were collected in 1995, representing an overall recovery rate of 40 percent. CICEPLA countries currently import about 1.5 million metric tons per year of recovered paper, of which 723,527 metric tons per year are OCC. The second largest imported grade is ONP, with 473,859 metric tons per year. Combined, CICEPLA countries consumed 6.1 million metric tons per year of recovered paper.

Mexico is the largest consumer of recovered paper, at 2.7 million metric tons per year, followed by Brazil with about 1.9 million metric tons per year. According to a report from the Food and Agriculture Organization of the United Nations titled “Projected Pulp and Paper Mills in the World: 1994-1999,” new mills and expansion projects in Latin America could add close to 1 million tons of annual demand for scrap paper by 1999.

The Environment

The Latin American paper industry is experiencing two major changes that will impact its future for years to come: increasing concern for the environment and the emergence of global competition.

As a region, Latin America is increasingly aware of environmental issues such as industrial air and water pollution and intensive use of natural resources, including forestry practices. Latin American governments are analyzing the economics of environmental issues. International institutions like the World Bank, the Interamerican Development Bank and the European Union are providing technical and financial assistance on infrastructure development.

According to a recent report by Environmental Business International Inc., the Latin American environmental market totaled $7.8 billion in 1995, lead by Brazil (44 percent), Mexico (22 percent), and Argentina (14 percent). As the report suggests, the key to all current and future developments is infrastructure.

In addition, a study by the Institute of Man and the Amazon Environment recently reported that in 1995 Brazil’s Amazon forest provided 75 percent of Brazilian wood production compared to 14 percent in 1976. As new information regarding forest practices enters the political, educational and social establishments, forest companies are experiencing negative public opinion pressures. Yet, in Mexico, over the past 5 years, forests have declined by 50 percent. This intensive use of natural resources and other environmental concerns are pressuring industry to fashion alternatives. Extensive government studies were followed, in some cases, by regulations, which are becoming increasingly popular.

Recycling trends bring another dimension to environmental quality control. Recycling is driven by the need to ease pressure on landfills, preserve timber and reduce the cost of producing pulp. Latin American countries know that environmental degradation could limit access to foreign markets.

Trade

Instead of focusing on the North American Free Trade Agreement and how slowly trade is taking place, the Southern Cone Common Market, MERCOSUR, (MS) is showing rapid growth. This economic agreement between Argentina, Brazil, Paraguay and Uruguay recently added Chile as an associate member.

MS eliminated tariffs and trade barriers inside its member countries, with a few exceptions for certain industries. The agreement allows the free movement of goods, services and factors of production among its member countries and establishes a common external tariff for third countries. To date, 85 percent of those tariff lines have been achieved. MERCOSUR is the fastest growing region of Latin America, representing a single market of about 210 million people. It is projected to surpass the 260 million by the year 2000. MS countries combined represent 50 percent of Latin America gross domestic product; 59 percent of its total area; more than 51 percent of its industrial production and inter-regional trade; and 53 percent of the total Latin American foreign trade.

MERCOSUR has reached a market of $1 trillion. This is primarily because of the bilateral trade between the two largest economies in South America, Brazil and Argentina. MERCOSUR has achieved international recognition as the third largest trading block in the world after the European Union and NAFTA. MS global trade in 1995 increased 17 percent over the 1994 figures, with total trade at $145.5 billion. Argentina MS trade went from $2.7 million in 1990 to $11.2 billion in 1995. In the case of Brazil’s total trade, MS share hovered around 6 percent between 1985 and 1990. Since 1991, this share has gone up significantly, primarily because of an increase in exports to 13.2 percent in 1995.

Market Opportunities

MS is the U.S.’s eighth largest export market at $25 billion, and its twelfth largest supplier. A dramatic increase in trade during the last two years has multiplied the number of foreign investments. Multinational companies are leading the way with inter-company production, marketing and administrative arrangements, such as Union Camp’s association with Argentina Zucamor. This has resulted in additional expansion and modernization projects, further enhancing their ability to serve their customers’ packaging requirements.

In addition, Stone Container now owns 50 percent of Cartonex, previously owned by Celulosa Argentina. As part of Argentina’s national privatization program, the province of Misiones recently privatized Papel Misionero. Papel Misionero is a kraftliner and sack paper producer serving domestic markets.

Grupo Durango, the largest forest products company in Mexico, recently acquired McKinley Paper Co., Prewitt, N.M., and Recycled Materials Management, Albuquerque, N.M., from their Australian parent company Amcor Packaging. The $138 million deal is part of Grupo Durnago’s strategic international expansion plan, and is thought to be the first acquisition of a U.S. paper company by a Mexican firm.

In the past, political and economic instability prevented American equipment manufacturers from doing business in this region. Currently, in many instances, it is a lack of commitment from top management to overcome the initial difficulties and financial requirements that prevent U.S. manufacturers from exporting. Also, Latin American businesses have learned that too many companies turn to exporting when business falls off in the United States. When domestic business starts to boom, they neglect export trade or relegate it to a secondary position. Companies often carry out institutional advertising campaigns, special discount offers, sales incentive programs, special credit term programs, warranty offers, and so on in the U.S. market, but fail to make similar offers to their international distributors.

Recommendations

The corporate strategy adopted by a company looking to invest and trade with MS will have to take into account:

·market conditions (demand and

competitiveness)

·the economic context of MS

·global and economic trends in MS

·the enlargement of MS

Tremendous potential exists for U.S. paper companies to become more active in exporting to Latin America. According to the U.S. Department of Commerce, during 1996, Mexico became the largest U.S. export market for finished folding cartons with 46 percent, surpassing Canada as the leading export market. The area is constantly growing because of a better economy, improved political structures, less debt and more privatization. Growth rates in MERCOSUR countries more than double the U.S. and are projected to triple by the turn of the century.

As Latin American economies expand, resulting in increased paper consumption, U.S. paper companies should position themselves to supply most of the increased demand. Latin American paper makers recognize the United States as the world’s largest paper and board producer as well as a key potential partner as they look for strategic alliances and access to capital and the latest technologies.

Latin America provides U.S. companies the best growth opportunities in the world after Asia, yet U.S. officials have paid only scant attention to the region since the historic December 1994 Summit of the Americas in Miami. The U.S. paper and paperboard industry will find itself with an increasing ocean of opportunities which it will have to share with Asian and Europeans investors. For U.S. companies to succeed, they will have to be able to see their greatest growth opportunities in joint ventures. Moreover, American companies must adapt their domestic philosophies to the different Latin cultures.

Real profit and risks will always be associated with trading. U.S. companies looking to enter the Latin American market must stop using “our way or the highway” as a way to conduct business. It is up to each company to weigh the necessary commitment and potential benefit against the saturated domestic U.S. market. – Carlos A. Rovelo.

The author is director of Market Development for Rock-Tenn Recycling, Dallas. The article is part of an 18-month project on the Latin American Paper Industry. Rovelo serves as appointed delegate to the United States by the Mexican Recycling Institute (INARE). The INARE will hold its 5th annual Congress and Exposition Nov. 18-19 in Mexico City.

The INARE consists of more than 1,500 companies and members representing equipment manufacturers, collectors, processors and others in the Mexican recycling industry.

For information on attending or exhibiting at the recycling conference call Carlos Rovelo at (214) 536-7896 or e-mail: crovelo@aol.com .