In uncertain times

3 December 2009

The vibrancy of the Asian panel markets over the past decade, particularly those in China, has long been commented upon. China has been an exciting place in which to observe the development and growth of what has become an enormous industry.
A similar sense of excitement has started to pervade the panel sector in South America, particularly in the ‘Southern Cone’ countries (Argentina, Brazil, Chile, and Uruguay), but especially in Brazil.
In recent years, we have seen rapid growth in markets, capacity and investment in the sector. Clearly Latin America is no China and the wood panel industry in South America is significantly smaller than that in China.
However, the sense of excitement in the region has been palpable – and comparable in many ways with that in China. There is a downside to this excitement (at least from an economist’s point of view). This relates to the almost grandiose, and close to irrational, business decisions that can be made when markets are close to euphoria.
In recent years, just as in China, the primary business model in Brazil (at least into early 2008) could arguably be described as “build it and they will come”!
Just as in the movie, “Field of Dreams”, where a baseball stadium was built in a cornfield with the expectation that paying spectators would appear as if from nowhere, panel producers in China and Brazil seem to have had a similar philosophy, or faith, that profitable business would simply show up as needed.
Certainly in China, business plans have often been awfully thin on substance about where market growth would be for the output being added by multiple new facilities. This approach was almost understandable when growth rates of 20% a year were typical and export potential seemed unlimited. But markets do mature, growth rates consequently slow, and good businessmen need to have a clear understanding of market potential when growth rates are not 20% annually.
In recent years we have seen rapid growth in South American panel markets, largely because of domestic market strength. Steady and sustained economic growth, the development of home ownership, and a growing middle class, have fuelled Brazilian demand for panels for furniture and fixtures.
The table below summarises Brazilian production of wood based panels over the past four years (2005-2008). MDP (‘medium density particleboard’) output jumped 27% and MDF production was up 47% over these four years. In both cases (unlike plywood) exports were a minimal contributor to demand.
However, over the same period, Brazilian hardboard production slipped 4% as MDF/HDF increasingly displaced hardboard in export markets (even as domestic hardboard consumption edged higher); softwood plywood output slumped 17% (largely because of plunging US demand – domestic consumption actually rose); and hardwood plywood production tumbled over 50% as tropical log supplies tightened and buyers increasingly steered clear of purchases of products manufactured from endangered tropical hardwood species.
Surging demand led to stronger prices and the best profitability in over a generation for many panel producers. The result was a boom in investment, both in new production lines and in complete new (greenfield) operations. Cambridge Forest Products Associates (CFPA) estimates that total Brazilian MDF and MDP capacity in 2005 was approximately 4.45 million m3.
As of 2008, effective capacity had climbed to 5.28 million m3 and will be close to 7.1 million m3 in 2009.
By 2011, once all the new lines have fully ramped-up to their rated capacity, Brazil’s combined MDP/MDF capacity will be approximately 8.85 million m3.
These estimates assume no closures of existing capacity. However, market conditions will probably dictate closures of at least some older capacity over the next few years. Even assuming that Brazil quickly shakes off the global economic recession in 2009, and domestic markets return to a growth path, it is hard to see how this growth will be sufficient to absorb all the new capacity that has, and is scheduled to, come on-stream through 2010. And with weak off-shore markets and fierce competition from other under- utilised panel operations in Asia and Europe, it is hard to see Brazilian panel producers exporting their way out of trouble.
In 2008, CFPA estimates that the production/ capacity ratio for MDP/MDF was close to 90%. To maintain that operating rate in 2011 with no mill closures would suggest production of 7.9 million m3; or 3.2 million m3 greater than in 2008 (a record year). This would represent average annual compound rates of growth of close to 20%, 2009-2011. We know that in the first half of 2009 production was down approximately 16% from the same period of 2008. Even assuming a stronger second half of the year than the first, total 2009 production will likely be flat to slightly lower than in 2008 (Figure 2). Consequently, it is highly unlikely that Brazil’s MDP and MDF producers will be able to sustain operating rates close to 90% over the next few years and will average operating rates of 65-70% or lower.
In CFPA’s assessment, the Brazilian panel industry will undergo a period of upheaval and consolidation. Already, in the matter of just a few months, we have seen two major changes in the structure of that industry.
First, the creation of a newly-enhanced Duratex company as it merged with Satipel to create one of the 10 largest global panel producers. This company’s operations are equipped with multiple modern facilities utilising relatively abundant plantation-grown fibre.
Second was the announcement in late August of Arauco’s acquisition of Tafisa- Brazil’s operations; this acquisition has vaulted Arauco into the position of a major panel producer in Brazil (as well as probably pushing this company close to being a Top 10 global panel player).
Further consolidation within the Brazilian industry is to be expected, particularly as lower panel prices put pressure on margins, reduce cash flow and push some operations into financial difficulties.
Consolidation will facilitate shake-out and rationalisation of the industry. In CFPA’s estimates, this will include the closure of significant volumes of MDP capacity in particular (around 450,000m3) and possibly of older MDF capacity.
In addition, ownership consolidation will facilitate more efficient distribution of production to the most efficient and lowest-cost facilities.
Even with this re-structuring, it will be difficult to push average production/ capacity operating rates much above 70% by 2011 through growth in Brazilian domestic demand alone.
However, companies such as Duratex and Arauco are better positioned to expand Brazilian panel exports, given their current already-significant exposure in North America, Mexico, Europe and parts of Asia.
Nevertheless, growth through increased offshore exports (as distinct from exporting to the ‘near-abroad’, ie the neighbouring countries within South America) will be difficult as Chinese and European MDF producers look for opportunities in South and East Asia and the other growth regions over the next few years.
Relatively strong currencies (in both Brazil and Chile) will also hamper an export-led growth strategy outside South America – especially one aimed at North American markets.
It is therefore hard to see an export-led growth strategy solving Brazil’s problem of excess wood based panel capacity, at least in the near term. Longer term, the problem will likely solve itself as Brazil’s domestic markets sustain relatively rapid growth over the next decade. This growth will be propelled by a rapidly expanding middle class, with larger discretionary incomes to spend on furniture, cabinets and fixtures in the new homes expected to be built over the period.
But the next few years will likely be rough for an industry that not too long ago thought the good times would never end. Economic cycles will continue: following the downswing, there will indeed be an upswing, but patience and deep pockets will first be required before the Brazilian panel industry again enjoys boom conditions.

The author, Bernard Fuller of Cambridge Forest Products Associates, (, welcomes your questions and comment s, which should be sent to: