Chile, the world's fifth largest pulp exporter, is endowed with excellent soil and cheap production costs that allow it to weather industry cycles.
Copper makes up more than 30% of Chile's exports, but wood pulp and other forestry products are also a big economic driver, representing 12 percent of exports.
With pulp prices on the rebound, the South American country is boosting output through a new plant and by bringing existing plants up to full capacity.
Last year Chile exported close to 1.25 million tons of different types of wood pulp at varying prices, ending the year with prices at about $560 per ton CIF, which includes freight and insurance costs.
Prices have continued to climb this year. Benchmark Nordic pulp prices, or NBSK pulp , recently hit their highest level since 2001.
Immune to cycles?
"Because we are a low-cost pulp producer, even if international prices are low, Chile always continues competing," Maria Teresa Arana, research manager at the National Lumber Corp., a private-sector business group, told Reuters.
"Forecasts for this year lead us to believe that the average price will be higher than last year," Arana said.
The strength of the pulp market is already being reflected in higher revenue and profit for Chile's timber companies, particularly Copec and CMPC.
"The forestry sector is robust, with new projects like Copec's Valdivia plant, and CMPC also has expansion projects," said Javier Corthorn, analyst at Tanner brokerage in Santiago. "These companies' shares have already been rewarded."
Chile exported some $900 million in pulp last year while overall forestry exports - including paper products and sawed timber - were $2.550 billion, according to preliminary industry figures.
Asian demand helps
National Lumber Corp. forecasts 11% growth in forestry export returns this year to $2.830 billion. Half of that will go to Asia.
Output will also jump this year after Arauco, a unit of Copec, in January opened a $1.2 billion pulp plant, called Valdivia. The plant will initially add 400,000 tonnes to Chile's production, later rising to full capacity of 600,000 tons.
Further fueling industry optimism is the removal of South Korea's two percent import tariff on Chilean pulp after a bilateral free trade deal goes into effect in April.
"The agreement improves our competitiveness and, in addition to that, China has such strong economic growth that it is the leading market for our pulp exports," said Arana.
UBS investment bank said in a report Feb. 23 it expects pulp prices in Europe to rise again in the spring, but warned that the industry remains highly sensitive to supply and demand shifts.
"The key risks are weak demand, as evidenced by general economic conditions, or increases in supply, in the form of capacity additions," UBS analyst Richard Schneider wrote.
Even though Chile's timber firms have sought to sell more value-added products and diversify markets, their best business continues to be shipping raw materials to Asia and Europe.
Growing conditions for forests in southern Chile surpass, in some cases, those of the United States and Canada, experts say.
"Our companies generally sell all their production and don't have the problems of other countries where they have to close plants when prices are very low," said Arana. (Reuters)
