Industry Reports

Deutsche Bank Reports Summaries

080409 Deutsche Bank Report - Latin America Tour

Deutsche Bank - Equity Research

* Takeaways from DB's Latin America tour

On a trip around the region, we visited with leading Argentine, Brazilian and Chilean producers as well as North American & European producers like International Paper, MeadWestvaco, SmurfitKappa and StoraEnso.   We also toured a number of facilities in Brazil & Chile and met with leading industry consultants (Poyry) and equipment suppliers (Voith).  Key takeaways from each of our meetings are inside.

* The falling US$ has been "good news/bad news" for many Latin companies

The bad news?  Most firms produce US$-denominated commodities, typically with most costs in local currencies.  Thus, as the Brazilian and Chilean currencies have appreciated, production costs have risen in US$ terms.  The good news?  The Latin producers still enjoy among the lowest costs in the world.  At the same time, rising currencies and other issues are forcing high-cost producers in Canada & Europe to shutter capacity.  This is resulting in higher- than-expected prices.

* More consolidation ahead for the Brazilian pulp sector?  

The pending expiration of a shareholders' agreement between the primary owners of Aracruz and VCP is generating considerable interest in a potential merger of Brazil's 2 largest pulp producers.  There is even some thinking that a transaction could encompass Suzano's expanding pulp operations.

* Land prices continue to escalate across much of Latin America.

There is an old truism that “most of the value in this industry gets bid back to the stump.”  In the midst of a global commodities boom, raw land prices are rising strongly.  Higher land costs are raising the barriers to entry and may trigger some rethink on where expansion occurs.  The highest land values are in areas where forestry projects are competing for good agricultural land.

* No signs of a looming surge in South American white paper exports. 

There are only 2 major Latin uncoated white paper producers: International Paper and Suzano.  Both are focused on producing for the local (Brazil) and regional (South America) markets.  All other Latin players are focused on expanding market pulp capacity for exports.  A constant message was, "produce pulp in low-cost locations, produce paper close to the customer."

* Valuation/Risks

We use various methods to value the stocks, including PE, book and EBITDA.  Overall, paper companies and companies appear to be trading near the mid-point of their historical norms, 1.7x book and 6.2x '08E EBITDA, respectively.  The primary risks involve momentum in the economy, the health of demand within key grades like containerboard and white paper, and additional energy, chemical, and freight cost inflation.  Companies with significant exposure to globally traded commodities are affected by currency fluctuations.