As Pulp Prices Rise… This Industry Promises Real Paper Profits

by Tony Daltorio, Investment U Research
Monday, March 22, 2010

Recently, Louise Basenese recommended timberland stocks in countries such as Argentina, New Zealand and Chile.

And he’s right. Those countries offer worthwhile opportunities in that sector.

But timberland stocks aren’t the only way to profit from trees…

Take the pulp and paper industry. The publishing world relies heavily on pulp to make newsprint and magazine paper. It’s also a key ingredient in fine paper, cardboard and other packaging products. And it’s in short supply, pushing paper and packaging prices up significantly around the globe.

The rise in packaging prices even contributed to higher food and beverage prices as recently as 2007 into 2008. In fact, according to the U.S. Department of Agriculture, packaging accounts for almost 15% of food prices at the retail level. And cardboard and paper account for nearly 40% of the $430 billion packaging market. So clearly, pulp prices affect everybody everywhere.

Paper and packaging companies that buy pulp to make their products already feel the strain. But even those companies with their own integrated pulp facilities can’t escape the consequences of the rise in pulp prices.

According to Helsinki-based consultancy Foex Indexes, European benchmark pulp recently rose more than 50% to $875 per ton over the past year. That’s fast approaching the $900 peak it hit in 2008, not to mention the all-time high of $1,000 set in 1995.

And pulp prices could easily head higher…

Pulp Production Around The World

Chile and Finland’s pulp production account for over 10% of the world’s intake.

Yet Chile’s recent 8.8 magnitude earthquake last month still has much of its pulp operations shut down. And several Finnish mills have closed as well due to the country’s longest dock strike in two decades. The protests have halted pulp exports from the country altogether.

Worst yet, Chinese consumption is soaring.

But the extent of any price increase in paper and cardboard depends on the length of the supply disruptions in Chile especially. The Finland strike will end eventually, but pulp mills in Chile can’t predict when they’ll be able to restart production again.

Some of the worst affected companies saw their entire operations swept out to sea by giant waves following the quake. That isn’t something any business can easily recover from.

Making matters even worse, European pulp producers interpreted last year’s low of $577 as marking a long-term overcapacity in the industry. To deal with that, they permanently shut down many facilities. And that sent prices higher even before the more recent supply disruptions.

In other words, this disruption in pulp production will be a long-term problem and prices will reflect it for a while to come. On the plus side, it also provides investors with an excellent opportunity.

A Profitable Way to Invest in Pulp

Fibria Celulose SA ADR (NYSE: FBR), a Brazilian company, offers one of the best ways to play the rise in pulp prices.

Created after Aracruz and Votorantim Celulose e Papel – two other Brazilian pulp and paper companies – merged last year, it produces a variety of hardwood pulp called eucalyptus kraft pulp.

With a capacity of six million tons of pulp, it sells about 84% of its product to third parties both in Brazil and the export market. It currently has a reasonable valuation, with a prospective P/E ration of about 20 and a dividend that yields around 5%.

This is one opportunity you don’t want to miss.

Good investing,

Tony Daltorio

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