The boys from Brazil.

A funny thing happened on the way to writing this column. I thought I had a correct thesis to present to you, and all I had to do was develop the data to back it up. So much for correct theses--the data took me to an entirely different conclusion than my uninformed prejudices had conceptualized.

The topic is the topsy-turvy currency market and the effects of the devalued U.S. dollar on our integrated, global pulp and paper industry. One would suppose the devaluation of the dollar has had a complicating affect on the paper industry recovery. After all, the dollar is down over 20% against the Euro since just January 2000 and over 30% since even more recent January 2002 (remember when a dollar would buy over 1.10 euros?). This coupled with the condition that the Chinese Yuan is firmly tied to the dollar is causing Chinese goods to become more inexpensive in Europe than at any time in modern history. The condition that oil is denominated in U.S. dollars is reducing OPEC's income unless they squeeze production. Another condition is that capital goods purchased from European suppliers are now relatively expensive.

Yes, all these things are true. Yes, no doubt these conditions are causing strains in the pulp and paper industry worldwide. It is as if you can work and work to improve economies inside your mill fence, only to see all your efforts completely wiped out by unknown, unseen currency traders in unseen exchange pits around the world.

Yet the currency of one country outweighs them all, for it relentlessly marches forward at an ever more economical rate compared to the major currencies of the world. This currency as of January 1, 2004 has declined to:

* 62% of its value against the US Dollar

* 50% of its value against the Euro

* 56% of its value against the Pound

* 55% of its value against the Can Dollar

* 62% of its value against the Yuan

* 62% of its value against the Saudi Arabia Riyals as compared to the value it held January 1, 2000. This currency is the Brazilian Reais.

With exchange rate data and the economic analyses one hears in the worldwide press, it is easy to think of the myriad of cross connections in labor, energy, capital goods, finished product market conditions, and raw materials that these currency fluctuations can cause. One could easily be enmeshed in a long dinner discussion of these items--except if one starts with raw materials first.

In the international pulp and paper industry, the currency of the realm is pulp and the currency of pulp is raw materials. Combine these conditions with an ideal growing environment, superb international shipping logistics and one zeros in on Brazil. The visionaries that conceived the eucalyptus pulp industry of Brazil nearly two decades before the birth of this year's paper school graduates had it right. Yes, they took risks--the risks of building infrastructure where there was none, the risks of political stability, and the risks of a nascent environmental movement, the direction of which no one could possibly have foreseen. Yet their risks have paid off.

No, this column did not start out to be an advertisement for Aracruz, but the facts are undeniable. From their own investor presentations of this past December (go to http://www.aracruz.com.br/shared/ri/apres_barney041203.pdf). Aracruz claims they:

* will surpass Weyerhaeuser and become the world's largest pulp producer by 2005

* have improved productivity of forest; yields by 100% in the last 20 years.

* are self-sufficient in energy; and

* that the total market share for hardwood pulp (vs. softwood pulp) is up from 23% in 1980 to 47% in 2003.

Add to this a currency devalued by 40% against the U.S. dollar since 2000.

I lamented the demise of U.S. pulp mills in a Nip Impressions column in late January. I lamented the loss of these permitted sites as the U.S. pulp mills shutdown. I was wrong. I might as well have been lamenting the loss of supply chain infrastructure for leather suitable in the production of buggy whips.

No wonder Stora Enso has jumped into Brazil with both feet in Veracel, under construction and a 50/50 partnership with Aracruz. All of this brings back a conversation the late Dr. Barry Crouse of IPST and I had, probably the last time we got together, Barry said, "If we can't find a way to change the tilt of the earth's axis, the entire pulp industry will end up in the Southern Hemisphere." So right.

Finally, lest you think I am ending on a down note, what is described here is good for the overall industry and society as a whole--I am an impassioned embracer of a worldwide pulp and paper industry. Yet will these conditions cause further local dislocations and personal career pain for some? Undoubtedly yes. That is why your career needs to focus on the industry as a whole, not on a locality. Economics always wins, and you must position yourself to win with it.

ABOUT THE AUTHOR

Jim Thompson is chairman and CEO of Talo Analytic International Inc., Atlanta, Georgia, USA. He is also a member of the Solutions! Editorial Board and writes the weekly column "Nip Impressions" in TAPPI's weekly electronic newsletter, Over-the-Wire. Contact him at [e-mail].

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