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The Chilean market pulp giant, Arauco, sees a long term future ahead by simply doing more of what it does best
By Rita Pappens
Arauco: putting the ability into reliability
More like a Volkswagen than a Rolls Royce. That is how Arauco likes to describe itself - a company that embodies reliability rather than expensive grandeur. Certainly, Arauco has helped to put Chile on the world map as a dependable supplier of low cost softwood pulp. But while the company has a low key marketing approach, its expansion plans are decidedly less than conservative. With two greenfield pulp mills already on the drawing board, Arauco plans to add over one million tons/yr of market pulp capacity within the next five years. And that is just in Chile. The company is also rapidly expanding its forestry holdings in Argentina and a second line at the Alto Parana mill remains a distinct possibility, although a sawmill and an MDF (medium density fiberboard) plant remain first priorities.
Arauco towers above the South American pulp market
Having made its reputation in radiata pine, Arauco is now also moving into eucalyptus pulp production. As sales manager, Ubaldo Salvestrini, explains, "In the short term, there is a transitory shortage of radiata pine in Chile and we have been running some eucalyptus campaigns. This has been well received by the market. We can compete with other hardwood pulp producers on quality and our radiata pine customers are happy to buy short fiber pulp from us."
And as the director of sales, Rodrigo Palacios, adds, "Land is getting scarce in Chile and the next round of expansion will probably also be the last. The only way to increase output will be to switch to eucalyptus. Radiata pine will be grown for higher value-added timber with the thinnings going to pulp production. Eucalyptus for pulp production will be grown on dedicated plantations."
Table 1 - Arauco Group: 1.5 million tons/yr of market pulp capacity
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Chile
Arauco mill
Line #1: 270,000 tons/yr bleached hardwood pulp (eucalyptus globulus)
OR… 200,000 tons/yr of bleached softwood kraft pulp (radiata pine)
Line #2: 470,000 tons/yr of bleached softwood kraft pulp (radiata pine)
Constitucion mill
320,000 tons/yr of unbleached softwood kraft pulp (radiata pine)
Licancel
110,000 tons/yr of bleached softwood kraft pulp (radiata pine)
Argentina
Alto Parana mill
300,000 tons/yr of bleached softwood kraft pulp (taeda and elliotti pine
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Planning ahead
Despite the long term concerns over land availability, Arauco is convinced that Chile will remain a cheap source of good quality fiber for the foreseeable future and could become a far bigger player in the sector in the medium term. "There will be an explosion of trees in the early 2000s," Salvestrini comments, "enough for more than one new pulp mill."
As a result, Arauco is already making plans to take full advantage of the fiber to come. The company's present ambitions include a 550,000 ton/yr mill at Valdivia and a second 500,000 ton/yr mill to be built close to the Itata river in the VIII region. Both schemes envisage the production of both radiata pine and eucalyptus pulp.
The cost of the Valdivia plant is estimated at $1,300 million, including the forestry element. Arauco did experience some problems securing an environmental permit for this project as the site is close to a nature reserve. But by adding a tertiary stage to the effluent treatment plant, the company got all the necessary approvals.
Environmental studies on the second proposed scheme are under way and Arauco expects to have everything in place to move ahead with the project - but not until the timing and the market conditions are right.
Indeed, the company makes clear that giving a green light for either project is not just a matter of watching pulp price movements before pushing ahead with the new mill. Theoretically at least, the schemes could be shelved altogether if other strategic opportunities present themselves. As the Arauco team is keen to point out, building capacity is not the only way forward.
Figure 1 - Production Line #1 (1971-1998)
Getting bigger
Besides greenfield projects, Arauco is also looking at other means of growing the business. Acquisitions are now a definite possibility, especially given the recent changes in the corporate structure of Arauco. Carter Holt Harvey (CHH) previously held a 30% stake in Arauco through the holding company, Inversiones los Andes. So when International Paper took control of CHH several years ago, the US giant also gained a degree of influence over the strategic development of Arauco.
Last year though, CHH sold its interests in Inversiones los Andes. And with International Paper no longer in the background, Arauco has gained freedom to push forward in new directions. That is not to suggest that Arauco was tied up in a corporate straightjacket when CHH still had control over part of the company. Indeed, Arauco made at least one big move with the acquisition of Alto Parana in Argentina.
Arauco moves along with pulp and plantation plans
As the only softwood pulp mill in Argentina, Alto Parana has huge potential, according to Salvestrini. The plant offers access to a large domestic market in Argentina and the mill is located in Misiones state, close to the Brazilian border. Alto Parana is also a natural supplier to Brazilian papermakers, providing a reinforcement pulp for the eucalyptus furnish commonly used in the country.
"The mill was in serious financial trouble, but it was in perfect condition when we bought it," Salvestrini explains. "We brought our expertise and made it into a highly competitive mill. The cost structure is similar to the Arauco mill, which is one of the best in the world."
According to a study carried out by the US consultant, RISI, in conjunction with Arauco, production costs at Alto Parana stood at $300/ton, compared to $280/ton for the Arauco mill; $379/ton in the US south; $412/ton in British Columbia, Canada; $374/ton in Finland and $387/ton in Sweden.
On that basis at least, Alto Parana looks like a sound buy for the Chilean group.
In addition, Arauco also acquired the 110,000 ton/yr Licancel pulp mill last year. A big attraction of the acquisition was the 30,000 ha of radiata pine plantations that came with the mill. The forest areas are located close to Arauco's holdings, making them easy to manage. Added to that though, the overall value proposition was certainly boosted by the financial aspect of the deal. "The mill is a small efficient operation and the price was right," says Salvestrini.
| Table 2 - The Main Equipment at the Arauco Mill |
| Line #1 |
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| Chip screening |
Rader, Canada |
| Batch digesters (6) |
Confab, Brazil |
| Brown stock washers |
Impco, Brazil |
| Bleaching washers |
Dorr Oliver, Canada |
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Impco, Brazil |
| Cleaning system |
Noss, Sweden |
| Pulp machine Black |
Clawson, UK |
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Voith Brazil |
| Pulp dryer |
Fläkt, Canada |
| Pulp cutter |
Karhula?, Finland |
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Lamb, USA |
| Recovery boiler |
Babcock & Wilcox, UK |
| Power boiler |
Babcock & Wilcox, UK |
| Evaporators |
Balfour, UK |
| Precipitators |
Fläkt, Sweden |
| Causticizing line |
Dorr Oliver, UK |
| Lime kiln A |
Chalmers, UK |
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Fuller, USA |
| Line #2 |
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| Woodyard |
Kone, Finland |
| Chip screening |
Rader, Canada |
| Continuous digester |
Kvaerner, Sweden |
| Diffuser |
Kvaerner, Sweden |
| Oxygen reactor |
Sunds Defibrator, |
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Sweden |
| Displacement press |
Sunds Defibrator, |
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Sweden |
| Bleaching line |
Stebbins, Canada |
| Washing filters |
Sunds Defibrator, |
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Sweden |
| Pulp machine |
Valmet, Finland |
| Pulp dryer |
Fläkt, Sweden |
| Recovery boiler |
Gotaverken, Sweden |
| Power boiler |
Babcock & Wilcox, |
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Canada |
| Evaporators (6) |
HPD, USA |
| Turbo generator (1) |
Siemens, Germany |
| Lime kiln (1) |
FL Smidth, Denmark |
| Precipitator (1) |
FL Smidth, Denmark |
| Causticizing (1) |
Ahlstrom, Finland |
| Precipitators (2) |
Fläkt, Sweden |
Growing green
The recent acquisitions and the prospect of further capacity additions to come appear to put Arauco in a prosperous light going into the new millennium. But there is also a degree of apprehension among management about the future of the group. First of all, some of Chile's native Americans have started protesting against development of the land, urged on by the "greens". Other dark clouds on the horizon come in the form of changes taking place in the world market. Arauco's most important market has always been Europe, but the company has been somewhat concerned in recent years by the rapid concentration and consolidation of the pulp and paper industry across the region.
As Salvestrini explains, "We have developed long term relationships with Europe's non-integrated paper mills. We know our customers, give them good service and they trust us. The problem is that there are now few independent mills left. The European industry has seen some dramatic changes in recent years."
| Table 3 - Arauco's Forestry Holdings in Chile |
| Total forest reserves |
761,000 ha |
| Total plantations |
532,000 ha |
| Radiata pine |
486,000 ha |
| Eucalyptus |
43,000 ha |
| Other |
3,000 ha |
| Native forest |
125,000 ha |
| Protected areas |
144,000 ha |
With its main market under threat, one obvious solution would be to turn Arauco into an integrated pulp and paper producer serving the Latin American market. But, so far at least, Arauco is not considering any moves into paper production. According to Palacios, the group would prefer to remain a market pulp producer. "Anyway, Arauco feels that Europe will need cheap fiber if it wants to keep the Indonesian paper producers at bay and we believe that there is a long term future for suppliers of cheap softwood fiber."
Certainly, as a producer of low cost pulp in a tightening market, Arauco looks well placed in the medium term. So the company has the luxury of a few years yet before it is forced to jump one way or the other. Whether Arauco uses this time to develop a plan to integrate, expand capacity or build up strategic partnerships remains to be seen. But at least the group has the comfort of knowing that the market seems to be moving in its favor - for now, at least.
The Arauco mill aims ever higher
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| Optimization and boosting efficiency are the buzzwords most commonly found flying around the Arauco pulp mill in Chile and the obsession with improvement seems to be paying off. As the mill manager, José Vivanco, proudly points out, he has a graph that details the steady growth in output over the last years (Figure 1). "We have state-of-the-art equipment, which we are already running at over 94% efficiency and we are determined to do even better," he says.
Vivanco's pride and joy is line #2. The fiber line came on stream in October 1991 utilizing the best technology that money could buy at the time (PPI June 1993). The cost was a staggering $1,000 million.
The line was rebuilt in 1997 when the first bleaching stage, DO, was switched to medium consistency. New chip screening equipment and brown stock washing presses have also been introduced at the mill. The pulp dryer has been extended along with improvements to the evaporator plant. There is a new superheater and economizer in the recovery boiler, while the lime kiln has been retrofitted with a lime mud dryer. As a result of all this work, the capacity of the line has increased from 1,000 tons/day to 1,300 tons/day.
The $140 million investment involved in the rebuild also included a modernization of line #1, which now runs eucalyptus pulp as well as radiata pine. Capacity stands at 600 tons/day of softwood or 800 tons/day of eucalyptus pulp. The addition of an oxygen delignification stage means that the mill now produces only elemental chlorine-free (ECF) pulp, while the DO stage was also switched to medium consistency bleaching.
Other investments at the plant have included the addition of new precipitators to the recovery boiler and the conversion of the power boiler to fluidized bed technology. Pollution control measures included the installation of a collection and incineration system for malodorous gases and there is also a new primary effluent clarifier with aeration pond. Liquid effluent is constantly monitored and a spill collection system is incorporated into the system.
Line #1 now produces eucalyptus pulp "without difficulty" according to Vivanco and it is up to the marketing department to decide on the amount of eucalyptus produced. In 1999 for instance, Arauco produced 125,000 tons of eucalyptus and 113,000 tons of radiata pine pulp on line #1.
Top performance
Running the mill at its very best is what Vivanco concentrates on. "We have determined the maximum capacity of each area of the mill by running that particular equipment full out for part of the day. We now know where there is margin, but also where the weaknesses are. Inspection and maintenance can now be intensified for the weaker areas, which also receive more scheduled shutdowns. In other words, we are aiming for more prevention and less crisis," Vivanco explains.
People obviously play an important role in getting the most out of the mill and Vivanco stresses the need to work as a team. "Communicating, talking and explaining why we are doing things a certain way are crucial in getting the employees to feel they have a stake in the mill," Vivanco says. "For instance, manuals are prepared by the people who work the system. We also believe in promoting from within the company."
The community as stakeholder is also a concept that Vivanco is passionate about. Indeed, the company has set up the Fundacion Arauco, which helps train teachers and gives support to the local schools. The company reckons that between 1991 and 1998, 490 teachers were trained and 10,000 students benefited from the Fundacion. Local hospitals, polyclinics and local basic health centers are also beneficiaries.
Given the extent to which an operation of Arauco's size reaches into the lives of the community at large, the company knows that a healthy population with access to good housing and even sports facilities will ultimately provide a payback for the mill beyond any simple altruistic motives. Or to put it another way, good health translates into healthy relationships at all levels, making good business sense for the mill.
"We have state-of-the-art equipment, which we are already running at over 94% efficiency and we are determined to do even better
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