Chile Wood Pulp Industry Shakes Off Earthquake's Devastation

By Erin McCarthy

Of DOW JONES NEWSWIRES

SANTIAGO -(Dow Jones)- Chile's wood pulp industry is on a rebound just four months after a massive 8.8-magnitude earthquake struck at the industry's center, severely damaging production facilities and halting production for nearly a month.

The majority of the country's pulp mills are located in south-central Chile, the epicenter of the massive Feb. 27 earthquake that devastated the region. That and the subsequent tsunami paralyzed the industry, shutting down all plants, damaging employees' homes and cutting electrical power.

As a result, Empresas CMPC SA (CMPC.SN), one of Chile's two main pulp producers, reported first-quarter net losses of $50 million, along with a production loss of 260,000 tons of pulp. The other main producer, Celulosa Arauco y Constitucion SA, a subsidiary of fuel and forestry conglomerate Empresas Copec SA (COPEC.SN), has yet to report the cost of damages, but a production unit responsible for 18% of its output, or 500,000 tons, still remains offline and is expected to operate again later this year.

Yet the pulp industry in Chile, one of the biggest producers of wood pulp in the world, now is nearly back to full capacity.

CMPC and Arauco have nearly all production lines back online--with the exception of one of Arauco's units--leaving CMPC operating at 100% and Arauco at 84% as of mid-June.

"It was a faster recovery than expected for sure," said Susanne Linhardt, research analyst with local investment bank Banchile Inversiones. "We assumed three months of very, very low production."

She attributed the rapid recovery to higher international pulp prices and continued demand, despite Europe's financial crisis.

"The [companies] didn't experience any slowdown from demand in Europe or Asia," Linhardt said.

The Chilean pulp industry was quick to resume its role as producer of 8% of the global market's pulp, with the first plants opening less than a month after the quake.

"We are a reliable supplier which meets its deadlines and contracts and we want to stay that way. For this reason, against all expectations, we were operating at a high level of our production capacity in April," Charles Kimber, director of Arauco's corporate and commercial affairs, told Dow Jones Newswires.

Despite the severe damages caused by the quake, CMPC and Arauco posted higher sales in the first quarter of 2010 than in the comparative 2009 period as a result of historically high pulp prices.

The two main kinds of wood pulp, softwood and hardwood pulp, are the raw materials used to manufacture magazines, newspapers, tissues and other paper products.

In June, Finland's index provider FOEX reported that the price of softwood pulp, also known as long fiber pulp, rose 67.6% to $967.85 per metric ton versus its low of $577.30 in March 2009. Meanwhile the FOEX price of hardwood pulp, or short fiber pulp, rose 85.9% to $897.59 from $482.90 in April 2009, Banchile reported in a research note.

Arauco saw consolidated sales of $784.9 million in the first quarter of 2010, an 18.9% increase from 2009 first-quarter sales, the company said in its quarterly report. Arauco has yet to release the cost of damages to its assets and operating sales.

CMPC, Chile's second-largest wood pulp producer, estimated a loss of $50 million from quake damage to fixed assets and inventories and a production loss of 260,000 tons of pulp. But the company saw $938 million in consolidated sales for the first quarter of 2010, a 34% increase from the 2009 first quarter. Pulp sales, compared to the fourth quarter of 2009, rose 22%.

Industry outlooks for the remainder of the year are positive. Pulp prices should remain high through 2013, with a possible slight drop later in the second half of 2010, according to Banchile's note.

"The markets in general are healthy, with strong demand and relatively low inventory levels," Kimber told Dow Jones Newswires.

-By Erin McCarthy, Dow Jones Newswires; 56-2-715-8939; erin.mccarthy@dowjones.com

(TALK BACK: We invite readers to send us comments on this or other financial news topics. Please email us at TalkbackAmericas@dowjones.com. Readers should include their full names, work or home addresses and telephone numbers for verification purposes. We reserve the right to edit and publish your comments along with your name; we reserve the right not to publish reader comments.)