How companies like Arauco and Duratex choose to respond to the changing market challenges in the region will be important, not just to their shareholders who have become used to 15%+ net profit margins, but also to the global MDF industry.
By 2010, Latin American demand for MDF exceeded 4.5 million m3, after growing at 15% per year during the previous decade. This growth occurred mainly in Brazil, with the Brazilian MDF market now representing about 70% of the total Latin American market.
The increasing MDF consumption in Latin America has been fuelled by strong economic growth, an expanding furniture industry and buoyant construction. However, the key growth driver underpinning the rapid expansion of MDF markets in Latin America has been market penetration and substitution in some key furniture and construction applications.
The Brazilian furniture industry today consumes four and a half times more MDF per euro of furniture produced than their western European peers.
In the construction sector, the volume of MDF used per euro of output in Brazil has almost doubled since 2002.
This strong demand growth was accompanied by a considerable expansion of production capacity, with MDF capacity in Latin America surging to more than six million m3 in 2010.
Arauco and Masisa from Chile, and Duratex from Brazil, took the lead in the race to install new production lines and the combined MDF capacity of these three companies now represents over 70% of total Latin American MDF capacity.
In 2009, Duratex installed the world’s largest MDF line, in Agudos, with a nameplate capacity of 700,000m3.
Capacity will continue to grow in Latin America, with announced projects adding 15% in nameplate capacity every year for the period from 2012 to 2015.
Volatile economic conditions and an uncertain outlook in the euro-area, North America and, increasingly, China, has resulted in the growth forecasts for these key global economies being revised downwards in both the short- and medium-term perspective.
The IMF’s World Economic Outlook Update in July 2012 forecast that GDP growth for Brazil for the year 2012 will be only 2.5%, which is more than one percentage point lower than that forecast only nine months earlier. This will have a significant impact on MDF demand going forward and Pöyry questions the ability of demand growth to keep up with announced capacity expansions.
At the same time, the Latin American MDF market is starting to show some signs of saturation and we would have expected demand growth to slow down anyway, even if the domestic economy continued to perform strongly.
Consumption of MDF per capita in Brazil is already at western European levels (excluding MDF used for laminate flooring), while Brazilian MDF consumption per head of GDP (m3/GDP/capita) is now almost double western European levels. Therefore Pöyry does not expect to see MDF demand growing much faster than the underlying economy for very much longer.
With an additional 2.4 million m3 of MDF capacity predicted to come on stream in Brazil during 2012-2015, in a market where demand is slowing, the development of the Latin American MDF industry is approaching a decisive moment.
Will the industry that has grown by more than €100m per year on average over the last decade eventually run out of steam, or will the Latin American MDF producers manage to stimulate further growth in their markets?
Recent activities show that the industry is taking action to reinvent its business to deal with a more mature market.
Geographical diversification
A major step in this direction occurred in June this year when Arauco acquired Flakeboard in the US, following its takeover of Pfleiderer’s US assets in 2011. This is the first step outside its home region by any Latin American MDF or particleboard producer.
Duratex’s acquisition of a minority share in the Colombian panel producer Tablemac earlier this summer, and Masisa’s recent acquisition of Rexcel in Mexico, can also be seen as attempts to achieve growth through geographical diversification.
Value added products
Almost no laminate flooring was produced in Latin America 10 years ago, but today production exceeds 12 million m2.
This is still a relatively small volume compared to other markets, but with an annual growth in production of 10% in 2006-10, the Latin American MDF industry seems to be betting on laminate flooring to drive future growth.
This growth will be strengthened by Arauco and Unilin, who joined forces in Brazil earlier this year.
Under the joint venture agreement, Arauco’s HDF will be used for the production of ‘Floorest’- and ‘Quick-Step’-branded laminate flooring, while Unilin will bring much-needed floor coating and surface protection technology, as well as the development of new products.
Other value added products, for example moisture resistant and lightweight panels, etc, still only constitute some 5% of the total MDF market in Latin America, while the speciality MDF market in western Europe is well above 20% of the total MDF market.
As the Latin American market matures, the share of speciality products is destined to increase.
Additionally, the more value that is added to standard MDF, the bigger the available geographical market becomes for the Latin American producers as the transport economics improve.
With easy access to cheap wood fibre supply, Latin American MDF producers could position themselves to supply markets currently well outside their geographical reach.
Pöyry believes that Brazil will continue to be an exciting market for upstream suppliers in the MDF value chain (such as chemicals, machinery, surfacing materials) but innovation and differentiation will become more important as the market becomes more competitive and growth slows.
Although the economic outlook will remain challenging in the short-to-medium term, we can be certain that, whatever happens, Latin American companies will be increasingly important players in the reshaping of the global MDF industry.
