June 25, 2019

The forestry sector—including pulp—is currently the largest contributor to Uruguay’s foreign exchange earnings (US$1.66 billion in 2018). However, a significant segment of this sector—larger diameter, higher-value timber—is unable to reach its full potential due to the inability of industries and sawmills to absorb the pine and eucalyptus harvests the country produces annually, a figure that is expected to continue increasing over time.

Last year, Uruguay exported a record 1.95 million cubic meters of thick pine logs. The bad news was the price received for this raw material, falling short of the expectations of producers who invested in planting this variety more than a decade ago. Pine logs are trading on international markets between US$60 and US$70 per cubic meter, and eucalyptus logs between US$40 and US$50 per cubic meter.

However, the Uruguayan producer ends up with between US$2 and US$6 per cubic meter. This is due to the significant impact of timber freight costs to the ports, given that most of these forests are located in remote areas such as Rivera or Cerro Largo, explained Álvaro Pérez del Castillo, general manager of the forestry consultancy Pike.

In addition to the pine, approximately 200,000 cubic meters of thick eucalyptus logs were also shipped to Southeast Asia (primarily China) in 2018. In this case, there are logistical restrictions on transporting larger volumes because this type of wood requires special handling (preventing cracking or drying), so it must be transported in containers or warehouses. The alternative for processing this thick wood is chipping.

Currently in Uruguay there are about 900,000 hectares of forested land, with a wood extraction volume of about 16 million m3 at the end of 2017, according to DIEA data.

Cellulose, another business

The natural question that arises is why Uruguay does not take advantage of this by sending that wood to the two operational pulp mills or eventually to the third one that is close to being confirmed.

Firstly, both Montes del Planta and UPM have their own forests, which supply a large part of their industrial cycle.

The other aspect is that pulp mills in Uruguay use short-fiber wood, meaning they consume fine-grained eucalyptus wood. Wood for pulp costs around US$60 per cubic meter, but after deducting freight costs within Uruguay, its net value for the producer drops to between US$6 and US$12 per cubic meter, depending on the distance between the forests and the ports.

One option for Uruguay to make better use of its thick timber is to install a long-fiber (pine) pulp mill in the future, a possibility that Pérez del Castillo sees as «distant» because the area of ​​that variety in the country has been reduced by about 30,000 hectares – currently there are about 170,000 ha – precisely because of the few commercial prospects that this crop has today.

Most local producers have opted to replace that land with eucalyptus, a trend that may intensify in the future. The three or four growers who cultivate this variety choose to sell their timber abroad because they are forced to reduce the number of trees per hectare (thinning), and also because they sometimes need to generate income from their pine plantations. «They’ve been waiting for processing plants for 10 years. There comes a point when they have to sell,» explained Pérez del Castillo.

Forestry consultant Rosario Pou told Radio Rural’s «Tiempo de Cambio» program this week that during the first quarter of the year, 40% of timber exports consisted of pine logs sold at depressed prices. The expert noted that these trees had previously received government subsidies for their planting, but today this production is generating little added value for the country.

Pou considered that Uruguay should consider offering an «interesting framework» to attract the interest of industries that process sawn timber of «high quality and variety».

«We know that eucalyptus is very good for construction, for frames, for engineered wood,» he emphasized.

Markets and costs

According to Andrés Dieste, a professor at the Faculty of Engineering at the University of the Republic (Udelar) and a member of the Forestry Process Engineering group, the main reason why processing industries are not being established today is due to the external market situation. He explained that after the 2008 crisis, the major markets that consume processed wood have not yet recovered.

«That clearly doesn’t favor the climate for industrial investment in Uruguay. The only remaining alternative is to export low-priced logs because per capita wood consumption in Uruguay is very low,» he noted.

Pérez del Castillo noted that there are also «internal factors» restricting the arrival of external investors interested in setting up plywood plants or sawmills that add value to the wood. He cited energy and labor costs, as well as the climate of labor disputes, as examples.

One of the companies that invested in industrializing thick timber in Uruguay in 2004 was the Urupanel plant, which produced MDF and plywood in Tacuarembó. A decade later, it closed its doors, leaving more than 400 workers without jobs. Today, that plant has been repurposed, but it operates as a sawmill (Frutifor) employing about 50 people.

The other large industry (Lumin, formerly Weyerhaeuser) continues to operate today.

In total, it directly employs about 750 people and has the capacity to produce 270,000 m3 of plywood panels annually.

Pou considered that, just as the State offered advantages to UPM so that it could install its second pulp mill in Paso de los Toros, something similar could be considered for companies that could form a cluster to set up in Tacuarembó, Melo or Rivera, near the tree plantations.

Agroempresa Forestal (AF), one of the private groups with the largest forested area in Uruguay, is optimistic about the arrival of investments in the short term. «We are going to make a strong commitment abroad so that Uruguay can have a new industrial plant,» its director, Francisco Bonino, announced to El Observador this week.

Beyond the current outlook for industrial investment in Uruguay, the timber market appears promising. Pérez del Castillo participated in conferences with experts in the US, where the prevailing message was that, in the future, «there will be a shortage of timber» to meet projected consumption. This is particularly true for industrial sectors such as adult diapers—manufactured with cellulose—and the booming retail sector, which primarily uses paper and cardboard for packaging.

The cultural factor

Dieste also identifies a «cultural factor» that leads to Uruguay also having a significantly lower per capita wood consumption than developed countries (USA, Europe, Canada), or even in the region where Chile is making steady progress.

In the case of pine, the Udelar professor believes that in addition to a cultural deficiency in incorporating this raw material, there is also a knowledge deficit.

“In Uruguay, we don’t know how to build with wood,” he stated. He added that only in recent years has a nascent path begun with the training of human capital in the Engineering and Architecture faculties of the University of the Republic (Udelar) and the ORT University. One of the misconceptions about wood is that it doesn’t allow for tall buildings.

However, Dieste pointed out that today in Uruguay there is a three-story hotel on La Juanita beach in José Ignacio built entirely of wood.

The expert is optimistic that the construction industry will increasingly incorporate this material into housing construction, due to several advantages such as environmental benefits, lower freight costs (because it is lighter than traditional materials), and time savings during construction. This is because a large part of the structure can be built through prefabrication.

The forestry sector as a whole directly employs 17,000 workers. The BPS (Social Security Bank) has 1,770 registered companies, 92% of which are micro, small, and medium-sized enterprises (MSMEs).

The Uruguayan company Agroempresa Forestal paid US$319 million to acquire 55,000 hectares of land belonging to Harvard University in Uruguay.

68% of the wood is processed in Uruguay by four companies, which consume more than 100,000 m3 per year.

Sawmills

With 14 companies, Rivera is the department with the most sawmills in the country. Next come Canelones (11), Paysandú (7), and Tacuarembó (7).

Source: El Observador – Andrés Oyhenard