While the overall macroeconomic context poses significant challenges, the market also reveals opportunities for growth and adaptation, as disclosed in our Latin American Pulp & Paper 5-Year Forecast.

Want to learn more? Access our data story, which includes data visualizations on how Argentina’s inflation compares to other nations in the region, changes to demand and capacity for containerboard in recent years and our expert forecast for containerboard packaging paper and operating rates for the coming years.

Domestic resilience is a double-edged sword

The containerboard market fell by 8.8% in 2023 and is expected to decline by almost 20% in 2024, following the strong reliance on the domestic market, which is different from that seen in other Latin American countries, such as Colombia, Peru and Ecuador. That reliance often provides some support from external economic shocks and volatility on food exports and highlights the strength of the internal market and purchasing power for Argentinians.

Packaging paper production has declined by more than 12% year-to-date up to August, according to data from the Local Pulp and Paper Producers Association (AFCP), tracking precisely the weaker consumption.

It is precisely that resilience that should pose a significant opportunity for growth and recovery in the coming years, driven by local consumption, as the economic crisis seems to have hit bottom. We project an increase of 9.8% on average per year between 2025 and 2026 for the domestic containerboard, recovering part of the demand loss in the 2023-2024 crisis but not enough to put the country back to the pre-crisis levels.

For the non-containerboard packaging paper, demand recovery should be smoother at a 4% average rate between 2025 and 2026, mainly because the demand loss in 2023 and 2024 was not as significant as in the containerboard market. This reflects precisely the strong purchasing power of Argentinians compared to other Latin American nations and also the firm resilience in the domestic market.

While facing an overall decline, the P&W segment is not expected to pose a recovery trend in 2025 and 2026, tracking the secular demand decline and shift into purchasing habits and consumer trends. Consumption will decline by 3.8% on average in the next two years. Still, Argentina is one of Latin America’s most robust reading countries, with literacy and book consumption average above the rest of the region and like mature economies. However, as the crisis approached, people naturally prioritized essentials first, accelerating the shift to digital in the country and posing a possible permanent demand loss for the P&W markets.

Challenges for the future

Persistent high inflation, driven by public spending and monetary emissions, creates economic instability, impacting consumer purchasing power and business investment decisions. This poses a significant challenge across all sectors, including paper.

The difficult trade-off between controlling inflation and supporting social welfare further complicates the economic landscape. Government efforts to control spending through austerity measures negatively impact sectors like education and public administration, which are traditionally significant consumers of P&W products.

The global shift towards digital platforms and communication severely impacts demand for printed materials, posing an existential threat to the P&W segment. The increasing share of digitally published books exemplifies this trend.

Due to inflation and economic uncertainty, declining purchasing power leads consumers to prioritize essential spending, impacting demand for non-essential items, including certain paper products.

Summary: There is a bright future ahead for Argentina, although challenges are not small

The Argentinian paper products market presents a mixed outlook. The packaging segment, driven by domestic demand and a positive business environment, exhibits strong potential for growth. However, due to digitization and economic pressures, the P&W segment faces significant challenges. Successfully navigating these challenges requires strategic adaptation, innovation and focusing on niche markets. The overall market’s success hinges on the country’s ability to address macroeconomic challenges and foster a stable and predictable business environment.

Want to learn more? Access our data story, which includes data visualizations on how Argentina’s inflation compares to other nations in the region, changes to demand and capacity for containerboard in recent years and our expert forecast for containerboard packaging paper and operating rates for the coming years.

The post Argentina: Risks and opportunities for 2025 paper products market appeared first on Fastmarkets.

Variation across the board

Pricing trends for paper and board products in Latin America have been mixed in recent months. Changes in supply and demand have pushed prices down in Chile while in other large markets, such as Brazil and Mexico, PPIs are still trending upward and not losing momentum, meaning there is plenty of room for actual prices assessed by Fastmarkets to increase.

Overall, paper product prices in Latin America continued to increase in August, reflecting the higher cost inflation across the pulp and paper supply chains and higher export and import parities given the general weakening of local currencies versus the US dollar, as we have expected since the start of the year.

We anticipate prices will continue climbing in the coming months, affecting all buyers across the value chain. Local producer price indices in Latin America, either assessing production costs for pulp & paper producers or costs of pulp & paper products as raw materials for manufacturers, are also increasing, reflecting the general rise in prices across the supply chain.

However, looking at the current market supply and demand balance and the trends in the overall industrial PPI indices, it is unclear whether there is a prevailing price trend in Latin America at the moment, and the wave of price increases may be cooling off sooner than we expected.

Pulp and paper production indices in the region varied, reflecting the unstable momentum.

Economic outlook

Activity picks up amid higher industrial production, boosted by currency devaluation

Latin American countries are facing a policy trade-off between controlling inflation and stimulating economic growth.

While inflation remains elevated, interest rate cuts could trigger capital outflows and currency depreciation, reigniting inflationary pressures but boosting activity, just as in July. Policymakers must carefully time their policy adjustments to maintain stability and growth.

Higher global interest rates have increased the debt servicing burden for Latin American governments, reducing the fiscal opportunities to support economic activity, which can be done, although in a limited way, via monetary policy and interest rate controls. Reducing fiscal imbalances in a politically charged context is a crucial challenge facing the region.

Overall, economic activity in Latin America was stronger in July in the markets analyzed by
Fastmarkets, with industrial production increasing in those markets, boosted by low interest rates and the devaluation of local currencies versus the US dollar in the last three to four months. The continued currency depreciation in Latin America resulted from the ongoing interest-rate cuts policy promoted by the major markets to boost activity while inflation seemed controlled.

However, this may soon change, as it has in Brazil, for instance, where the Brazilian Central Bank increased interest rates in September as inflation expectations seem to be increasing amid the stronger economic activity, higher than market expectations.

The recent cut in interest rates by the US Federal Reserve should put an end to Latin American currency devaluation in 2024, as the gap between the US premium bond and Latin America’s is reducing, favoring a capital inflow to Latin American economies, thus reducing exchange rates a little bit in the short term.

Interested in accessing the full monitor, including forecasts for each commodity? You can get a free sample of the Fastmarkets Latin America Paper Products Monitor report here or by filling in the form above. Fastmarkets provide a range of market intelligence, including short-term forecasts, price data and market coverage to keep you one step ahead of the market. Speak to our team and find out more today.

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The strong increase in paper packaging and food production and exports from Brazil, both boosted by the currency devaluation observed between January and May, has supported the production of packaging and packaging papers. Higher demand from the food delivery segment has been boosting production of boxboard and sacks since the start of the year, despite the recent decline in drivers on the consumer side.

Interested in the factors influencing your food sector packaging costs? Access our cost model scenarios for the F&B paper packaging market for a deeper understanding of the raw materials supply chain. Gain unmatched transparency. Learn more now.

Production continues to be strong despite weak domestic sales

Total shipments of corrugated boxes, boards and accessories in Brazil grew 8% between January and May, according to data from the local packaging paper association (Empapel), higher than our forecast of around 5% released in January and much more than the market consensus at that time for a timid recovery of 1-2%.

Overall paper packaging and boxboard production data show a similar trend, increasing 9.9% and 4.9% year over year respectively between January and April from the same period in 2023, while domestic sales for both grades declined 0.4% and 2.5%, according to data from the Brazilian Tree Association (Ibá).

Production and domestic sales data show an even greater disconnect when we analyze industry inventory levels of durable and non-durable goods in tandem with weak demand. Overall inventories are high and at levels closer to those seen in the first and fourth quarter of 2023, while demand for durable goods has been reportedly weak, which is limiting their packaging procurement purchases.

If packaging and paper packaging production is strong despite the drop in domestic sales and the industry’s high inventories, what has been supporting production? The answer is in the external sectors.

Packaging and food exports supporting high packaging paper production

The external market has been one of the main production drivers in Brazil, affecting production through two channels: direct exports (of paper packaging and packaging) and indirect exports (of packaged goods, mainly food). In both cases, the change in the exchange rate, which grew 4.8% between January and May from December last year, increases international shipments by raising the profitability of those deals.

Direct paper and packaging exports have been growing at double-digit rates, according to Fastmarkets estimations based on trade data. Kraftliner exports totaled 176,000 tonnes between January and May, growing 15.3%, while testliner shipments almost doubled in the same period. Boxboard and other industrial packaging paper exports expanded 5.9% to nearly 43,000 tonnes in the same period.

Interested in the growth opportunities within Brazil’s paper packaging market? Stay ahead of developments in your market with an in-depth analysis of key trends by region and grade with our short and long-term market forecasts. Learn more.

A similar conclusion can be drawn by looking at Ibá’s data, despite differences between the grades analyzed. Overall paper packaging exports jumped 19.5% to 318,000 tonnes between January and April, while cartonboard exports jumped almost 70% to 39,000 tonnes in the same period.

Indirect exports have also improved in 2024, enough to continue supporting production and offsetting a further decline in domestic sales.

Food production in Brazil increased 6.3% between January and April, according to data from the National Bureau of Statistics, IBGE, supported by robust food exports, which soared 47.7% against the same period in 2023 or 38.4% if we include May in the analysis. Processed food exports rocketed 50.8% between January and May to more than 15.6 million tonnes, while offshore shipments of animal protein — mainly beef and poultry — jumped 8% to 3.6 million tonnes in the same period.

Industrialized food exports usually utilize two types of paper packaging: the primary packaging, usually a boxboard or cartonboard grade, which protects the product in retail stores, and the secondary packaging, usually made of containerboard, which bundles and protects a number of small individual units safely through the long distances of international trade.

Despite the positive performance of the external sector, post-pandemic changes in consumer behavior thanks to a more stable macroeconomic environment have only partially supported domestic sales, not enough to impede a larger drop in total domestic sales figures caused mostly by the drop in overall consumer goods demand.

Food delivery recovers and partially supports packaging paper demand

Demand for food delivery increased substantially between 2020 and 2021 due to the social isolation created by the pandemic but heavily declined between 2021 and 2023 thanks to the economic reopening and soaring inflation, which heavily eroded consumers’ purchasing power. However, available data for 2024 shows a recovery in food delivery demand due to the more stable macroeconomic environment.

The recovery in income levels for part of the population since 2022 and the inflation control between 2023 and 2024 both restored consumer purchasing power and allowed households to resume food delivery habits acquired during the pandemic. According to the IBGE, average incomes grew 4.7% between January and May of 2024 compared with the same period in 2023 and 12.2% from 2022, opening room for discretionary spending, such as ordering food online.

To improve sales, the majority of food establishments offer online ordering for delivery and/or takeaway; according to the Annual Foodservice Sectorial Research 2024, online orders account for about a third of their earnings. The resumption of in-office working and less constrained budgets for many middle-income households, as well as the convenience and large range of options available for order, have boosted online food ordering in Brazil.

Even the consumption of processed food, which was also harmed in the last two years by the shrinkflation trend to keep boosting sales despite the strong overall inflation, has been climbing thanks to the economic recovery. Retail sales at supermarkets increased 5.6% between January and April this year, according to data from IBGE.

If the food sector is performing so well, then why are overall packaging sales still so weak? The recent deterioration in consumption drivers and a comparison against other non-core sectors, such as durable goods, provide the answer.

Consumption drivers’ deterioration limits durable goods demand

The durable goods sector, which accounts for roughly 20-25% of packaging demand in Brazil, has been struggling with worsening consumption conditions since the start of 2024, despite the overall improvement in the macroeconomic landscape compared with 2022 and 2023.

Surprisingly, even with the increase in disposable incomes and the decline in unemployment rates, debt levels have been steadily rising since January. Data from the Local Commerce Confederation CNC indicates that about 78.6% of all households in Brazil are in debt to some degree, and more than 28% are behind in their debt repayments. The national debt-to-income ratio is currently nearly 45%, a level only slightly lower than the 50% registered during 2022 and 2023, according to data from the Brazilian Central Bank. The almost insignificant improvement in debt conditions is a concern for policymakers, especially when macroeconomic conditions are so much better than in 2022 and 2023.

In fact, debt levels retreated during the second half of 2023 due to the economic recovery and several debt renegotiation programs issued by both public and private entities, such as the Desenrola, but the effects from those programs were expected to last longer than they have.

The increase in household debt limits domestic consumption now and in the future, especially for durable goods. Since early 2024, consumers have been reporting that they are postponing durable goods purchases and consider current conditions to be similar to those in 2023 despite their higher income levels.

Surprisingly, access to credit has also been facilitated thanks to the drop in interest rates and the removal of consumers from blacklists issued by credit bureaus, according to data from CNC, but these conditions have not been enough to support demand for durable goods and thus have been limiting packaging demand from this sector. Retail sales of furniture and appliances grew only 1.7% between January and April, according to the IBGE, below market expectations and not enough to support packaging demand like the food sector did.

While the food delivery segment has been growing and supporting packaging demand, we cannot say the same for e-commerce. Listed companies have reported in their quarterly earnings calls that online sales have been poorer than market expectations, which anticipated a faster recovery versus 2023 thanks to the overall economic improvement.

Not by chance, road freight sales indices — which also include food delivery orders — grew 1.9% between January and April this year, according to the IBGE, while cargo storage and auxiliary transport services sales correlated to e-commerce dropped 1.5% in the same period. In other words, more perishable cargoes were hauled across the country, while the transport and storage of durable goods declined.

Other consumer habits, both old and new, are influencing household consumption and dampening durable goods purchases.

New habits: Experiences and gambling stealing durable goods’ budget share

Consumers have also opted to spend a significant part of their incremental income on experiences. As the economic reopening consolidated, so did consumer spending on services related to experiences away from home.

Data from IBGE show that consumer spending on hotels and accommodations increased 11.7% between January and April against the same period in 2023, while spending on food services away from home grew 10.1%, highlighting the new consumption priorities.

However, a new trend — which is also the subject of official investigation — has been draining significant resources from households: the unmapped and unregulated market of online betting. This market has been boosted since the pandemic, tracking the increase in digital inclusion (which has also been supporting the food delivery sector, for instance). It has been taking a significant share of household budgets.

Brazilians spent more than R$54 billion ($10 billion) on online bets in 2023, equivalent to 2.3% of the total retail market and more than the total earnings of animal protein exports, which were around R$46 billion last year. It is important to note that online betting figures are likely to be revised up because of the lack of data and transparency in this market.

According to recent research by the media group Folha and data from IBGE, Brazilians spend an average of about 10% of their monthly budget on online bets, a huge share considering the average debt-to-income ratio of 45%. Data show that the poorer consumers are, the greater the share of their income is spent on online betting.

Problems related to this unregulated market have already been affecting the reality of hundreds of households, which report a surge in debt levels to keep up with their gambling addiction, hoping to recover part of the money lost. This is especially true for sites hosted internationally, which are not regulated by local authorities and, in many cases, are being investigated for fraud.

Summary: Production should grow in 2024 despite stagnant consumption

The packaging market in Brazil should post positive figures for 2024 despite weak domestic sales and stagnant domestic demand.

In our Latin America Pulp & Paper Forecast, we anticipate that overall containerboard production will grow to 5.4 million tonnes in 2024, 3% above 2023. Exports will increase almost 20% in the year to more than 500,000 tonnes, while overall apparent consumption should increase by 2% to nearly 5 million tonnes. For the boxboard market, our projections show annual growth of 6.4% to 1.1 million tonnes.

For the total shipment of corrugated boxes, board and accessories assessed by Empapel, we expect annual growth of 6.1% to 4.2 million tonnes in 2024.

The external sector, driven by direct and indirect exports, should be the major production growth driver and should also support domestic sales in the year, boosted by the devaluation of the currency that is expected to continue through the end of the year.

The improvement in the Brazilian macroeconomic environment and demand drivers has not translated into growth in goods consumption but rather in experiences and food delivery (which is also an experience). The resumption of the food delivery habit, which was acquired during the pandemic but paused between 2022 and 2023 due to inflation and purchasing power erosion, has brought hope for the packaging sector, supporting sales and production. However, economic risks related to household debt have been increasing in Brazil, challenging improvement in domestic sales of goods and thus packaging.

Want to dive deeper into paper packaging market developments and industry trends? Speak to our team today and find out how we can help you stay ahead of the competition.

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The consensus is that the GDP growth forecast of 2% for Brazil is likely to be cut by 0.3-0.4 percentage points, as Rio Grande do Sul accounts for approximately 6.5% of the country’s GDP, but with higher shares for both industrial production (around 8%) and agriculture (around 13%). According to some estimations made by the federal government, the state, which is home to 10.8 million people, will need approximately $10 billion for reconstruction. Several pulp and paper mills were directly or indirectly affected by the tragedy.

It should be noted that after other similar catastrophes around the world, the average GDP of the country affected was cut was around 1.5 percentage points, according to estimations made by economists for the Valor media group.

So, what does this mean for paper products consumption? To facilitate our explanation, we will discuss it over two time periods: the short term (the next 1-3 months) and the medium term (the next 4-12 months).

Interested in the factors impacting paper products demand and consumption? Learn how Fastmarkets’ short-term and long-term forecasts can help your business predict the future and stay ahead of the market. Talk to us today.

Short-term impacts: Harder to assess

In the short term, we expect operating rates at existing mills in the state to drop, reducing production and the consumption of raw materials. However, other mills around Brazil may be able to temporarily increase operating rates to offset the production losses at Rio Grande do Sul’s mills. This is particularly true given the state’s lower importance in the country’s capacity share.

The state is home to CMPC’s Guaíba mill, which can produce 2.3 million tonnes of pulp annually and accounts for roughly 7.9% of the country’s total pulp capacity. There are also at least seven tissue producers located there, accounting for 90,000 tonnes per year or 3.7% of Brazilian tissue capacity and around 77,000 tonnes or roughly 3% of Brazil’s total printing & writing paper capacity. Finally, there are about 107,000 tonnes of containerboard capacity installed and 24,000 tonnes of other industrial packaging papers, representing 1.7% and 0.9%, respectively, of the country’s capacity.

So, at first glance, the tragedy should have little impact on the production side, regardless of the grade analyzed. However, the consumption of paper products by the local industry will fall, as manufacturers have partially or totally halted their lines amid the disaster.

The major impacts on packaging paper consumption will be from containerboard, although this is mostly produced outside the state, and the animal protein and food sectors, which are reporting double-digit losses and losing production as animal feedstock is being rationed at the major beef and poultry farms. Exports are also expected to drop in the short term, reducing the consumption of packaging paper.

However, the consumption of containerboard is also expected to sharply increase in the short term, as people around the country demand boxes to send donations to the affected regions, increasing the demand for cargo transportation. It is hard to assess which way the net effect on consumption — and shipments — of corrugated boxes will swing in May and June, given the two opposing forces.

Medium-term impacts: Demand poised to grow above average

Looking out 4-12 months from now, it is easier to expect that demand for paper products will grow faster than the average pace, despite the expected drop in GDP for the period. First, we can assume that a significant part of the packaging and paper inventories held by the local industry will be lost due to the floods. Therefore, the simple fact that economic life will return to normality is enough to foresee an abnormal — one off — increase in demand for those products, which are likely to be supplied by states unaffected by the tragedy given the low capacity share in Rio Grande do Sul. And this should be valid for all industries and business activities, not just major packaging and paper consumers.

Second, we can also assume that many businesses and people will have to replace part of their assets — goods, machinery, furniture and even appliances — due to the floods. The increase in demand for those durable goods should support the production of these items elsewhere in the country, thus stimulating the consumption of paper products, especially packaging, to transport them down to Rio Grande do Sul.

Third, from a political perspective, 2024 should see high expenditures from the government as municipal elections are scheduled to take place. Usually, election years are characterized by increased spending on advertising, flyers and even promotional goods distributed to increase public approval. Despite government expenses being limited by austerity laws, tragedies such as this one are often a reason to declare emergency situations and to spend beyond the government budget. So, the incentives for the government to increase expenditures are higher than normal given the tragedy plus the elections.

However, the income lost by many people will be negative, as they are likely to rely on credit to restore their homes and replace durable goods, which will probably limit normal daily demand in the medium term due to increasing debt levels.

Summary: Opposite forces will offset each other

Our preliminary conclusion for the consequences on demand from the tragedy that has hurt Brazil’s Rio Grande do Sul is that opposing forces — those supporting demand and those reducing it — should occur together in the short term, offsetting one another and making this essentially a zero-sum situation. Any one-off gains from the reconstruction will likely be immediately offset by a sharp drop in demand caused by higher consumer debt levels.

From an industrial perspective, we believe the gains from replacing damaged paper products inventories in the short and medium term will be offset by production losses in the short term, with one force offsetting the other. Therefore, we have not revised our demand forecast for Brazil shown in the latest Latin America Pulp & Paper Forecast for 2024, which is for growth of 1.7% for containerboard, 1.5% for other industrial packaging grades, and 2.7% for tissue and a decline of 2.1% in printing & writing papers. For total shipments of corrugated boxes and board assessed by Empapel, we still forecast an increase of 4.2%.

Risks to our analysis are mostly related to the inflationary impacts caused by the crop losses in Rio Grande do Sul. The state is the top Brazilian rice producer and an important fresh food grower. Those items are usually quite sensitive to supply shocks and factor heavily in consumer budgets. Therefore, a sudden price increase for food could lead to a reduction in purchasing power nationwide, limiting the consumption of paper goods elsewhere in Brazil.

Want to dive deeper into paper packaging market developments and industry trends? Speak to our team today and find out how we can help you stay ahead of the competition.

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However, were there any characteristics of the Brazilian market that helped to accelerate the drop? And what is next for P&W markets in the country?

Brazilians are quick to adopt the digital world

The structural change in people’s behavior of consuming content via digital devices instead of printed materials is a global trend. This shift-to-digital megatrend has been reducing the consumption of paper products worldwide over the past 20 years, following the widespread use of computers and laptops in offices, schools and universities and the invention of the iPhone in 2007, which revolutionized the market for smartphones and digital content and allowed people to consume it anywhere and anytime.

However, one thing is a cultural fact: Brazilians love to be in the tech vanguard. The country is famous worldwide as a place for first adopters of new social media, electronic gadgets or any sort of digital improvements. Brazilians spent an average of 9.5 hours per day online in 2019, second only to Filipinos, who average 10.03 hours per day online, and way above developed countries, which average 6.0-7.0 hours, according to data from Hootsuite.

So, what causing the delayed decrease in P&W demand in Brazil, which grew by 41% between 2000 and 2012 and only started falling – very quickly – after that to 1988 levels by 2022?

There are several reasons, but the major one is economic inequality, which results in lower access to digital devices, despite the culturally positive attitude toward the adoption of new technology. Brazil’s economy is historically more uneven, in terms of income distribution, than economies in Europe or the US. This inequality not only affected the ability that Brazilians had to purchase consumer goods, such as digital devices, but was also reflected in the country’s infrastructure, i.e., internet access, which was considered to be behind the more mature markets. Only since 2012 have the consumer patterns seen in mature markets finally started to appear in Brazil as well thanks to a few factors:

1. Infrastructure investments made in the 2000s finally started to mature, from electric grid expansion to small cities and rural areas to wider internet access in big cities. Between 2002 and 2012, more than 16 million people were added to the national electric grid and had access to electricity for the first time in their lives. Not only did their standard of living improve, but average monthly incomes in this group were positively affected, rising 41% over the 10 years.
2. Brazilians saw steady income growth over those years, with more than 30 million people escaping the extreme poverty income range and more than 35 million people moving from the poor segments to the middle-class population of around 105 million Brazilians by 2012. The growth of the middle class until 2012 drove consumer goods consumption in the country, accounting for more than 40% of overall consumption in the country, according to government data.
3. Higher national income and broader internet access exposed Brazilians to a worldwide strategy: marketing. Global electronic device producers realized the enormous growth potential for sales in Brazil as consumers there were now more informed, with access to electricity, the internet and more disposable income.

Improved mobile phone ownership and internet access

Internet penetration in Brazil has escalated quickly, closely approaching the shares seen in mature markets. It has improved from 51% of houses in 2015 to 84% in 2019 (before the pandemic) to 90% by 2022, boosted by the pandemic and a wider use of mobile phones to access the internet and consume content, according to data from the National Bureau of Statistics (IBGE). By comparison, internet penetration in the US was around 83% of houses in 2013 and 93% in 2022. Among Brazilians, smartphones are the most common device used to access the internet, used by roughly 99.5% of the population with internet access.

As more time passed, internet access in Brazil increased and marketing strategies continued to push people online. Additionally, the creation of content for printed media became more difficult as advertising in this segment plummeted, causing the content to lose readership and further encouraging people to go online to consume more popular, heavily sponsored content. Overall marketing investments in printed media reached BRL 15 million ($7.6 million at the time) when it peaked in 2012 before tumbling to BRL 5 million by 2020 ($970,000).

Unsurprisingly, advertising in printed media and sales of printed materials are strongly correlated, with both peaking in 2012 before plummeting to historically low levels since. Similarly, printing activity in the country has also plummeted since 2012 due to weaker demand for printed goods, including magazines, catalogs, menus, books and other printed materials. Higher usage of digital devices to consume not only once-printed-but-now-digital content, such as an e-book or a news article, but also digital-only content such as watching videos or playing video games, has clearly hammered the consumption of printed materials in Brazil over the past 10 years.

Paper consumption drop accelerated by retail crisis

The crisis that has affected the Brazilian book retail segment since 2012 has accelerated the drop in consumption of P&W papers. After years of acquiring smaller competitors and publishers, the major brick-and-mortar book retailers in Brazil made disastrous decisions that led to the doom of the whole market.

First, they increased investments by opening new stores using credit, expecting that more locations would increase total sales. Second, most Brazilian book retailers waited too long to start selling books online, leaving the market open to the arrival of Amazon and brutal competition. Finally, the largest Brazilian book retailers waged a price war between 2011 and 2018, attempting to increase their market share at the expense of their profitability.

The opening of new stores did not increase overall sales as expected, but the costs of expansion and funding their increased operations rose sharply in a short period of time. Due to political and economic turmoil in tandem with high inflation, interest rates in Brazil jumped from 7.25% in 2012 to a historical high of 14.25% by 2016, heavily increasing the cost of capital in the country and hitting those with high debt levels, including many book retailers.

Meanwhile, the price war intensified as retailers went online and aimed to increase their market share of the still nascent, but growing e-commerce market in Brazil – this happened at about the same time that retailers other than booksellers also migrated online to increase sales and their client base. The effect of the price war between the two major retailers in Brazil also affected other smaller retailers, as they were caught in the crossfire. As a result, earnings in the sector – and thus profits of book sales – plummeted, putting several companies in financial difficulty.

Brazilian book retailers faced competition from other online vendors

The slow speed at which Brazilian book retailers started selling online also contributed to the retail crisis seen in the past decade, as local players faced strong competition against non-book retailers and online vendors, such as Amazon, in a market that was once solely theirs.

Livraria Saraiva’s online book sales accounted for less than 15% of its total sales by 2015, a year in which total online-only book sales grew by more than 250% in the country, according to data from the National Union of Book Publishers (SNEL). Livraria Cultura’s online presence was somewhat stronger than Livraria Saraiva’s, with an estimated 30% of its sales coming from online. However, this was still not enough to support the retailer’s operations.

Data from SNEL shows that Brazilian book sales earnings on the open market adjusted by 2022 inflation have decreased by an average of 4.2% per year since 2011, due to the price war and eroding demand. However, the largest declines occurred between 2013 and 2014 and in 2018, years that market participants consider the toughest of the price war between major book retailers and highly associated with their bankruptcies.

Similarly, earnings on sales to the government, which accounted for 40% of the market, also fell because of cuts in public expenditures during that time and higher competition among publishers and printers in public tenders as earnings in the private sector fell – and payments were delayed.

The mounting debt of the largest book retailers in Brazil hit publishers and the P&W market hard. By 2015, Livrarias Saraiva and Livrarias Cultura together accounted for an average of 35% of publishers’ overall sales, but reports from that time mention that this was only true for a limited number of large publishers. The situation for smaller companies was even worse, with the two giants accounting for more than half of their earnings – so, their filing for Chapter 11 bankruptcy protection and debt haircuts pummeled the segment.

What’s next for the P&W market?

There was a domino effect from the book retailer crisis in Brazil on the P&W market, with several publishers and smaller companies also eventually filing bankruptcy. However, it does appear that the worst is over for the P&W market, as what is left is basically scorched earth.

Livraria Saraiva and Livraria Cultura have both declared insolvent, and only small bookstores are now operating in the country, amid an already fading consumer demand. Also, there is the risk of huge, unsold inventories from the two former leaders to hit the market, which is likely to squeeze publishers and bookstores’ margins even further.

We project that P&W consumption in Brazil will decline by 2% in 2023 and 1% on average in the next two years, slipping to 1.41 million tonnes by the end of 2025 – still 75,000 tonnes above the 1.34 million tonnes consumed in 2020.

From an overall perspective, the pandemic lockdowns and business and school closures between 2020 and 2022 are now water under the bridge. The pandemic and its aftermath heavily damaged the segment, with P&W apparent consumption plummeting 22% (370,000 tonnes) in 2020, although it had recovered 140,000 tonnes of that loss by 2022.

From a practical perspective, most of the demand decline expected to happen in the 2020s before the pandemic – such as the substitution of paper menus and forms by digital options and increased use of technological devices in schools and universities – ultimately rapidly occurred because of the pandemic. Therefore, we understand that even though there is still an ongoing effect of the shift-to-digital trend, it tends to get smoother each year.

However, several risks still need to be considered, and much can change quickly in Brazil, which would force us to adjust our forecast. Upside risks can cause demand to decline less than forecasted, while downside risks cause demand to fall further.

The upside risks to Brazilian paper demand

1. More book fairs and events

One upside risk for Brazilian P&W demand is the growing presence of book fairs and events in the sector’s total sales. As consumers are more oriented to living experiences and making memories, publishers quickly jumped on this trend and started to organize bigger and more grandiose events to attract consumers, promoting book signings and offering significant discounts for quantity purchases. The end of restrictions on events due to the pandemic also brings the hope that there may be pent-up demand for attending events, such as the coming fairs.

2. Boosting consumer goods demand

Another upside risk for the Brazilian P&W segment is that the election of Luiz Inácio Lula da Silva (Lula) as president could mean an increase in demand for printed materials from both consumers and the government. Lula has previously advocated for better consuming conditions for people from the lower and middle classes, and many market participants assume that his government will issue some sort of credit or income aid program during his term (2023-26), which would boost overall demand in the country for consumer goods – and thus somewhat support P&W paper consumption. He also advocates for higher investments in education, which could result in larger purchases by the government; again, this sector accounts for roughly 40% of earnings.

3. Preference for paper-based learning materials

A third upside risk is the global trend of resistance to technological devices replacing printed materials in daily life, including in schools and universities. More and more people have been questioning the effectiveness of using technological devices instead of paper and printed materials as learning tools, arguing that the carbon footprint of digital devices is higher than for paper products and that exposure to certain light spectrums is harmful to one’s health. Additionally, recent studies argue that learning opportunities and effectiveness are higher when using paper products and printed materials instead of technological devices, which further fuels the debate whether the shift-to-digital trend, and its effects on the market in the long run, are permanent.

The downside risks to Brazilian paper demand

On the other side, one downside risk is that the Brazilian market shows the consumption of books and other printed materials is not strongly correlated with GDP. Unlike other paper grades, such as containerboard, the consumption of P&W products does not necessarily expand in step with gains in GDP. However, whenever GDP decreases because of an economic crisis, the consumption of printed materials and P&W papers tends to fall because they are not viewed as essential.

This strong elasticity, in tandem with the secular decline trend, explains the fragile condition of P&W industry margins and the high exposure of the segment in the event of an economic crisis in the future. For example, in 2021, total book production increased 24.3%, but book sales grew 15.4% and total book sales earnings adjusted for inflation decreased 4% year over year.

Another downside risk is related to the country’s giant retailer Americanas filing for Chapter 11 bankruptcy protection in early 2023, which has a strong potential to reduce total sales (and production) of books in Brazil in 2023-24.

Although not exclusively a book retailer, the company owes about BRL 72 million ($15 million) to publishers; the majority of this debt, which equates to roughly 3% of the sector’s projected annual earnings, is owed to big publishers. The complicated financial situation for the company could lead it to start another round of aggressive book sales discounts, further damaging the margins of other competitors and creating another domino effect, like that seen between 2012 and 2018 when Livraria Saraiva and Livraria Cultura fought that war.

Want to learn more about the Latin American paper and packaging markets? Our Latin American Paper Products Monitor provides short-term forecasts and market coverage for the region to keep you one step ahead of the market. Speak to our team and find out more today.

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In Latin America, Smurfit Kappa operates paperboard businesses in Brazil, Mexico, Argentina and Colombia, while WestRock has operations in Brazil and Mexico. How will this potential mega-merger change the packaging capacity share in the region?

Smurfit Kappa and WestRock to become the largest packaging company in Latin America

The mega-merger between the two global packaging producers will end up creating the largest packaging producer company in Latin America with approximately 14.5% of the region’s capacity share, overtaking Brazilian producer Klabin with 13.4% of the capacity share.

This takes into consideration all grades of packaging paper assessed by Fastmarkets, including corrugated board (containerboard), cartonboard and boxboard grades, wrapping papers and other sorts of industrial packaging papers, according to the latest adjusted capacity estimates in our Fastmarkets’ Latin American Pulp & Paper Five-Year Forecast report and in our Latin American Paper Products Monitor.

Before the merger, WestRock was the second-largest packaging producer in the region, owning around 8.4% of the packaging production capacity in Latin America, followed by Smurfit Kappa, which owned around 6.1% of the production capacity.

Other producers, including multi-national groups, account for 62.2% of the region’s capacity share, meaning that initially, despite the fact that the mega-merger is a game changer for Latin American capacity share, more than half of the market capacity is still pulverized among more than 180 different companies across 15 countries.

The two companies would vertically integrate and complement each other well in markets in which one or the other previously had little or no operations. Internalizing via replicating and integrating businesses is the most efficient organizational structure for this kind of multi-national enterprise, which global value chains (GVC) theories predict.

A risk for this outlook is related to the pending approval of the deal by local anti-trust authorities in all countries in which the two companies own assets.

Packaging production to be concentrated in Brazil and Mexico

The integration of Smurfit Kappa and WestRock also aims to explore scale gains across the production chain, from pulp production (not necessarily in Latin America) to the possibility of internal trade using competitive pulp in its own operations. In other words, it also looks to better scale gains in the upstream segment. The deal also aims to explore bigger consumer markets and a comprehensive structure of corrugating plants in downstream segments.

One of the goals of every multinational is to optimize its organizational form to maximize profits, a basic GVC theory principle. In order to do so, one of the economic puzzles companies need to solve is where and how should production be allocated.

The allocation of productive assets in Latin America reflects two GVC principles: factor advantages and distance to downstream segments. This means that producers will try to allocate production either in places where they can explore local factor advantages, i.e., great availability of wood to produce competitive pulp and paper products, or they will try to place production closer to the final consumer market, which means closer to converters and end-users who buy packaging.

If utilizing local factor advantages is not possible, companies will try to allocate production as close as possible to places where they can use this strategy, reducing transport and transaction costs.

It is no surprise that Brazil and Mexico lead the capacity allocation of packaging papers in Latin America, which totaled around 19.1 million tonnes by 2022, according to our latest estimates.

Brazil accounts for 44.3% of the total Latin American packaging capacity, which has much to do with two factors: wood availability and adequate weather for competitive pulp and paper product production. Many producers, including leading packaging producer Klabin, explore those advantages and can export production offshore at very competitive rates. In addition, Brazil is home to one of the largest packaging markets in Latin America, and allocating production there means that it will be closer to corrugators and consumers.

Mexico is the second-leading producer of packaging in the region, representing about 28.7% of total packaging capacity, reflecting one of the GVC principles: the proximity of the country to important consumer markets. About 80% of Mexican consumer goods production is exported to the US, a trade flow that is benefited by the geographic proximity of the two countries.

Mexico cannot grow trees or produce as much virgin paper as Brazil due to unsuitable weather and soil conditions, but it can easily import both pulp and paper grades from the US and has specialized in the production of recycled paper product grades to ship its consumer goods production offshore.

Other countries represent a smaller share of the packaging capacity in the region, with the next largest in Chile, Argentina and Colombia. In those countries, there is some production of virgin paper like there is some production of pulp, although it does not compare Brazilian production. Those countries are also the three next-largest packaging markets in the region, mostly due to fruit exports and some domestic relevance.

Impact on paper packaging markets by country

Here is a summary of the impact of the Smurfit Kappa and Westrock merger on paper packaging markets in four Latin American countries: Brazil, Mexico, Argentina and Colombia.

• Brazil: The merger will mostly affect the containerboard market because the two companies do not produce other paper product grades.
• Mexico: The merger will affect the whole packaging market in Mexico, as the two companies produce all sorts of packaging paper in the country.
• Argentina: The merger will initially not affect the Argentinian market, but this could change in the future.
• Colombia: The Colombian packaging market was already led by Smurfit Kappa before the merger.

For a full in-depth analysis of the impact of the merger on the four countries and to access all the data charts included as a part of this report, sign up here.

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The lost decade  
Covid-19 hit the Latin America economy particularly hard. GDP levels at the start of 2021 fell back to levels not seen since 2011. Latin America lost a full decade of economic progress. 

Total Latin America GDP fell by 7.5% in 2020. The GDP loss was similar across South America and in the Central America and Caribbean sub-regions. Compare that to global GDP, which fell by around 3-3.5%. 

The pandemic was the straw that broke the camel’s back, coming at the end of ten years of stagnant economic growth. 

A decade of GDP stagnation 

Alternating declines and timid growth caused GDP to stagnate.

• In 2009, GDP fell 2% after the subprime crisis, but soon recovered 
• It grew by only 0.2% in 2015 and fell by 0.9% in 2016
• In 2018, GDP grew only 0.9% and decreased by 0.3% in 2019
• Finally, in 2020, GDP plummeted by 7.5% because of the pandemic 

Working less, earning less, spending less 
Rates of unemployment and underemployment increased significantly when comparing 2020 to the final quarter of 2019, compounding a problem ten years in the making. Latin America lost more working hours than any other region of the world, saw more than double the global average loss of income, and was responsible for almost a third of all jobs lost globally. 

• 41 million jobs lost in Latin America
• 114 million jobs lost globally 
• 19.3% lost income from employment in Latin America
• 8.3% lost income from employment globally 

The data above speak to official employment. But 12 out of the 18 selected countries in Latin America have more informal workers than registered employees. The problem of unofficial employment affects more than half of the working population in key markets such as Mexico and fast-growing nations like Peru, Ecuador and Colombia.

Brazil, Argentina and Chile, important economies in South America, have between 40% and 47% of their working population off the books.

Being in unofficial employment means you have none of the protections of a registered, such as paid medical leave and redundancy pay, and you can lose your job at any time. Informal employment also burdens the young, who may be supporting older generations who don’t have a safety net of pensions and savings. 

Unstable jobs and unprotected workers combine to constrain present and future spending, slowing the recovery from Covid-19 and economic growth overall. 

No visitors 
Latin America relies heavily on tourism – it contributes more than 15% of GDP in many countries in the region, with Mexico and Uruguay at the top of the list. 

Total arrivals in Latin America fell by an average of 70% last year, with higher drops in Central and South America. The Covid-19 vaccine rollout is slow in the region, which is deterring international travelers looking for “Covid-safe” destinations. If Covid-19 cases remain high and the rollout remains slow, tourism isn’t expected to recover until 2023 or 2024, so a significant share of GDP recovery is unavailable for the next 2-3 years. 

Healthy demand for Latin American exports is a double-edge sword 
Agriculture helped to offset losses in other sectors in 2020, and it’s contributing to the recovery in 2021 and 2022.

Latin American agricultural exports to China jumped 5.4% last year, while exports to the US grew roughly 5%. Exports to all other countries dropped 3.5% in the same period.

Brazil, Mexico and Argentina are the biggest exporters of food to developed countries, shipping everything from grains and fruits to beef. Other major producing countries as Uruguay, Ecuador and Paraguay and are expected to enjoy higher exports as well, though they’ll remain small compared to Brazil, Mexico and Argentina.  

The region’s dependence on agricultural exports is a double-edged sword. Soaring global commodity prices, including grains, beef, and food in general, have stimulated the region to increase exports. But the health of the agriculture industry and other commodities is not leading to an equivalent increase in employment rates, because so many of the jobs lost were in other sectors such as hospitality. The exception is Mexico, which is increasing exports of manufactured goods to the US.

Nor is agriculture industry growth leading to an increase in income levels.

Latin American incomes are stalling. In the past seven years, the Purchase Power Parity (PPP) per capita stagnated while it grew in all other regions, including emerging economies in Asia. 

In the past two years, inflation-adjusted minimum wages increased by only 1% in the region, mostly driven by gains in Mexico and Chile. Brazil and Argentina have seen a stagnation and a decrease, respectively, of their inflation-adjusted minimum wage.

In other words, Latin America is stuck in a moment in time. Latin American buyers can buy roughly as much today as they could in 2013.

Higher global commodity prices cause domestic supply shocks
Inflation is no stranger in Latin America, but the current conditions are unique. Higher public spending in 2020 and higher global commodity prices in 2021 are driving up prices while unemployment levels remain high and purchasing power stagnates. 
  
Higher global commodity prices push up local prices in two ways. First, producers are often better off exporting their goods and earning US dollars, rather than selling the food domestically in local currencies. Second, critical imports are more expensive, including manufactured and industrial intermediate goods such as packaging, two markets where Latin America is heavily reliant on imports.

As a result, the 12-month average inflation rates in Latin America are at or above the local central banks’ targets. 

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In Brazil, inflation was at 5% in the 12-month average by June, while the month’s year-on-year result is more than 8%. In Mexico, inflation is also close to 5% year-on-year. The situation in Argentina is highly problematic; inflation there is near 40% year-over-year. And Suriname and Venezuela have three- and four-digit inflation figures.

Can inflation be tamed?
Inflation is a risk to future growth in the region. The one-million-dollar question: Can inflation be tamed? Cutting government expenditure, reforming taxes and increasing interest rates could help. The problem here is that there is little room for further fiscal reforms or spending cuts that would not also hinder GDP recovery. 

Do governments have a choice but to cut spending? Without cuts, inflation will continue skyrocketing, leading to calls from the public for subsidies and price controls. This could lead to an investment withdrawal from the region, reducing reserves and pushing up inflation even more. It’s a tough challenge ahead. 

Cash-strapped governments will struggle to respond 
The response to the Covid-19 pandemic as a share of GDP was far lower than the share seen in developed countries such as the US and in Europe. And because much of the aid provided by Latin American governments was not budgeted for, it led to higher rates of inflation and short-term debt levels. Brazil, Argentina, Peru and Colombia are the most affected. 

That has left most Latin American governments penniless – they are not now in the financial position to stimulate demand though aid and investment. Exchange rates and the end of the commodity upcycle also pose a threat to recovery. 

What’s the outlook for Latin America?
Growth in Latin America will be lower than the global average.

We expect to see Latin America get back to the pre-pandemic levels in three years, growing 3.5% on average in 2021 and 2022. 

All sub-regions, South America and Central America and the Caribbean, will recover at a similar pace, boosted by commodity exports and some economic reopening. But the growth rate is uneven on the country level. Chile, Columbia and Peru come out on top, with Mexico close behind. 

Economist Rafael Barisauskas presented a detailed Latin America macroeconomic outlook for 2021 and 2022 at our recent our Latin American forest products conference. Learn more about that event here.  

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