On the wall of Charlie Kimber’s office in Arauco’s headquarters on the 14th floor of a Sanhattan skyscraper hangs a huge map of the United States. Pointing to North Carolina on the Atlantic coast, Kimber traces an imaginary railway line through Georgia, Alabama, Mississippi, Louisiana and Texas.
“We can use rail to reach Mexico from our mill,” says Kimber, Arauco’s corporate affairs manager. “It’s a big market and there is little manufacturing there.”
With annual sales of some US$4 billion, Arauco, which exports panels, mouldings, sawn timber and other wood products from Chile, Argentina and Brazil, is one of the largest forestry companies in the world.
Now its sights are set on the North American market. In January, it completed the acquisition of a wood panel plant in Moncure, North Carolina, from Uniboard USA, a subsidiary of Germany’s Pfleiderer, for US$56 million.
The deal makes Arauco the latest Chilean company to acquire production facilities in the United States since Concha y Toro forked over US$238 million for California’s Fetzer Vineyards last year.
“There is a big cost advantage to shipping direct from the domestic market rather than from Brazil, Argentina or Chile,” says Kimber. “We save on transportation and service costs among others.”
The plant, one of the largest of its kind in the country with 284 employees, makes medium-density fibreboard (MDF), particleboard and melamine for the flooring, furniture and cabinet-making industries in the United States and Canada, adding 600,000 cubic meters of annual panels production to Arauco’s global capacity.
Arauco, controlled by Chile’s Angelini group through its holding company Empresas Copec, is not the plant’s first Chilean owner. In 2004, at the peak of the US housing boom, the plant was acquired by ATC Panels, part of Chile-based Aconcagua Holdings. But when the bottom dropped out of the market in 2008, ATC sold the mill to Pfleiderer.
The downturn in the US construction industry has cut sales of wood products and led to overcapacity in the lumber industry, which means prices for sawmills and processing plants have plummeted. Pfleiderer invested over US$200 million in the Moncure plant since 2008, but it cost Arauco a quarter of that amount to purchase.
“As the US economy picks up and people start investing in housing again, the business will recover,” predicts Kimber.
Another advantage is the plant’s low operating costs. Despite higher wages in the United States compared to South America, Kimber says manufacturing costs at Moncure are “very competitive” due to higher productivity and lower expenses on services like security and cleaning.
The plant also offers synergies with Arauco’s distribution business. The United States accounts for 14% of Arauco’s exports with sales of some US$400 million annually, and is its second largest export market after China, which accounts for 34% of exports.
Using its marketing expertise developed in South America, Arauco has established distribution channels that allow it to sell panels and mouldings direct to retailers like Home Depot and Lowes.
“People used to buy a new home every few years instead of fixing their old one, but in this market they prefer to do their own renovations,” says Kimber. As a result, sales of do-it-yourself wood cabinets and mouldings are booming.
Arauco has a 25% share of moulding sales in the U.S. and a 12% share of the panels market, which it aims to increase through Moncure that supplies 18% of the national MDF market.
“We plan to add value using our product development and marketing expertise,” says Kimber.
Then there is the location. Close to Arauco’s US headquarters in Atlanta and forestry suppliers in the southeast, the plant is ideally positioned to export wood products to Mexico and even the Caribbean in the future, he says.
The plant will not compete with Arauco’s Chilean exports, since the fibreboard produced in Chile is ultra-light and suitable for niche markets where weight is important, explains Kimber.
But it will help to diversify Arauco’s manufacturing base and mitigate the exchange rate risks inherent in exporting from South America. It also marks a departure from the company’s traditional model of integration along the production chain from forest to market.
In the Southern Cone, Arauco supplies its own raw materials from its sustainably managed forest plantations. In the United States, however, Timberland Investment Management Organizations (TIMOs) receive tax benefits to manage forests on behalf of institutional investors.
“We don’t see the need [for foresty operations] because there are many suppliers of wood chips, pulp logs and sawdust,” explains Kimber.
Arauco’s investment in North Carolina is a drop in the bucket compared to its South American investments. For example, it plans to invest US$2.3 billion in its Nuevo Horcones program in Chile’s Bío Bío Region, which includes modernizing and expanding its Arauco plant, installing a 120-megawatt wind plant and building a new plant nursery.
It is also expanding in the region – last year it began building a pulp mill in Uruguay in partnership with the Swedish-Finnish firm Stora-Enso with investment estimated at US$1.9 billion.
But while continuing to increase production close to home, the diversification of markets and manufacturing facilities in North America is key to the company’s long-term growth strategy.
So far the news is good. In its first 45 days of operation since Arauco took over on January 15, the Moncure plant produced record sales.
Kimber smiles and spreads his arms to cover the whole map on his wall: “We hope this will be Arauco’s first step into manufacturing in the North American market.”
Julian Dowling is Editor of bUSiness CHILE