Cellulose Beira Industrial SA - Financial Position - Example

Executive Summary

Companies struggle to remain in a superior position compared to their competitors. Cellulose Beira Industrial SA (Celbi) was formed in 1965. It is primarily involved in production and sale of short fiber pulp from eucalyptus (Celbi Website). The company is also involved in production of electricity. Celbi has been part of Altri group since 2006. As one of the best eucalyptus producers in the world, Celbi has an installed production capacity of seven hundred thousand tons. The paper produced is from eucalyptus wood which plays a key role in the quality of its products. According to the company’s 2014 annual report, net sales from 2011 to 2014 were 333 197, 347 941, 379 215, and 368 662 million euros respectively. This depicts a situation where the company has maintained its overall performance but retarded in progressing to increase its sales. Certain considerations were made as the reason behind the company’s retarded growth in the preceding years. The complex macro-economic environment in Europe played a significant role to affect the recovering companies adversely. Geopolitical tension created by the stand-off between Russia and Ukraine created an unfavorable economic environment that affected the operations of the companies in the surrounding countries in Europe. Portugal is a member of the European Community which explains the reason behind its affected industries when there is tension in the region. A slight increase on the domestic demand adversely affected the company’s operations since imports increased creating a deficit in the current account.

Installation of new companies in South America such as Suzano in Brazil created new competition in the market with more than 4.3 million tons of short fiber pulp being introduced into the market. With such a value, it was hard for the struggling and less stable Portuguese companies to venture well in the international market. Global competitiveness is a serious concern in the paper industry. In the previous years, companies, especially in Europe have faced an emerging trend where they have failed to click in the global platform responding to a downward pressure with some facing looming shutdown. Global competitiveness helps in securing the company’s future especially in the highly changing environment. Considering the trend in the pulp and paper industry, South America has come up as a strong competitor producing 4.3 million tons of short pulp fiber. Realizing the company’s financial position and competitive advantage is the only way to make new strategies aimed at correcting its limitations. Considering the state of the market, the year 2014, which is the last year whose financial report was available presented various challenges in the pulp industry. As will be discussed in this paper, the European and specifically Portuguese pulp industry is facing a serious threat from South America which is better positioned and having a wider market therefore posing a major threat. Global economy forecasts provided ahead of the period were pessimistic and a tough period had been predicted. Therefore, it is important to evaluate the threats and opportunities, by conducting a SWOT analysis and establish how they can recover. Suzano Pulp and Paper Company in Brazil shall be compared with Celbi since they are located in different continents with different political and economic drivers. While Celbi is a renowned company in Europe, Suzano is still struggling to realize global recognition. However, going by the revenues realized in 2015, and Suzano’s entry in the China 8.8 million tons market, the company cannot be ignored. Both companies are adversely affected by high energy costs which in turn lead to high pricing of their goods. The European Union gives Celbi an upper hand in the European market. The South American Market is free with more than five major Brazilian pulp and paper companies competing.

Company Financial Analysis

The company’s financial position can be obtained by establishing the trend over the years from 2010. In 2014, the global hardwood demand for pulp grew by 3.3%. This translated to 940 thousand tons compared to the value required in the previous year. China was the leading consumer requiring 8.8 million tons similar to what was required across Western Europe. With the trend described above, the total revenues for the company dropped by 39 USD. Price recovery in US dollars to 735 USD was recorded in the fourth quarter boosting the value of the Euro. Comparing the total revenues in 2013 and 2014, a drop by MEUR 12.9 was recorded. This can be attributed to the fluctuating Euro, the changing global market and the effect of the increasing tension between Ukraine and Russia. Stock variation was identified as the key driver in boosting cost of sales where a positive value was recorded. There were serious commitments that had to be serviced in the following year. The net income for the year was MEUR 28.1. Consulting a SWOT analysis to establish the company’s strengths, weaknesses, opportunities and threats was important.

Strengths

Celbi has a large regional market. Having been in the market for over fifty years, the company has muddled through to become one of the most reliable players in pulp and paper industry. To master such a huge market, it had to make sure it produces high quality goods. Majoring in eucalyptus, the company managed to create a major brand distinguishing its products from the rest in the market. Availing high quality products is often followed by good stakeholder policies. Using the stakeholder theory, the company has ensured that it captures the specific needs of the market and provided high quality goods to satisfy the market. Its production facilities have been mad efficient with raw materials being transported to various centers where they are processed and transported to various destinations. Developing an effective infrastructural network is key in the pulp and paper industry. Raw materials, wood, is bulk requiring a clear plan on the way it should be transported. Hiring skilled personnel coupled with the organization’s culture has helped to create an efficient and effective workforce that has steered the company to its current heights. Corporate social responsibility and business ethics have become a core part in business in the 21st century. Celbi has ensured that its operations are environmental friendly by abiding with the laws set in various regions where it is in operation.

Weaknesses

Energy costs have significantly increased calling for bigger allocation in production costs. The wrangles in the Middle East which is a major producer of oil leads to price fluctuations which in turn affects the production cost. The cost of wood has shot up. This is a major weakness considering that the pulp coming from South America is produced at a lower cost therefore having competitive prices in the market. High labor costs have increased production cost. When production cost is high, the price of the goods will be high. This positions the company in an awkward position especially when the competitors can produce the same products with a lower price. Branding plays a key role here where the company has to have loyal customers who can buy their products despite the hike in prices. Global warming and increased emphasis on environmental conservation has led to overregulation of the industry. Laws have been developed to make sure that as much as the companies are operating, they do not affect the environment adversely. This has limited the company’s operations and threatened their existence in some regions such as Western Europe.

Opportunities

The increasing demand for pulp and paper in China is a good opportunity for Celbi compared to South American production. Though the market has been shaky due to the tension between Ukraine and Russia where China is often a key player, exporting its goods to the China market can boost its operations significantly. The company has mastered the European market and so using Porter’s Five Forces model, it is not easy for competitors to venture in. The industry requires huge capital investment to feature in the market. Therefore, for the South American companies to venture into the European market, they have to invest heavily and still they can never be guaranteed that they will operate smoothly. The European market, focusing on customer preference is tricky with most customers preferring to stick to their suppliers rather than buying their products from new players. This creates a good opportunity for Celbi since it is a renowned brand in the region. Transportation infrastructure in Portugal and Europe is good. Transport of goods to China by water makes it cheaper hence position it well in the competitive China market. In 2006, the company became part of Altri which was a positive step towards globalization. Considering that Altri has more experience in the global market, Celbi is poised to perform better in the coming days. Information technology has made operations efficient and faster.

Threats

Celbi faces a number of threats mainly due to changing market and decreasing revenues over the years. High competition from South America has deteriorated its performance. Cost for wood and energy has raised production costs leading to a corresponding rise in prices. The period of economic recession in Europe in the last eight years affected the pulp and paper industry. With most companies struggling and some closing down, Celbi barely survived with its strategy to venture in the European market saving it. New environmental requirements in some regions are posing a threat to the company’s operations since its operations are founded on the environment. Poor transport infrastructure in some regions has limited the company’s access especially considering the bulk of its products which cannot be allowed to be transported in some roads which are weak. Suzano pulp and paper industry is a major exporter for the same products in South America. The company has an extensive network both regional and international which positions it as a major threat to internationally recognized companies such as Celbi. South America is rich in eucalyptus which is an advantage to Suzano. With decreased production costs it is in a position to produce more and satisfy the South American market which is increasing before venturing in Europe.

Suzano’s Financial Position

Unlike Celbi which is currently struggling to remain in the industry, Suzano is an unstoppable force if its financial position is anything to go by. The Global World 20 Report of the Pulp and Paper Products Council (PPPC) on eucalyptus shipments showed an increase by 7.1% in 2015 (Suzano Financial Report 2015). The stronger demand for the products in China played a key role in this increase. The value amounted to 18.7 million tons. Suzano’s pupl production in 2015 amounted to 3.4 million tons which was a 13.1% increase compared to the value recorded in 2014. The operation of the pulp mill in Imperatriz, Maranhao in 2015 was attributed for the increase. The company’s pulp sales amounted to 3.3 million tons which was a 15.5% increase from the sales in 2014. Exports amounted to 2.8 million tons increasing by a whopping 19.5%. This amounted to 86.1% of the total sales recorded in 2015. Net revenue from pulp sales increased by 71.5% recording R$6.6 billion (Suzano Financial Report 2015, p. 7). The company is aiming at greater heights with its increased exports in the first quarter of 2016 presenting positive results on the goals set in 2016. Forecasts on its performance shows that the company may outdo the targets set in the year since the international market, especially in China is responding well. Therefore, conducting a SWOT analysis on Suzano shows that among its strengths is the geographical location where it can easily access eucalyptus trees, available cheap labor which in turn reduces production cost and a large regional market which stabilizes it before engaging in the global platform. Its major weakness is branding since it is not an identified brand in the European countries. However, considering that it has already identified its target market in China and South America, the company may not need to venture in Europe. Strict import policies in Europe which have been developed to safeguard local companies makes it hard for international companies to venture into the countries.

Local companies such as Celbi are therefore better positioned in the European market. Suzano has better opportunities for growth compared to its competitor Celbi. However, in the future, the trend in competition may force Suzano to merge with other South American or European Companies to have an international appeal and hence have an upper hand in competition. Mergers are common in the 21st century where companies either assimilate or merge with their competitors to give both a lifeline rather than competing and possibly giving a third player an advantage to edge both out. Regional competition and international laws poses as major threats to Suzano’s operations. Being a young player in the international scene, it may be hard for it to realize some of its goals due to globalization problems especially if it plans to open new processing units in other countries. Comparing the performance of Celbi with other firms in Portugal, its performance does not grant it a position to be among the top performers. Portugal is highly industrialized with companies such as Celbi struggling to have national recognition. In Brazil, which is a higher middle class economy, Suzano is a recognized company and among the top five in pulp and paper industry. This contrast is mainly due to the commercial activities where Brazil is not as industrialized as Portugal.

Country Comparison: Portugal v. Brazil

Brazil: Portuguese is the official language in Brazil. By July, 2015, the country’s population was estimated to be 204 259 812. 85.7% of the country’s population lives in urban centers. Major urban centers include Sao Paulo with an estimated population of 21.066 million and Rio de Janeiro with an estimated population of 12.902 million (CIA World Factbook). Life expectancy is 73.53 years. Literacy level is above 92%. The country’s economy is characterized by well-developed agricultural, manufacturing as well as mining sectors. The country is classified as an upper middle class together with other highly developing economies such as South Korea and South Africa. The country’s economy outweighs the combined economy of the rest South American countries combined. This explains its position in the region and the supremacy of its companies. The country was not significantly affected by the economic recession that hit most parts of the world especially Europe in 2008. The country’s Gross Domestic Product (GDP) (purchasing power parity) from 2013 to 2015 was $3.26, 3.265, and 3.166 trillion respectively (CIA World Factbook). The GDP (official exchange rate for the year was $1.8 trillion). The GDP per capita for 2015 was $15 800, same as in 2014 and $100 higher from the value in 2013. GDP composition by sector revealed that agriculture contributed 5.9%, manufacturing industries 22.2% and services 71.9%. Brazil’s labor force is 109.2 million. Unemployment rate in 2014 was 4.8% and that in 2015 was 6.4 %. Inflation rate in 2015 was 10.6%.

Portugal: Portuguese is the official language in Portugal, same as in Brazil. The country has a population of 10 825 309. Its urban population is 63.5% with Lisbon being the major urban center with an estimated population of 2.884 million followed by Porto with an estimated population of 1.299 million. Literacy levels are above 95% which translates to more skilled labor. Unemployment rate among youths was 38.1% in 2015. Since joining the European Community the country has been characterized by an increasing service delivery industry. Technology has played a key role in the development of the service industry with a huge number of citizens working in the delivering computer based services at the comfort of their homes or offices. The country’s GDP (purchasing power parity) was $281.6 billion, $284.1 billion and $288.6 billion in 2013, 2014 and 2015 respectively. This is a positive trend that shows the country may realize higher values in the coming years. The country was adversely affected by the economic recession in 2008 and the instability of the Euro. The tension created between Ukraine and Russia has also affected Western Europe countries with business operations and export activities being retarded. The country’s real growth rate was 1.6% in 2015. Paper and pulp is one of the major industries in Portugal. Composition of GDP by sector revealed that agriculture contributed 2.3%, industry contributed 21.6% and services contributed 76.1%.

Comparing the two countries, Brazil has a huge population of more than two hundred million citizens which has been identified as a key driver to its economy. With the population of its major urban center being more than the population of Portugal, the need for Celbi to venture in the global market is emphasized. The national market cannot sustain Celbi compared to Suzano which can concentrate on Brazil’s market and have significant revenues as well. With Portugal joining the European community, Celbi is in a better position to venture in the European market since one of the major functions of the European Union is to enhance trade. This is an opportunity for Celbi to brand its products and secure the market. Suzano is venturing on the China market where Celbi is also interested. Various factors such as price, local laws and policies and country’s culture will determine which company succeeds. With a demand of 8.8 million tons of pulp, the two can coexist competitively. The two companies therefore operate in totally different terrains with each having a competitive advantage over the other. Though Portugal has a small population, the country’s membership in the European Union has helped companies receive regional recognition and take part in regional business. However, the manufacturing industry is becoming more unpopular in Portugal especially with technological advancements and embracing the computer age. Most people therefore, especially the young ones prefer serving in the service industry compare to the manufacturing industry. The high unemployment rate in the country (38%) despite the literacy levels >95% can be explained by the increased ventures in the service industry where most of the youths cannot be accounted for in the list of those employed. Brazil being an upper middle class economy, the manufacturing industry is fed by the available labor and ready market boosting local companies. Regulating imports can be an added advantage to the local companies such as Suzano. Whereas Suzano would easily venture in the Portuguese and European market, Celbi would may not be in a position to venture well in the South American market. Considering its competitive advantage such as branding, Celbi would need more time to brand itself in the market. However, since it has more than 50 years’ experience, serving such a massive population would be an ultimate challenge that would increase its revenues. Suzano’s competitive advantage is its cheap labor, low production cost and the country’s high population. As a well-established brand in South America, standing among the five popular pulp and paper companies, venturing in the Portuguese market with the European Union regulations would be tough. As an international company, and not being a member of the union, the limitations may retard its progress. Such regulations are not effective in South America so Celbi could perform better in Brazil.

Cited Works

Cellulose Beira Industrial (Celbi), S.A. Financial Report 2014. Web. <http://www.celbi.pt/> Accessed 30 March 2016.

CIA World Factbook. Brazil/Portugal. 2016. Web. <https://www.cia.gov/library/publications/the-world-factbook/> Accessed 30 March 2016.

Suzano Pulp and Paper. Financial Statement 2015. Web. <http://ri.suzano.com.br/enu/s-6-enu-2014.html> Accessed 30 March 2016.