Matt Collins
2/2/2016
Strategic Management Homework 1
Industry Analysis for Arauco

Pulp itself, as a raw commodity, can be broken down into one of four main variations based on whether or not it is bleached as well as softwood versus hardwood pulp. From here pulp can be used to make a wide variety of paper products. Associated with the production of pulp are Arauco’s other two product lines, forestry and wood products. Forestry products include pulpwood and saw logs while wood products include things like fitches, lumber, and panels. The pulp industry is a highly fragmented one with the largest players all being fully integrated companies that produced pulp and paper, start to finish. Of the approximately 183 million tons of pulp manufactured in 2003, “142 million tons of pulp were used in the production of paper by vertically integrated pulp and paper companies.” (10) Apart from these fully integrated conglomerates there are some other companies that focus on a particular category of the process of production. Additionally there are a handful of local firms that produce paper based on specific needs of their markets. The top five largest producers of market pulp hold 27% of the market with each producer specialized in a specific category of pulp that they dominate. Historically, pulp production has been dominated by the U.S., Canada, Sweden, and Finland (Norscan). Despite this historical dominance, southern hemisphere pulp producers have been on the rise very much recently because of the market growth in hardwood pulp that is easier to extract from tree types in the southern hemisphere. This emergence of hardwood pulp has cut Norscan’s global share of market pulp down to roughly 50%. The current geographic pulp market can be broken down by examining the approximately 183 million tons of pulp produced, of which “North America manufactured 78.2 million tons, followed by Europe, Asia, and South America.” (10)

An examination of the pulp industry through the lens of Porter’s Five Forces reveals a variety of criteria pertaining to the attractiveness of the pulp industry. When examining the bargaining power of suppliers it is important to remember that a large number of the players in the pulp industry and fully integrated. “Some industry insiders felt that maintaining a fully integrated structure allowed for greater negotiation leverage with the main suppliers to the industry, such as chemical providers and paper and pulp machinery manufacturers.” (9) Sense the majority of the players in the pulp industry are these fully integrated companies, that means the majority of suppliers to these companies have fairly weak bargaining power. When analyzing the bargaining power of buyers in the industry it is important to remember that “market pulp” acts like a global commodity in the paper business. Like any commodity, price fluctuates based upon demand. While this demand based pricing holds true, it is also important to remember that the largest potential buyers of pulp all produce their own, so supply for “market pulp” is limited to what the handful of non-fully integrated producers can manage in addition to the excess pulp of fully integrated companies. Based on these two factors, the bargaining power of buyers in the pulp industry is moderate.

The threat of new entrants in the pulp industry is fairly low for a number of reasons. A pulp mill, which is necessary for the production of pulp, can cost around $1 billion and take 3 years to construct. This is a clear indicator of how labor and capital intensive the pulp industry can be. In addition there is also government regulations pertaining to the production of pulp and paper products that act as another barrier to new entrants. On the surface it might seem like the threat of substitutes is very high for the most integral material in making paper because paper products are everywhere around us, and they have been around for a long time. The threat of substitutes isn’t to pulp as much as it is to paper. In an ever increasingly digital era dominated by screens, paper is finding itself on the way out for the first time in history. All of history populations have been growing with paper growing as societies premiere medium, but that is no longer the case and for that reason the threat of substitutes to the pulp industry is high. Rivalry is fairly high in the pulp industry because of how fragmented the market is. There is not a lot of ways to differentiate products, which leads to heavy price competition, which in then turn contributes to the rivalry amongst players in the pulp market. Based on Porter’s Five Forces I don’t believe the pulp industry to be particularly attractive. The market has very high barriers to entry, including extensive capital resource requirements. This coupled with the high threat of substitutes to paper, the product most closely linked with pulp, is enough reason to find the pulp industry unattractive.

The threat of substitutes touched on what I believe to be one of the biggest changes in the pulp industry moving forward. My prediction is that the growth rate in pulp production will decrease moving forward because of a decrease in demand for paper products moving forward. I believe the ever-growing number of screens in the hands of consumers will bring on this decrease in demand for paper. Every new device with a screen is just one more additional outlet for consumers to get the same information they traditionally received through paper product mediums. In order to deal with this negative change I think that Arauco should focus less on their pulp products and more on their forestry and wood products. Paper will always be around to some degree, which means that pulp will also too be around to some degree. So by investing resources that better utilize the excess resources left over by the pulp production process, Arauco will be positioning themselves to capitalize on a niche that has strong long-term growth potential.