Caso De Arauco

Celulosa Arauco: Forward Integration or Horizontal Expansion?

In early March 2004, Alejandro Pérez, president and CEO of Celulosa Arauco, a Chilean forestry company, was about to present his recommendations to the board of directors as to whether his company should invest US$1 billion to construct a new state-of-the-art chemical pulp plant. The plant, part of a multi-phase project calledItata, would increase Arauco’s capacity by approximately 800,000 tons to 3.2 million tons, placing the company as the largest producer of market pulp, just ahead of Aracruz in Brazil. Two years earlier, Arauco’s board approved the first phase of the Itata project for US$150 million, which consisted of building a sawmill, plywood mill, and energy complex. The second phase involved constructing a pulpmill following the inauguration of the new Valdivia plant on January 30, 2004. The Valdivia plant had a production capacity of 700,000 tons of pulp, with an operating life between 30 and 40 years and expected sales of USD $350 million per year.1

Pérez was concerned about the downward trend in market pulp prices over the last three years. In addition, major paper companies, the sole buyers ofmarket pulp, were typically backwardintegrated into the production of pulp.

Pérez was confident, however, that the board would trust his judgment given Arauco’s tremendous success in recent ventures into remanufactured wood products (such as cut stock, blanks, clear rips, and decking balusters), plywood, and fiberboard panels. Pérez anticipated the toughest question the board would pose: wouldshareholders be better served by a strong-willed forward integration move into paper manufacturing rather than the horizontal growth plan he was proposing? Furthermore, was a large resource commitment a good strategic move at this point?

History of Celulosa Arauco and COPEC

Celulosa Arauco was formed through a merger between Industrias Arauco and Celulosa Constitución in 1979. Both companies hadbeen created 20 years earlier by the Chilean government to develop forest resources, improve soil quality, and promote employment. In the late 1970s, the Chilean government had initiated an aggressive privatization program, which resulted in the sale of Industrias Arauco in 1977 to Companía de Petróleos de Chile (COPEC), a conglomerate involved in oil and gas, fishing, forest management, andpulp. Two years later in 1979, COPEC purchased Celulosa Constitución, merging the two entities to create Celulosa Arauco (referred to as Arauco).

Arauco began its expansion plan throughout the 1980s, which involved purchasing land and plantations and installing new technology equipment to improve efficiencies to compete effectively in the world market pulp arena. The expansion plan paid off as thecompany’s total holdings in hectares2 grew from 170,000 in 1980 to 1,200,000 hectares in 2003.3

Throughout the 1990s, the company increased its production capacity by constructing a second line at the Arauco mill, introducing new bleaching systems, entering new product lines, and expanding energy generation at its plants. By 1996, Arauco moved across the border to Argentina to purchase thecompany Alto Paraná, expanding the company’s overall product offerings, land holdings, and production capacity.

In 2,000, Arauco aggressively increased its capacity yet again by purchasing its third mill in Chile, increasing production in Argentina, and entering into the MDF (medium-density fiberboard) and HB (hardboard) markets through stakes in sawmill plants such as Cholguán and Trupán. In late2001, the company commenced a three-year construction project of its new mill, the Valdivia mill, at an estimated cost of US$600 million. The Valdivia plant had opened in January 2004 with a total construction cost of US$1.2 billion; US$900 million was apportioned to the purchase of the plant’s assets (a pulp plant and other assets), and US$300 million was for the creation of a 100,000 hectare...