Suzano Still Benefiting From High Pulp Prices (NYSE:SUZ)

Suzano (NYSE:SUZ) continues to defy expectations because of very excessive pulp costs regardless of anticipated pressures. Provide is the principle determinant of the worth state of affairs in pulp, and points nonetheless stay, particularly with the lockdowns in China having ended lately. There may nonetheless be issues with the Chinese language reopening, however for essentially the most half it’s smart to anticipate the cycle to return to an finish as provide turns into extra normalized, despite the fact that it’s more likely to come down much less dramatically than it rose.

FY 2022 Outcomes

The value of pulp continued to rise even in This fall, which for many companies got here with some kind of slowdown. Costs have come off the highs in the direction of the top of 2022, however they continue to be excessive whilst of January figures. There are a number of causes for the excessive 2022 costs, and several other explanation why costs ought to come down in 2023 however most likely fairly slowly. 2024 and onwards is extra regarding as new provide comes on-line.

• Provide chain disruptions from COVID-zero. Whereas China is a serious demand sink for pulp, particularly as they needed to prioritize virgin pulp attributable to limitations on recycled paper imports, issues acquired caught in logistics there and a variety of pulp was taken off the market as Chinese language logistics could not end off deliveries.
• Russia gives timber, and various imports have been prioritized together with Suzano’s Eucalyptus and Pine pulp.
• Lastly, excessive costs have been permitted to an extent by prospects with a view to guarantee provide and have the ability to safe sufficient inputs.

The outcomes had been phenomenal as a consequence:

Money prices had been up nearly 25%, however a ~35% improve in pulp value led to the EBITDA progress we see, as volumes had been really very flat.

Costs have come off barely from highs, however not by a lot as of January 2023.

We do anticipate costs to ultimately fall, in line with the market’s commodity a number of view on the corporate.

• Demand in China has fallen, and which means as soon as logjams clear up there will probably be extra provide free for Asian patrons, and due to this fact a detrimental value stress.
• Whereas we’re getting a reopening in China, it will likely be gradual to restoration to pre-2022 ranges, since China is going through many extra financial challenges this yr and secular outlook deteriorating.
• International demand in some key paper and packaging markets may develop into affected by the speed cycles occurring in most western economies. Development paper but additionally basic ranges of commerce are liable to coming down. China, US, Italy, Netherlands and different European nations are all large export markets and are challenged this yr attributable to inflation.
• Decision of provide chain points will improve availability and take away the ‘hoarding premium’ that appeared on some commodities this yr attributable to conservative 2022 stock administration practices. Specifically, there may be nonetheless low stock of containerboards amongst purchasers conserving costs in that vital market excessive. As soon as this normalizes we may see extra menace.
• After 2024, we’ll begin seeing extra pronounced capability will increase, together with Suzano’s personal Cerrado undertaking, come on-line to convey down costs additional.

Backside Line

There are mitigating components. Prices have come up for producers, and which means they’re going to resist calls to drag down costs of pulp. Nevertheless, that is solely as a result of decrease costs really threaten margins, and this is not nice.

Whereas Suzano’s a number of at a 2.4x FWD PE appropriately displays cyclicality in precept, the worth seems very low. Suzano’s belongings are among the lowest value within the trade, and when the half-complete Cerrado tasks is totally completed, the prices will proceed to common down. Furthermore, the circumstances over the following yr or two stay fairly beneficial, and the a number of is not more likely to rise on falling earnings by an excessive amount of in that point. Payback durations are very low and achievable right here.

Nevertheless, we expect the Lula win in Brazil poses an issue for the trade because of the challenge round deforestation. A political low cost is probably going being positioned on Suzano. Furthermore, their deleveraging has stopped attributable to CAPEX on the Cerrado undertaking, which was an excellent motive to put money into them earlier than. Suzano claims its plantations are inexperienced nevertheless it’s not for us to say or speculate how a lot the federal government will heed this. Negatives from regulators may are available in even when not aimed toward Suzano particularly, even whether it is limits on timber harvest volumes and adjustments in deforestations thresholds.

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