Credit Suisse: LatAm Pulp - Paper - Bidding up pulp prices

Strong pulp pricing momentum to continue. Our previous price curve, in spite of our bullish stance, carried more moderate increases after a sharp recovery from pulp price trough. However, with roughly 9% of the pulp capacity idled due the unfortunate Chilean earthquake, pulp supply/demand prospects became even tighter. Thus, we are revising our curve for the short term.

Inventories should continue below normalized levels for longer. Taking into account the recent supply/demand developments, we estimate pulp inventories could reach 24/25 days of supply, down 4 days from Feb/2010 and about 8 days below normalized levels. Breaking it down, hardwood inventories could reach 28 days (-4 days), and softwood inventories 21 days (-3 days). We took into account (i) Chile ’s earthquake, (ii) poor weather conditions in the Northern Hemisphere, (iii) 16-day dock strike in Finland , and (iv) recent pulp mills restarts.

Increasing short-term pulp price estimates. We are revisiting our pulp price estimates to account for a tighter-than-expected pulp market in the short term.
In our view, pulp prices should continue on a upward trend over the next 2-3 months. BEKP price could reach $920/t in June/2010 (C&F Europe). Over 2H10, we estimate a pulp price correction of about $60/t as pulp supply starts to improve and a oversupplied paper market should partially curb papermaker’s ability to pass through higher fiber input costs, thus impacting end-user demand.

Upgrading estimates for Fibria and Suzano. We are increasing target price for Suzano to R$29/share (20% upside), from R$25/share previously, and for Fibria to R$34/share (12% downside), from R$32/share previously. Among the main changes to our estimates, we highlight (i) higher pulp prices for 2010 and 2011; (ii) mark-to-market 4Q09 results; and (iii) weaker BRL for 2010/2011, at R$1.8/USD, from R$1.7/USD. We maintain our outperform rating on Suzano and our neutral rating on Fibria. Suzano trades at 6.3x EV/Ebitda ’10, while Fibria trades at 8.2x EV/Ebitda ’10.