Chile - Chemical Pulp Plant and Newsprint Mills Project

_ ______________ TO- 33 ',..16 ,I.l -i,, " ..L:'>'VE .,SE VY'; T EGO C1 35' !O,; 1E VINT INSTITUTE This report is restricted to use within the Bank. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TECHNICAL REPORT on CHEMICAL PULP AND NEWSPRINT MILLS in CHILE August Z8. 1953 Technical Operations Department  Exchange Rate 110 Pesos a One U.S. dollar 1 Peso a .91 cents I million Pesos - $9,091  TECHNICAL REPORT ON CH-EI!aCAL PULP kND NZJSSPRINT MI'LLS C H I L E Page I. Purpose and Scope of this Report 1 II. The Borrowers 1 III. Description of the Project 3 IV. Powier b V. Pulptiood Resources 5 VI. Quality of Pulp and Paper 5 VII. Engineering 5 VIII. Estimated Cost of Construction 6 IX. Schedule of Construction and Disbursements 6 X. Iarkets 7 XI. Estimated Cost of Production and Income 8 XII. IMlethod of Financing 8 XIII. Earnings Forecast 10 XIV. Justification of the Project 11 XT. Summary and Recommenda'lions 11 Appendix A Appendix B J,ppendix C Appendix D Appendix r I lap  TECHNICAL REPORT ON CHEMICAL PULP AND NEDISPRINT MILLS C H I L E I. Purpose and Scope of this Report 1. This report presents an appraisal of a chemical pulp and newsprint project submitted by Cia 1anufacturera de Papeles y Cartones, as a basis for a loan from the Bank. The technical, economic and business aspects of the project are discussed and conclusions concerning it as the basis for a loan are included. 2. The report is based on data submitted by Cia Manufacturera de Papeles y Cartones, discussions with Company representatives both in Washington and Chile, and field observations by members of the Bankts staff. 3. All calculations in this report are based on the new exchange rate of 110 Chilean pesos to one U.S. dollar, which was established after consultation with the 'Monetary Fund. This rate applies to all imports except for certain specific Government purchases and to all exports of manufactured goods. It would also be the rate used to service the proposed loan. II. The Borrowers 14. It is proposed that the loan be made to Cia Manufacturera de Papeles y Cartones S.A. and Corporacion de Fomento de la Produccion as co-borrowers. Fomento, a borrower in name only, would be a party to the loan agreement because Chilean guarantee legislation authorizes a Govern- ment guarantee to loans only if Fomento is a borrower. The loan would be guaranteed by the Republic of Chile. 5. Cia Nlanufacturera de Papeles y Cartones S.A., hereinafter referred to as the Company, is a privately owned Chilean joint stock corporation with approximately 7,000 stockholders. The Company was formed in 1920 for the purpose of making paper and paper products from straw and imported chemical wood pulp. The Company, since its formation, has acquired sub- sidiary companies and property beneficial to its basic operations of paper manufacture, consisting of a 25 kilometer electric, narrow-gauge railroad which connects the main plant at Puente Alto with Santiago; two hydro- electric power plants, having a total capacity of 21,200 kw; a paper products factory "Sociedad Productos de Papel, S.A" which makes various types of paper bags, containers, wallpaper, etc; an electro-chemical plant making caustic soda, chlorine and hydrochloric acid, some of wihich is used in the making of paper, with excess available for sale; deposits of salt in the Tarapaca Province; approximately 30,000 hectares of pine forests, of which 4,000 hectares are planted with insignis pine, and the remainder  - 2 - to araucaria pine; a saw mill used in the making of shipping boxes for the Company's various products, and a small newsprint plant at Valdivia. 6. The Company is the only pulp and paper manufacturer in Chlile and is one of Chile's leading industries, producing in 1952 11,000 tons of newisprint and 30,000 tons of other papers and paper products. It has shown low production costs, efficient operation, steady growth and con- sistent earnings. 7. Management of the Company is composed of men who have wide experience in their respective fields and who are well qualified to oper- ate the proposed new mills without having to increase the number of key personnel. 8. The Company is conservatively capitalized and its financial con- dition is good. The first two columns of the following table summarize the Company's balance sheets as of June 30, 1952 and IMarch 31, 1953. The third column shows the effects of a recent recapitalization whereby 600 million pesos formerly carried as surplus and proprietary reserves were transferred to the capital stock account. The par value of the Company's shares was increased from 50 pesos to 100 pesos each and a 105 stock dividend declared. Summary Balance Sheets %/ As Compiled by Company (Peso Figures in Millions) Pro Forma Based on llarch 31, June 30, Ilarch 31, 1953 figures, 1952 1953 giving effect to Assets (provisional) recapitalization Fixed assets (less depr. at normal rate) 885.3 902.1 902.1 Investments in subsidiaries 16.9 16.9 16.9 Current assets 704.4 703.0 703.0 Total Assets 1,606.6 20 1,6_22.0 Liabilities and Equity Long-term debt 14.5 11.0 14.0 Capital and reserves: Capital stock 500.0 500.0 1,100.0 Surplus and proprietary reserves 754.5 932.8 332.8 Total Equity 1,9251.5 1,432.8 1,1432.8 Other reserves 31.7 31.3 31.3 Current liabilities 305.9 113.9 143.9 Total Liabilities and Equity 1,606.6 1,622.0 1,622.0 Net working capital 398.5 559.1 559.1 Current ratio 2.3:1 4.9:1 4.9:1 Number of shares outstanding 10,000,000 10,000,000 11,000,000 Par value per share 50 50 100 _/_See Annex A for nilore detailed balance sheets.  - 3 - 9. Papeles y Cartones has an excellent earnings record. Since 1940., sales (as in terms of value) have increased about twelve times, profits about six times. The increase in sales has mainly been the result of higher unit prices, reflecting in a large part the general inflation of the Chilean price level; tons of Papers produced increased only about 20% in this period. 10. The table below summarizes the Company's earnings statements for each of the fiscal years ended June 30, 1940 and 191-1952 and provisional figlres for the first nine months of the fiscal year ended June 30, 1953. A more complete tabulation covering the entire 1940-1952 period appears in Appendix B. Earnings (1M1illions of Pesos) Year ended Cost June 30 Sales of Operating Net Dividends Balance Sales Profit Profit Paid 191o 116 92 23 20 17 3 1949 538 469 69 63 49 14 1950 626 544 82 73 j 54 19 1951 898 785 113 90 / 66 24 1952 1,364 1,232 132 118 66 52 9 months to lIvarch 31,1953 1,199 962 237 212 33 179 III. Description of the Project 11. The project will consist of two plants, one located at Concepcion, the other in the Central Valley at Laja. The plant at Concepcion will be designed to make 44,000 tons of newsprint and 6,600 tons of boxboard per annum from ground wood, chemical pulp and scrap paper. The plant at Laja will be designed to make unbleached, seri-bleached and bleached chemical pulp totaling about 50,000 tens per annum. In addition to pulp manu- facture, the mill will also make 10,000 tons of kraft paper per year. A. Newsprint IHill The newsprint mill will be constructed on a site almost directly across the Bio Bio River from the city of Concepcion. Pulpwood and g/ After income taxes g/ Before surplus of 23.6 million pesos arising from readjustment of the prices of basic stocks of imported cellulose. / Before 1951 profit of 26.6 million pesos arising through difference in procedure of costing cellulose consumption.  - 4 - other material will be delivered to the mill by an existing railroad and br the all-weather road which follows the Bio Bio itiver Valley to the Company's pine forests. The mill will have an electric power load of about 10,000 kw, all of which will be purchased from Endesa. The boxboard machine will be moved to Concepcion frcm Puente Alto. Water for plant use will be taken from the Bio Bio River or from a nearby lake, either source being satisfactory. New housing for about one-half of the mill's 170 workers is included in the estimate of plant costs. It is expected that the re- maining labor force will live in the city of Concepcion. B. Chemical Pualp [ill The chemical pulp mill will be constructed on the Bio Bio River which will be the source of water for all of the pl,'nt's needs, and Jill also be near the village of Laja which is on the main line of the National Railroad running from Concepcion to Santiago. Both the railroad and Pan-American Hi7hway lead into large pine forests, and will be t}e racans of getting pulpwood to the plant. Tle roads over which the pulpwzood is to be transported are in -ood condition and adequately maintained. The plant's needs for process steam will be supplied from the e:xhaust of a single 53OCo kw non-condensing extraction steam turbine unit. A turbine generator will generate about two-thirds of the millf s electric power requirements from process steam. There will be need of additional power of about 3,000 kw which 7ill be purchaased from Endesa. In addition to the production of chemical pulp, the mill will make annually about 10,000 tons of kraft paper. The paper machine which wrill be used for this purpose will be moved from Puante Alto where it is now used in the making of kraft paper from imported pulp. New housing for the entire labor force of about 225 wnorkers is included in the estimate of plant cost. IV. Power 12. The two mLlls when operating at full capacity will have an electric ponwer demand of about 15,000 ic. Of this total, 5,000 knT will be gener- at.ed frcm process stean leaving 13,000 1c to be purchased from Endesa, u, 500 k- of whnich could be of'-peak power. The increased denand, therefore, on the Endesa system for peak load power would be about 8,5co kow.  - 5 - 13. Power for both mills will come from Endesa's Abenico station which now serves the Concepcion area. The load in this area is growing very rapidly and at the present rate of increase will require additional gener- ating facilities by 1957. This would be accomplished by the installation of the fifth and sixth generating units which Endesa now plans to purchase sometime during 1953. V. Pulpwood Resources 14. Pulpwood is the most important raw material needed in the pulp and paper industry and, in the case of the Concepcion and Laja mills, it will represent on the average about 28% of production costs. The total area in Chile nowv planted to insignis pine has an average self-sustaining yield of 1.5 million solid cubic meters per year divided equally between pulp- wood and saw timber. In addition, new areas known to be well adapted for growing of insignis pine are now being planted at a rate of about 6,000 hectares per year. ?/ Potential yields should eventually reach 3 million solid cubic meters per year. 15. The proposed pulp and newsprint mills will use not more than 4oo,ooo solid cubic meters per year, hence they will take only a minor part of the potential supply. Nothing short of a major disaster, there- fore, is likely to interfere with the Company's supply of pulpwood. VI. Quality of Pulp and Paper 16. The Company has used insignis pine in making mechanical pulp in Chile since 1938 with satisfactory results. However, chemical wood pulp has never been made in Chile. The Company, therefore, to be sure of the pulpings bleaching and mechanical properties of chemical pulp made from insignis pine, had such tests conducted by the Dahlem Technical University, Berlin, Germany in 1938; by the Technical University of Stockholm, Sweden, in 1946; by the U.S. Forest Laboratory, Madison, Wiisconsin, in 1947; and by the Swedish firm of M4o och Domsjo Aktiebolag in 1949. The results of all tests show insignis pine to be well suited for the economical produc- tion of kraft pulp having properties fully comparable to present day commercial pulps made from Southern Pine, Jack Pine or Western Hemlock. VII. Engineering 17. The Company will retain the services of an engineering firm to prepare final layout and construction drawings; make detail engineering flow sheets, specifications and purchase requisitions; supervise con- struction and erection of equipment; and conduct all tests during the starting up period of the two mills. g/ See Appendix C for further details g/ Equivalent to 120,OCO cubic meters when harvested.  - 6 - 18. The Alrtiebola',et Karlstads ielkaniska 'Jerkstad of Sweden will probably be the en-ineerin- firm selected. This firm, known also as HTh, was founded in 1860 and from 1880 has specialized in pulp and paper mills and related equipment. KI1'W has a record of building many large and out- standing pulp, paper and rayon mills throughout the world. 19. liost of the equipment is very special and wJill be purchased by negotiated contract. From a cost standpoint, the equipment will be about equally divided between the United States and Europe. The paper maclhines and steam generating equipment will probably come from the United States, with the electrical equipment coming from Germany and the other items from Sweden. VIII. Estimated Cost of Construction 20. Prices on all major items of equipment were obtained in November and December, 1951 from both European and American manufacturers and were confirmed in HIay, 1953. These prices are considered to be reasonable and are the basis for the following estimate of foreign exchange requirements. Newsprint Hill Foreign Exchange ______________ in U.S. Dollars Wood yard and wood handling equipment 309,000 Ground wood mills 955,000 Newsprint machine 2,750,000 Board machine 665,ooo Boiler plant 230,000 Electrical equipment 820,000 Fresh water supply 65,ooo flaclhne shop 112,000 Transportation 255,000 Contingency 825,000 Sub-Total 6,986,ooo Chemical Pulp il).l Chemical pulp mill 6,950,000 Kraft paper machine 500,000 Electro chemical plant 740,000 Boiler and power house 840,000 Transportation equipment 355,000 Contingency 3 131C000 Sub-Total 10T5160oo0 Interest during construction 2,1498,000 Grand Total 20,CO0,000 The estimated local currency requirements would be Ch.S 690 million (US$6.27 million at 110 pesos to US$ 1). This figure includes a normal contingency plus an allowance for inflation in prices during construction at a rate of 15% per annum. IX. Schedule of Construction and Disbursements 21. Firm quotations from both riropean and Aimerican manufacturers give delivery promises on minor items of from 14 to 16 months, and on major items of from 24 to 30 months. The project, therefore, could be completed in about 48 months after the signing of a Bank loan.  -7,- 22. Terms of payment differ widely between various suppliers; the average indicates, however, that disbursements will be at about a constant rate over the four-year construction period. X. Ilarkets Newsprint 23. The mean rate of new