(Updates with Moody’s comments)
By Ana Mano
SAO PAULO, Aug 16 (Reuters) - The pulp and paper industry will face more consolidation, given that excess capacity reduced prices to their lowest in 20 years, said Walter Schalka, chief executive of Brazil’s Suzano Papel e Celulose SA, which ranks fifth in the sector worldwide.
Schalka also said on Tuesday that he expected companies to cut production capacity because low pulp and paper prices are reducing profitability across the board.
“Clearly there is an excess capacity that the market is unable to absorb,” Schalka said at an industry event in São Paulo.
The combination of weak pulp prices and the strengthening of the Brazilian currency hurt Suzano’s results. Operating cash per tonne dropped by about half in the second quarter from 912 reais ($287) in the third quarter of 2015.
As a result, return on invested capital fell to 10 percent from 21 percent in that period. Schalka said such returns were not enough for a capital-intensive industry operating in a country with high borrowing costs.
China’s growing paper and tissue consumption will continue to drive pulp demand, but supplies are also expected to grow, keeping downward pressure on prices over the next two years, Barbara Mattos, senior credit officer at Moody’s Investors Service, said during the same event.
Moody’s expects global pulp production to reach 70 million tonnes in 2018, up from an estimated 63 million tonnes in 2016.
Pulp prices will be particularly hit next year as Brazil’s Klabin SA and Fibria Celulose SA, Asia Pulp & Paper Company Ltd, Finland’s Metsa Group expand production, Moody’s said.
$1 = 3.1745 Brazilian reais Editing by Lisa Von Ahn and Alan Crosby