Arauca: Sustainability in Pulp and Paper Industry
1) Is Arauco an efficient producer of pulp? What advantages does it have? Disadvantages?
Arauco is a very efficient producer of pulp, and their focus on production efficiency has played in important role in the company’s success. Arauco’s mills avoid seasonal fluctuations and typically run at capacity throughout the year. Arauco leverages economies of scale, develops strategic partnerships with their labor force, and focuses on their core expertise of growing natural resources and using them efficiently. Their efficiency is well-reflected in their low production costs of under $300 per ton, which helps Arauco maintain its “leading position in the volatile market pulp industry.”
Advantages
The company benefits from its advantages in cost control, product diversification, and natural and technological resources.
Low Costs:
Arauco’s low production costs are the best indication of their efficiency and also their greatest competitive advantage. Since pulp is a commodity, industry rivals are primarily price-takers, not price makers. Therefore the greatest profit advantages are available on the cost-reduction side. Exhibit 6 compares the producers’ costs for bleached softwood kraft pulp production in 2005 across multiple regions. Arauco’s total delivered cost of US$294 per metric ton was, on average, US$176.80 cheaper than their Norscan competitors, a difference of 37.5%. They performed better than their competitors in wood, chemical and labor costs, and outperformed them even more dramatically in “Other” costs ($40 per metric ton vs. an average of $117 per metric ton). One of Arauco’s main goals was to continue superb relationships with their labor and trucking supply, which helped keep costs low. They generally had long standing relationships with their sub-contractors and, on occasion, provided capital to truck owners in order to improve capacity and quality of services. Their supplier power was generally low in this regard. Their cost
Arauco is a very efficient producer of pulp, and their focus on production efficiency has played in important role in the company’s success. Arauco’s mills avoid seasonal fluctuations and typically run at capacity throughout the year. Arauco leverages economies of scale, develops strategic partnerships with their labor force, and focuses on their core expertise of growing natural resources and using them efficiently. Their efficiency is well-reflected in their low production costs of under $300 per ton, which helps Arauco maintain its “leading position in the volatile market pulp industry.”
Advantages
The company benefits from its advantages in cost control, product diversification, and natural and technological resources.
Low Costs:
Arauco’s low production costs are the best indication of their efficiency and also their greatest competitive advantage. Since pulp is a commodity, industry rivals are primarily price-takers, not price makers. Therefore the greatest profit advantages are available on the cost-reduction side. Exhibit 6 compares the producers’ costs for bleached softwood kraft pulp production in 2005 across multiple regions. Arauco’s total delivered cost of US$294 per metric ton was, on average, US$176.80 cheaper than their Norscan competitors, a difference of 37.5%. They performed better than their competitors in wood, chemical and labor costs, and outperformed them even more dramatically in “Other” costs ($40 per metric ton vs. an average of $117 per metric ton). One of Arauco’s main goals was to continue superb relationships with their labor and trucking supply, which helped keep costs low. They generally had long standing relationships with their sub-contractors and, on occasion, provided capital to truck owners in order to improve capacity and quality of services. Their supplier power was generally low in this regard. Their cost