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Export market growing for Brazilian tobacco box producer Klabin
Tobacco International / June 2003

By Larry Luxner

Brazil, the world's largest tobacco-exporting nation, is also the home of Industrias Klabin S.A., a leading manufacturer of corrugated boxes for the worldwide tobacco industry.

Klabin's total sales last year topped $1 billion, thanks to its vast interests in cellulose, pulp, paper, newsprint and packaging products. And although the production of tobacco boxes represents only a tiny fraction of Klabin's overall business, this particular business is growing every year, thanks to increasing cigarette consumption in the developing world.

"Tobacco consumption is growing in the Third World, and in Brazil too," said Tomás Arregui, export manager at Klabin Packaging, a division of the giant conglomerate.

Arregui, interviewed at Klabin's new commercial headquarters in the São Paulo suburb of Vila Olimpia, is a Uruguayan who has lived in Brazil since 1977 and worked for Klabin since 1993.

"We supply all the local tobacco processors with our packaging," he said. "Our export market is growing too. We're getting new customers year by year, and we have a very good reputation in this market."

Arregui said the company produced two million tobacco boxes last year, worth a total of around $20 million. These boxes, known in the industry as C-48, hold 200 kilograms of tobacco each. About 75% of Klabin's tobacco boxes are sold to local cigarette manufacturers led by Rio de Janeiro-based Souza Cruz, which controls roughly 80% of the Brazilian cigarette market, and Philip Morris, which has another 10%.

The remaining 25% of Klabin's tobacco boxes, worth $5 million, are exported, with African countries accounting for half of Klabin's overseas customers for this particular product. Arregui said his top export markets are Zimbabwe, Tanzania, Malawi and Zambia, with business also coming from Thailand, Philippines, Pakistan, Argentina and Venezuela.

"The [political] problems in Zimbabwe and the reduction of their tobacco crop reduced our sales there by 60%," he said, adding that Brazil overtook Zimbabwe about three years ago as the world's largest tobacco exporter.

The tobacco boxes Klabin manufactures cost anywhere from $8-14 each, and are produced at 10 factories throughout Brazil: Jundiaí, Piracicaba and Itaquaquecetuba, all in the state of São Paulo; São Leopoldo (Rio Grande do Sul); Itajai (Santa Catarina); Guapimrim and Del Castilho (Rio de Janeiro); Betim and Ponte Nova (Minas Gerais); Feira de Santana (Bahia) and Foiana (Pernambuco).

"We produce the tobacco boxes as we produce boxes for other industries, so we don't have any factory making these boxes exclusively," he said, noting that tobacco boxes destined for the domestic market are generally manufactured in southern Brazil (Rio Grande do Sul and Santa Catarina states). "The boxes that we export are usually produced in the São Paulo plants for logistical reasons, because those are near the port of Santos."

Klabin has been exporting tobacco boxes for the last 10 years,

Asked about the product, Klabin said "these boxes use very heavy paper. They're also very clean and very delicate, in the sense that tobacco is a sponge with absorbs any type of dirt or odor, so the tobacco box has to meet a certain level of technical specification with regard to absorption and resistance to pressure."

In 2001, Klabin produced 510,000 metric tons of corrugated boxes of all types, representing 28% of Klabin's production volume. The boxes generated R$586 million in sales, or the equivalent of 23% of Klabin's total sales.

Arregui said that when it comes to boxes specifically for the tobacco industry, transportation alone accounts for 20% of the product's cost.

"The challenge is to serve our customers as if we were local suppliers," he said. "When we have to export to some country in the middle of Africa, it presents many logistical problems because we must go through different countries and use different means of transport — ships, railways and trucks, for example. We have a very complicated logistics configuration, so we must handle this carefully to be sure the boxes will arrive to the customer in time."

With the collapse of Zimbabwe's tobacco industry, Malawi — a leading producer of burley tobacco — has emerged as Klabin's biggest single export market.

Asked why African tobacco companies would want to import boxes all the way from Brazil, Arregui said: "There are local producers, but their quality is not very good and the prices are high. And as the Brazilian real loses value against the dollar, obviously our advantage as an exporter increases. We can offer better prices under better conditions."

As bad as Brazil's economy has been lately, it has still fared much better than neighboring Argentina, where financial chaos has led to skyrocketing unemployment and political unrest.

That hasn't hurt sales of tobacco boxes to Argentina, says Arregui, because "the tobacco produced in Argentina is mainly for export, not local consumption." On the other hand, the Argentine devaluation did cost Klabin S.A. an estimated R$61 million in 2001 losses.

At present, Klabin has nearly 9,400 employees, and another 6,650 contracted through third parties. Overall, the domestic market currently accounts for 68% of Klabin's total revenues, with the remaining 32% coming from exports. The company produces 45% of Brazil's multiwall sacks, 36% of its packaging paper, 29% of its corrugated boxes and 22% of its tissue.

"In 2001, Klabin successfully managed to post continuing growth in its operating results and cash generation in spite of the worsening situation in the Argentine economy, uncertainties in the capital markets, the Brazilian energy crisis and the terrorist attacks in the United States," according to Klabin's 2002 annual report. "As a solid company with a history that goes back a century, Klabin is proud of its ability to have successfully weathered the various crises which Brazil has faced over the years."

At present, the Klabin family owns 59.5% of the company's common shares; another 20% of the conglomerate is in the hands of Monteiro Aranha, with other individual stockholders owning the remaining 20.5%.

As one of Brazil's largest companies, Klabin is active in various philanthropic activities. In the state of Santa Catarina, the company's Correia Pinto plant donated three downtown buildings to the local Association for Parents and Friends of the Handicapped for use as a clinic and for workshops to produce handicrafts.

Klabin is also a partner in the Junior Ecological Brigade of Ilha Grande, an island off the coast of Rio de Janeiro state. The brigade is made up of teens aged 14 to 17 who, in return for a financial grant, carry out the daily task of cleaning the island's footpaths and beaches. And it has also donated generously to Ten Yad, a São Paulo charity that runs a "meals on wheels" program for impoverished Brazilian Jews.

In the environmental arena, Klabin has won various awards for achievements in ecology. The company preserves on the land it owns more than 130,000 hectares of native forests, with a further 237,000 hectares destined for the cultivation of pine and eucalyptus.

Besides an extensive plant cover, Klabin's preserved area is also the habitat of more than 320 species of birds and at least 11 of the 50 mammal species currently considered at risk of extinction.

The company has also signed agreements and promoted technical and scientific exchange agreements with universities and research institutes both in Brazil and overseas.

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