This is no pulp fiction

Craig Barker, chief executive of Shanghai-based Sateri International, discusses plans to create the worldÆs largest cellulose pulp and viscose fibre producer.
Before we start, can you quickly explain what cellulose pulp and viscose fibre are?

Cellulose is natural, renewable and totally bio-degradable. It provides unique features such as tensile strength for heat resistance and viscosity for thickeners, UV stabilizers and filterability. It has many end uses. At higher temperatures itÆs stronger than oil-based fibbers like polyester. As such itÆs ideally suited for products like the reinforcing fabric for high speed tyres. It is also widely used as the raw material for making cigarette filters. It can also be used as a tableting agent in pharmaceuticals and even used as a molding compound for eyewear and for making sponges given its high absorbency. It is also being increasingly used as a flame barrier for mattresses. This market should grow rapidly given recent US legislation governing flame retardants in mattresses.

Viscose fibre is made from 100% regenerated cellulose and it gives the same absorbency and breathe-ability as cotton. ItÆs much more environmentally friendly than synthetic fibbers, which are neither moisture absorbent or bio-degradable given they are petroleum based. These synthetic fibbers are also being hit by rising oil prices and the fact that people are increasingly willing to pay more for natural fibbers. You find viscose fibbers in all sorts of textile products from baby wipes to medical pads and sanitary products.

Ok, so what advantages does an Asian-based operation give you versus your competitors in the Baltics and the US?

None of the US or Baltic companies have the ability to grow their own trees. Having your own raw materials is a big advantage.

Weather is also a huge factor. The big operators in Sweden and Russia donÆt have their own plantations so they have to source direct from the forests. But during the winter months, theyÆre finding it difficult to get their harvesting equipment in since global warming is leaving the forests wet rather than frozen.

Their fibre source is also not as readily renewable. It takes 30 to 40 years to grow replacement trees, whereas wood from our plantations in the tropics is ready to harvest in six to seven years and because we select and plant seedlings for higher cellulose yield and pulp quality.

In Canada, the pulp companies are suffering because the US is not building as many houses and the industry there relies heavily on waste from the US building industry. They also have little control over re-planting as itÆs all QueenÆs concessions, which means they have to replant the woods exactly as they found them.

We have the first and the only 100% foreign-owned viscose fibre mill in China. Current capacity at Sateri Jiangxi is 70,000 metric tonnes a year, but our planned expansion will see this increase to 130,000 metric tonnes by the end of 2008. This puts us at the heart of our customer base in the fastest growing specialty cellulose market in the world.

Our current capacity for specialty cellulose is 285,000 metric tonnes. But in Brazil we are completing an expansion and are looking in the medium term at increasing capacity to a total of 1 million metric tonnes of specialty cellulose.

In 2005, you were going to finance this expansion through a $300 million high-yield bond, but then dropped the idea. What happened?

We had a financing offer with more attractive terms so we decided to do a $320 million club loan.

How has Sateri funded its growth to date?

Our largest shareholder is Sukanto Tanoto and we have had strong support from him both in terms of equity investment and shareholder loans. We also have some bank debt in addition to the club loan discussed above.

You came to be involved with Sateri because of Tanoto, isnÆt that right?

IÆve known Sukanto Tanoto for many years. His companies have always been big competitors of my former employer, an Austrian-based international player, Lenzing AG, which specialises in cellulose and viscose fibre.

I was based in Indonesia for just over 10 years running a joint venture for them. I was there throughout the Asian financial crisis. During that period, life was obviously very difficult. Nevertheless, we were able to successfully restructure every loan and expand capacity significantly to one of the largest viscose producers in Asia.

Sukanto Tanoto first approached me in 2003. I was definitely looking for a new challenge, but my family wanted to leave Asia for a while so I didnÆt take it up. However, I came back as president of SateriÆs viscose business in April 2006 and became CEO of the whole group in January last year.

When you talk about growth do you mean for domestic or international markets?

Both. We see rapid growth in domestic consumption in China, India and Southeast Asia in the traditional use of cellulose and viscose, for example in the textile industry. Coupled to that, new and expanded applications of specialty cellulose is now found in a wide variety of products including LCD screens, building materials, pharmaceuticals and high performance tyres in the international markets. Domestically we are also seeing huge growth in viscose fibbers for the fast moving consumer goods sector such as baby wipes and sanitary products.

How competitive is the China market?

ItÆs competitive like everywhere else, but weÆre more efficient and after our planned capex programme, our viscose production costs there will be the lowest of any of our plants worldwide. A lot of mills in China are small. We have scale and the advantage of our own raw materials.

Sateri recently signed an investment agreement in Putian City of Fujian province for its 200,000 tonnes a year viscose fibber project. The total investment of the project is $400 million. The first phase accounted for $182 million and is designed with an annual production capacity of 91,000 of viscose fibber. Construction of the project will start in 2008 and will last for two years.

How big is the Sateri business now?

We have grown strongly in the last few years. Demand certainly exceeds our total output. We have also seen an upsurge in the selling price of specialty cellulose.

Sateri divested its operations in Finland. Why is that?

Viscose fibre demand had shifted significantly to Asia hence our focus changed. We divested 70% of our holding however we still continue to retain a 30% stake and maintain our technical exchange, and the opportunity to keep a specialty cellulose customer. In return we offer access to cellulose.

So who do you consider your biggest competitors in terms of other companies?

Our two largest competitors in standard grade cellulose would be Saicor in South Africa and Rayonir Jessup in the US. The former focuses on the standard grade market and a limited range of cellulose products and the latter is focused on the high purity segments.

When people think about pulp û they think about destruction of forests -- how important is responsible environmental management to Sateri?

Hugely important. We have a no burn policy and employ mosaic plantation techniques, which means we intersperse eucalyptus plantations with the conservation of high conservation value forest. At least 20% of our plantation concessions are set aside for this purpose.

We also ensure that waste products from mill operations such as black liquor, bark and boiler ash are recycled and used as bio-fuels in our specialty pulp plants and as fertilizer on the plantations. We recently initiated a programme to offer Brazilian cattle farmers the option to convert their land into eucalyptus plantations which helps to increase forestry land and also improve the economic opportunities for these farmers.
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