Arauco’s Production Capacity

With the help of the Nueva Aldea project, Arauco’s production capacity can be increased to 3.2 million tons per year, which makes Arauco to be the largest producer of market pulp. By increasing the company’s producing capacity, it is believed that the Arauco can gain market power and enjoy benefits from Economies of Scale. According to exhibit one, it can be seen that the Nueva Aldea project has a positive net present value of around $85 million US dollar. With a positive net present value, this indicates that the earnings generated by this long term project exceed its anticipated cost. Thus, Arauco should build the Nueva project.

One of Arauco’s competitive advantages that allow the company to obtain a leading position in the industry is its low-cost production capabilities. Firstly, Arauco is able to lower its production cost as it has its own electricity generating turbine next to its plants. By generating and producing its own electricity, Arauco is not only able to combat against the increasing cost of electricity and get enough electricity to sustain its daily operation, but also have excess capacity that can be sold to the Chilean electricity grid. The revenue generated by selling the additional electricity alone already adds up to be $100 million per year on average. With this strategy, Arauco was able reduce operation cost greatly per year, and operate at a much lower cost than its competitors.

Looking at exhibit 6 of the case, it can also be seen that when compared to other bleached softwood kraft pulp producers, such as Sweden, Norway, Canada and the United States, Arauco enjoys a much lower production cost. The low production cost is due to the climate condition and natural resources of Chile that favours the growth of radiate pine, which is a kind of fast-growing, good-qualitied conifer tree. Chile is also able to plant high-quality pulp logs and saw logs at a much shorter time. Compared to its competitors in the northern hemisphere who take 18 to 45 years to cultivate pulp logs and 50 to 150 years to harvest saw logs, while in Chile, it only takes 16 to 18 years and 50 to 150 years to harvest pulp logs and saw logs respectively. Arauco’s production cost is further reduced due to Chile’s high yield per hectare of radiate pine, which is contributed by the good soil quality of the country. This allows producers to plant more pines for each hectare of land to lower the cost on acquiring land for planting. With lower production cost and better quality, Arauco is able to gain competitive advantages by providing good quality logs at a lower cost to its customers. Moreover, Arauco’s investment on the log merchandizing also further reduces the cost of the company. With the help of this asset, Arauco’s risk of having error when cutting down trees and ensure that the company is “using the parts of the tree for the right purpose”, which helps saving millions of dollar per year.

Arauco is also