COMPETITIVENESS OF THE BRAZILIAN PULP INDUSTRY: A REAL OPTIONS ANALYSIS OF A FORESTRY INVESTMENT

Resumo

Abstract

Brazilfaces challenges that have to be overcome in order to turn it into a productive and competitive player in the world. These challenges have come to be known as ‘Brazil Cost’. But, in spite of that, some sectors of the Brazilian economy are so productive that not even such high premium cost can hinder their world competitiveness. The pulp industry is one of them. Due to the country’s comparative advantage in the production of cellulose and the importance of the sector to the Brazilian economy, this paper analyzes a forestry investment project. We also chose to use a real options approach to evaluate the forestry investment and the optimal time to harvest, since this approach can capture the value of flexibility of the investment decision. The option that results from this modeling has no closed analytical solution and so we had to resort to a fully implicit finite difference numerical solution that leads to systems of linear equations which were solved with an iterative algorithm called Projected Successive Over Relaxation (PSOR), implemented computationally with software developed for this specific purpose. The main objective of this paper which was to examine a forest investment in light of the theory of real options was reached and the optimal harvesting time was identified. In a context where the aspects of sustainability are growing in importance, identifying the optimum harvesting time enables the productivity of forests to be maximized, which in turn should decrease the environmental impact of the industry.

Keywords:  Forestry investment valuation; Real Options; Fully implicit finite difference method; PSOR algorithm.