Case Study: Aracruz Cellulose

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Aracruz’s USD 2.13 billion loss Introduction Aracruz cellulose is Brazil’s largest eucalyptus pulp maker. It was the biggest producer of bleached eucalyptus pulp, which was the only product it produced. It was a steady performer in terms of output, production, revenues and profits. It enjoyed a key status in the word markets. It had a 26% of the global market share. It enjoyed an enviable reputation and was rated highly by the global rating agencies like the Moody’s, etc. It’s market capitalization was USD 7.1 billion. Its new revenue was USD 1.7 billion. It was the first Brazilian company to come with an ADR in the NYSE. It had an annual capacity of 3.3 million tonnes over three production sites. It had enough resources like 593,000…show more content…
But, to use derivatives as a means of income generation is altogether a different matter. This is exactly what happened with Aracruz. There was a tacit understanding between the majority shareholders and the top-management of the company to use derivatives and derivative instruments to make gains to add to the overall profitability of the company in order to camouflage the ineffective management of the company by top-management. So, that no one should pay attention to the declining trend of operating profits from the core business operations of the…show more content…
The company use six different types of derivatives between 1999 and 2008 to hedge its positions. Two were standardised contracts, four were OTC derivatives. Of the two standardised contracts one was the standard futures contract with the Brazilian Mercantile exchange, and the other being currency coupons. The four OTC derivatives were NDF i.e. Non-deliverable futures, conventional swaps, and exotic swap with monthly settlements and a structured derivative called sell target forward. The last one was a main culprit in bringing the company to its knees. Using such a basket of derivatives was indeed a complex strategy. The timing and the purpose of using each strategy and the combinations thereof was the key to success. Somehow, it seems some erroneous decisions were taken and the timing of those decisions was also not in the favour of the

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