The New York Times
November 9, 1999

Delusions of Economic Grandeur Deep in Brazil's Interior

          By LARRY ROHTER

          MONTE DOURADO, Brazil -- Two decades ago, the American
          billionaire Daniel K. Ludwig took a bold but very expensive
          gamble here. After buying a piece of the Amazon jungle larger than the
          state of Connecticut, the shipping magnate spent a large chunk of his
          fortune building an industrial, mining and agricultural complex that he
          imagined would prosper as a result of the world's growing appetite for
          products like paper, aluminum, porcelain, rice, beef and pork.

          Today, Jari Celulose, as a scaled-down version of the project is known,
          is for sale, available to any bidder -- for one dollar. Better yet, the
          current owners, a Brazilian consortium that has seen only one profitable
          year since taking over after Ludwig gave up in 1982, may even throw in
          a bonus of up to $20 million to the buyer who will take the venture off
          their hands.

          There is a catch to the largely symbolic sale price, of course. Jari comes
          with $354 million in debt, its attractive bauxite and clay mines have
          already been spun off, and the project will require several hundred million
          dollars in new investment, including $100 million to build an electric
          power plant, if it is to continue to manufacture high-quality cellulose, the
          fiber used to make paper.

          Like the big hopes for the China market, the notion that there are
          unlimited riches to be had from the Amazon is one of those dreams that
          never seems to die. Since the first Spanish colonizers in the New World
          fell under the spell of the legend of El Dorado, adventurers have arrived
          with the conviction they can build empires in places such as this, only to
          run afoul of one of the most hostile natural and business environments on
          the planet.

          Jari may be an object lesson in such hazards, but it has fared better than
          most previous efforts, like Fordlandia, Henry Ford's failed effort to grow
          rubber 200 miles southwest of here. More than 30 years after Ludwig
          bought 6,301 square miles of inhospitable jungle for $3.1 million, the
          project is still a going concern and remains the focus of controversy and a
          symbol of both sovereignty and tenacity.

          From the start, Ludwig invited scrutiny by thinking in grandiose terms.

          When construction of a 17-story paper mill and power plant on the site
          he had selected proved impossible, he spent more than $269 million to
          have them built at his favorite shipyard in Japan and then towed 17,800
          miles across the Indian and Atlantic Oceans.

          He also installed 3,000 miles of road, 37 miles of railway, a deep-water
          port and a company town that now has 9,500 inhabitants. More than
          260,000 acres were planted with Burmese melina and Caribbean pine
          trees, which did not flourish in this harsh equatorial climate, and,
          eventually after much costly experimentation, eucalyptus, which did.

          "I always wanted to plant rows of trees like corn," Ludwig, who died in
          1992 at the age of 95, said in a rare interview, published in 1980 in
          National Geographic magazine.

          But the very scale of Ludwig's ambitions aroused suspicion among
          Brazilians, who have been distrustful of any foreign presence in the
          Amazon since the British destroyed Brazil's rubber industry a century ago
          by spiriting seeds away to Malaysia. Books with titles like "Jari: The
          American Invasion," and press reports suggested that Ludwig was
          creating his own nation with its own armed forces, using slave labor,
          destroying the jungle and smuggling gold abroad.

          Though Brazilians are taught in school that the Amazon is a natural
          wonder, and can recite the names of the river's tributaries with ease,
          relatively few from the big cities 1,500 miles to the south have ever set
          foot in the region or have a desire to visit. This distance fuels nationalistic
          slogans like "the Amazon is ours," but produces very little knowledge of
          or sympathy for the obstacles faced by any undertaking in the jungle.

          In part because Brazilians regard the Amazon as a place of quick and
          easy riches, "the state has not played its proper role" in the region, said
          Erton Sesquim Sánchez, Jari's current operations director. "They have
          not come in to build schools and basic sewage systems, pave roads,
          install electric power. We're here 20 years, and we still have to confront
          ourselves those and other problems that are really the responsibility of the

          Despite the social role that companies like Jari are forced to play, calls
          for these companies to be expelled persist today. The October edition of
          Amazon Agenda, a monthly newsletter published by Lucio Flavio Pinto,
          author of a critical history of Jari and the region's best-known
          investigative reporter, describes Jari and projects like it as "Trojan
          Horses in the Amazon" that enrich foreigners at the expense of ordinary

          In Ludwig's case, after he could not get government approval for a dam
          he wanted and walked away from Jari, the nationalists got their wish,
          though not quite in the form they had anticipated. Since the early 1980's,
          two government-owned banks, the National Bank for Economic and
          Social Development and Banco do Brasil, have poured at least $350
          million into the effort to keep Jari going and together now hold a
          one-third stake in the cellulose project.

          Over the years, the ambitions originally envisioned by Ludwig have also
          been pared down. Plans to raise cattle and pigs were shelved. A project
          to grow rice along the banks of the Amazon River, intended to turn Brazil
          into a rice exporter, was abandoned. That area has since been turned
          over to an entrepreneur who is trying to turn it into a fish farm.

          "Our focus these days is immensely different from what it was back in
          those early days," said José Ricardo Cordeiro, president of Jarcel
          Celulose, the project's holding company. "Before, everything was on a
          large scale. But we are aware we are not a big company, that Jari will
          never be the mega-enterprise it was projected to be, and we act

          Now, however, the process has come full circle: Jari's current owners are
          once again actively seeking a foreign partner. "We are in a global market,
          and so there are no restrictions," Sánchez said during an interview at his
          office at the paper mill. "The most important thing is not the origin of the
          capital, but the capacity to carry this undertaking ahead."

          Israel H. Coslovsky, chairman of Jari's board, said in an interview in Rio
          de Janeiro that preliminary talks with an American and a Canadian
          company, which he declined to identify, are already under way. But
          Brazilian market analysts are skeptical of the company's ability to attract
          significant foreign or domestic investment.

          "Jari is the ugly duckling of the paper industry, a project in which no
          serious player has an interest," said Thomas Mello Souza, who follows
          the Brazil pulp and steel industries for Merrill Lynch's office in São Paulo.
          "Despite being close to the American and European markets, it is in an
          isolated area of difficult access, and that complicates the operation of the
          business, adds to operational costs and makes for a very high turnover."

          Though Jari's cash flow is now positive, to expand and modernize its
          plant for an increasingly finicky international market will require an
          additional $400 million in investment, Souza estimated. "They are looking
          for a white knight, but I think it is a mission impossible," he said,
          "especially at a time when there are properties in Brazil that are more
          attractive, with better economies of scale, and which can't find buyers."

          Coslovsky and Cordeiro, however, contend that the company has turned
          the corner. Production is at 295,000 tons of cellulose this year,
          two-thirds exported to Europe and another 10 percent to North
          America. Production is expected to rise to 330,000 tons next year. The
          price of Jari-made pulp has also risen, from $320 a ton in 1998 to $580
          this year.

          "For the first time, I am optimistic" Coslovsky said. "Two years ago we
          had not one cent of working capital" after a fire that forced the project to
          shut down for several months, but "conditions today have never been
          more propitious than in the entire history of Jari, with a market that is
          stable and a government that has shown good will to resolve our

          Jari's debt, 70 percent of it in dollars, is owed to nearly a score of
          Brazilian and foreign banks, including, Coslovsky said, the Citibank unit
          of Citigroup and J. P. Morgan. But the 40 percent devaluation of
          Brazil's currency, the real, this year has had minimal effect on the
          company for two reasons: Jari earns dollars exporting its products, and
          "the debt was unpayable before, and it is unpayable now," as Sánchez
          put it.

          Though some nationalist groups have argued that Jari should simply be
          closed, that seems unlikely, since the social and political cost to the
          Brazilian government would be so high. Though the project itself has only
          1,050 employees, more than 70,000 people now live here or in
          ramshackle communities along the Jari River, and would be left without a
          livelihood if strictly economic logic were applied.

          "The economy of this entire region revolves around the Jari projects,"
          João Firmino Rafael, manager of the local branch of the Hongkong
          Shanghai Banking Corporation, said, referring to the cellulose, bauxite
          and kaolin plants as a whole. "They can't shut down. If they were to do
          that, a lot of other businesses would have to close, too, and we would
          have no reason to be here."

          Near the center of this tidy little town, named Gilded Mountain in
          Portuguese, the simple wooden house where Ludwig stayed during his
          frequent visits here in the 1970's is now a museum that describes him as a
          visionary. The museum and a similar display at the pulp mill offer plenty
          of data about the history and functioning of the project, but make no
          explicit mention of the main lesson to be learned from Jari's experience.

          "The Amazon has advantages but it also has disadvantages," Coslovsky
          said. "You have to be very much aware of them before you do anything
          in the region."