BRAZIL: Forests, Pulp Mills & Pulp Markets. Facing Today s & Tomorrow s Challenges

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1 BRAZIL: Forests, Pulp Mills & Pulp Markets Facing Today s & Tomorrow s Challenges Celso Foelkel

2 COMPETITIVENESS The ability to add more value than the global average in relation to the competitors in terms of the key-factors of competitiveness in a particular product chain

3 Competitividade = + Mill Global Society The real competitiveness happens in this type of world

4 Levels of Competitiveness Regional Competitiveness BRAZIL Networking, benchmarking, political participation Segment Competitiveness P&P Cooperation Internal Competitiveness MILLS Competition

5 GDP - Selected countries Source: Golden Sacks & Merryll Lynch

6 GDP per capita - Selected countries Source: Golden Sacks & Merryll Lynch

7 COMPETITIVENESS STRATEGY (Efficacy) Winning companies Do the right things Losing ground companies MANAGEMENT ( Efficiency) Do the things rightly

8 Market Pulp Brazilian P&P Exports Paper ton ton

9 Brazilian P&P exports: 1996 = Index 100 9% growth /y from 1996 Source: IPEA Data

10 1,80 1,60 1,40 BRAZIL Pulp Bi U$$ 1,20 1,00 Paper 0,80 0, Net value of trade balance (Exports - Imports) Source: Bracelpa

11 5,00 million ton 4,50 4,00 3,50 3,00 2,50 BRAZIL Pulp 2,00 1,50 Paper 1, Exports of pulp and paper Source: Bracelpa

12 We have P&P state-of-the-art mills

13 People, who plant forests, believe in the future Thus, we believe in the future

14 Plantation forests

15 The plantation forest model Utilization of rural farmers land areas (less expensive and enlarged social benefits) Utilization of low quality soils (degraded pastures, not competing for agricultural lands) Involvement of local partners as many as possible

16 The virgin pulp based model Substantial growth in virgin pulp and not in paper: oriented to market share growth Most of EBITDA formation comes from the pulp side: paper does not add too much further Worldwide distribution of pulp a lot easier than paper Domestic paper recycling allows virgin pulp surplus for exports

17 GLOBAL CAPACITY IN MARKET PULPS (in 1000 tons) BLEACHED SOFTWOOD KRAFT BLEACHED HARDWOOD KRAFT BLEACHED SULFITE UNBLEACHED KRAFT TOTAL PAPER GRADE Source: RISI, 2005

18 People, who build competitive mills, deserve to play the best markets We are playing the best markets, so we are competitive

19 Sources of Competitiveness to the Brazilian Industry focus on margins and EBITDAs ( cash costs and net prices) diversification on products portfolios expansion in market share, no matter how (growth, upgrades, consolidation, mergers) environmental and social compliance timing reduction of wastes, all kinds wastes

20 Eucalyptus & Pines Low-cost woods and superior quality

21 ABC & U countries In thousand hectares 3400 Total: 8,780 ha Softwoods (green): 4,040 ha Hardwoods (red): 4,740 ha

22 BSKP operating costs Chile Sweden Finland US South France/ Germany Canada East Wood Chemicals Energy Variable costs Labour Maintenance Other mill costs Fixed Costs OPERATING COSTS fob mill Ocean freight Marketing & sales TOTAL DELIVERED CASH COSTS cif BC Interior BC Coast WORLD WEIGHTE AV Source: Hawkins Wright, 2004

23 BHKP operating costs US$/tonne Brazil Indonesia US South Portugal Sweden France/ Belgium Canada East Wood Chemicals Energy Variable costs Labour Maintenance Other mill costs Fixed Costs OPERATING COSTS fob mill Ocean freight Marketing & sales TOTAL DELIVERED CASH COSTS cif Source: Hawkins Wright, 2004 Finland Spain WORLD WEIGHTE AV

24 World s Leaders Paper Manufacturers Paper Markets (1.000 Tons) Total world paper: tons USA China Japan Canada Germany Finland Sweden Korea France Italy Brazil Indonesia Source: PPI - Annual Review- 2004

25 World Leaders Pulp Manufacturers USA Canada China Finland Sweden Japan Brazil Russia Indonesia Pulp Markets (1.000 Tons.) Total world pulp: tons India Source: PPI - Annual Review- 2004

26 Consumption trends Paper Demand Growth in recent years 2,2% in developed countries; 5,5 6,0% in developing countries; 3,0% world average.

27 Threatening Challenges

28 Projected paper growth is moderate World P & B demand, tons Industrial & other Newsprint Printing & Wr. Papers Source: Merryll Lynch, 2004

29 Paper and board demand trends 700, tons 600, , , , , , US W Europe E Europe Japan Canada LatAm RoW Asia Source: Merryll Lynch, 2004

30 Paper Grades Attractiveness Demand Supply Price Volatility Entry Barriers Structure Tech Changes European Cost Position Cost Curve Overall Market Pulp /+ 0 0 Newsprint Magazine Paper Fine Paper /0 - + Containerboard / Cartonboard Tissue Very Positive -- Very Negative Source: Merrill Lynch Research Paper Grade Attractiveness Source: Merryll Lynch, 2004

31 Business in China: from Marco Polo to Market Pulp Source: VCP, PPPC Enormous growth in pulp demand in China Imports of market pulp by China 4,739 5,021 5,720 1,427 2,054 2,942 2,

32 Market pulp prices Pulp prices NBSKP US$ in June US$/ton, CIF Norte Europa Cyclical Downwards trend

33 BEKP CIF Price - Europe US$/adt July/2005 October/2005 January/2006 April/2006 July/2006 Oct/06 Quarters Source: HAWKINS WRIGHT

34 Fine paper & Pulp prices 1,100 /ton (NBSK in $/ton) 1, UWF A4 CWF Reels 100g NBSK (USD) Source: Merryll Lynch, 2004

35 Financial results of the P&P sector are not as wonderful as they may be thought Ratio Net Price in Europe/Total costs Source: RISI, 2005

36 USA Pulp production cost: delivered in Europe Canada Sweden Spain Finland Portugal Indonesia BRAZIL 2004 Lowest production cost in the world Source: Hawkins Wright, 2004

37 Pulp Production Costs Using market pulpwood cost Source: RISI, 2005 Exchange rate and wood cost effects

38 Uncoated wood free paper cost Using market pulpwood cost Source: RISI, 2005

39 Brazilian Pulp & Paper Industry 7º World manufacturer of pulp 5º World manufacturer of bleached pulp 3º World manufacturer of market pulp 1º World manufacturer of eucalyptus market pulp P & P sector own forest area = 1.4 million hectares 11º Manufacturer of paper and board.

40 Growth: 7.7% / year Pulp Production Growth in Brazil Year Production (Million tonnes) market pulp in 2004

41 Eucalyptus market pulp in 2004 (Source: PPPC, 2005) Brazil M tonnes Spain M tonnes Portugal M tonnes Chile M tonnes Thailand M tonnes South Africa M tonnes Norway M tonnes China M tonnes Morocco M tonnes New Zealand M tonnes Others M tonnes Total M tonnes

42 Production (1.000 adt) Trends for the Brazilian share in the global pulp market ( ) Long Fibers Total Short Fibers Other Short Fibers Eucalyptus Brazil Euca Brazil Source: Hawkins Wright, 2005

43 2004 South America: Total Market Pulp Million tonnes Production of Market Pulps - All grades South America Internal Consumption

44 World leaders in BHKP to the market (em tons) ARACRUZ (11,4%) RGM ( 9,1%) ENCE ( 4,9%) VCP ( 4,6%) CENIBRA 940 ( 4,3%) STORA ENSO 855 ( 3,9%)... 9º...PORTUCEL 590 ( 2,7%) 10º..ARAUCO 578 ( 2,7%) 11º..SUZANO 485 ( 2,2%) 12º APP 425 ( 2,0%) Source: RISI, 2005

45 Short fibers in Brazil - Growth in past decade Growth (in tons) ARACRUZ ES ARACRUZ (ex-riocell) BAHIA SUL CENIBRA IP (ex-champion) JARI LWARCELL RIPASA SUZANO VCP (LA) VCP (ex Simão - Jacarei) NOBRECEL VERACEL ( in 2006) 900 Source: RISI, 2005

46 Market pulp destinations from Brazil 70% 60% 50% 40% 61% % Source: Bracelpa, HW, Cenibra Quantities adt % 20% 10% 0% % % 12% % % 10% 1% % North America Europe Latin America Asia/Africa Oceania 1990 in adt 2004 in adt 1990 in % 2004 in % Source: Cenibra, 2005

47 BRACELPA - P & P expansion plan to Brazil PULP t 1000 t Growth % Production 8,000 14, Exports 3,500 7, PAPER t 1000 t Growth % Production 7,700 13, Exports 1,400 2, Country population (1,000) 176, ,000 Per capita consumption ,0 32.0

Brazilian Investment Plan 2003-2012 Pulp Paper Forestry TOTAL Total investments (US$ Billion)

48 Brazilian Investment Plan Pulp Paper Forestry TOTAL Total investments (US$ Billion) 7,3 5,2 1,9 14,4 Trade balance (US$ Billion) 21,5 8,9-30,4 New job generation ( thousands ) 60,7

49 Source: Paperloop, 2004 Brasil 37 Chile 56 Mexico 54 Argentina 44 United States 301 Canada 222 Finland & Belgium Spain 179 Japan 242 Portugal 101 China 42 Per capita consumption World average 51.7 kg/inhabitant.year

50 Brazil: moderate growth in paper consumption, more than vegetative due to people living standards and exports of manufactured products (000 tons) Net paper consumption in Brazil Growth : about 5 %a.a. 6,8026,7906,716 6,338 4,619 5,3205,8666,2076, Kg Per capita consumption kg/inhabit.year Brazil Mexico Canada Japan USA Finland Source: RISI, CNPL, BRACELPA

51 BRAZIL 8000 thousand tons Historical growth of pulp production in Brazil Source: Bracelpa

52 BRAZIL ton Historical growth of paper production in Brazil Source: Bracelpa

53 BRAZIL ton Historical growth of packaging paper in Brazil Source: Bracelpa

54 BRASIL BRAZIL ton Historical growth of printing paper in Brazil Source: Bracelpa

55 More virgin market pulp coming till (from South America)... Eucalyptus BHKP: 6,700 Thousand tonnes Pine (BSKP): 685 Thousand tonnes BCTMP Acacia: 280 Thousand tonnes Dissolving pulp: 250 Thousand tonnes

56 Forestry Driving Forces Eucalyptus forests growth rates: ( average Brazilian producers 40 m 3 /ha.year and top clonal forests reaching 60 m 3 / ha.year) In Argentina Eucalyptus grow about m³/ha.year; in Uruguay depending whether E.globulus or E.grandis; in Chile also depending whether E.globulus or E.nitens) In Chile, Pinus radiata grows 30 m³/ha.year; in Brazil, Uruguay and Argentina Pinus taeda has a growth of Wood cost /ton of BK Pulp: US$ (HW) ; (SW) Possibility of adding value along the forest base chain

57 More market pulp coming to the stream Brazil Aracruz de-bottlenecking the Barra do Riacho mill (+125,000t/y) and Guaiba mill (+30,000t/y) VCP adding extra capacity to the Jacarei mill ( t/y) and planting eucalyptus to build a new facility till 2010 in Rio Grande do Sul ( estimates of 1 million tonnes) Suzano Bahia Sul adding a new plant in Mucuri/BA to raise eucalyptus market pulp from 532,000 to 1,544,000 t/y till 2008/2009. Paper growth will be modest (from 818,000 t/y to 861,000 t/y) Veracel starting 2005 the state-of-the-art mill in Bahia with 900,000 t/y of eucalyptus market pulp

58 More market pulp coming to the stream Brazil Ripasa: a question-mark after taking over by VCP & Suzano, however it is certain to dry pulp to the market (about 250,000 t/y estimated 2006) Lwarcell; expanding capacity from 120,000 t/y in 2004 to 180,000 in 2005 and 210,000 in 2006 Jari: de-bottlenecking and modernisation in the Monte Dourado mill to grow additional 60,000 t/y till 2008 Bahia Pulp: evaluating expansion of eucalyptus dissolving pulp capacity from 115,000 to 365,000 t/y till 2007/2008

59 More market pulp coming to the stream Brazil Cenibra: a mill expansion plan has just been started from the today s 960,000 t/y to 1,160,000 t/y. Expected 2006/2007. Brancocel: a project waiting the go ahead, oriented to BCTMP from Acacia mangium (280,000 t/y) in Roraima

60 International Paper in MS?? Stora Enso in RS?? And more to come soon

61 Chemicals Forest Wood Mills Pulp to market Logistics in the P&P supply chain Ports Domestic market Exports

62 Freights and warehousing are very expensive and second class in many cases 20 a 30 US$ / ton of pulp 5 a 10 US$ / ton 35 a 70 US$ / ton 10 a 20 US$ / ton Other raw materials that also demand logistic Estimated US $ 12 a 15 US $ / ton

63 Pulp price in Europe: US $ 550 / ton Costs in logistic in the supply chain US $ 70 to 110 / ton. 13 a 20 % based on sales price

64 Today s trends coming from pulp market - Customers are larger and larger, very strict on quality and prices - Logistics is fundamental, and Brazil needs to improve - Technical support must be outstanding - Environmental issues are very much demanded (Forests and mills) - Pressures on production costs everywhere, including at home

65 Market pulp Causes for success of Brazilian manufacturers a) Supply chain management - Just-in-time - Warehouses in strategic locations b) Product quality -Inovationvia R&D - Quality control - Changes due to new expectations - Modernization on mill technologies c) Technical assistance - Product specifications - Efficiencies in customer manufacturing -Synergies

awareness and commitments - Transparency to stakeholders - Forest certification - ISO

66 Market pulp Causes for success of Brazilian manufacturers d) Production scale - Market share - Production efficiency - Ability to select customers e) Social and environmental awareness and commitments - Transparency to stakeholders - Forest certification - ISO certification - Social responsibility f) Mutual trustiness - long-term reliability

67 Main challenges for keeping competitiveness a) Structure - Logistics ( ports and vessels) - High level of efficiency and mill modernization b) Conjuncture - Exchange rate (Real x Dollar, Euro x Dollar, Iuan x Dollar) - World economic fragility due to natural disasters, oil price, weak economy on giants, except China - Brazilian risk and country s level of competitiveness (poorer) c) On site needs - operational efficiencies - low manufacturing cost

68 We have a lot of homework to do, But we are very enthusiastic about our sector

69 Well, this is all friends. Thank you very much.

Institutional Presentation

Institutional Presentation Disclaimer Certain statements in this presentation may constitute forward-looking statements. Such statements are subject to known and unknown risks and uncertainties that could