Brazil and South America: Timberland and Forest Products Investments

Future Forestry Finance 21 Brazil and South America: Timberland and Forest Products Investments Future Forestry Finance Conference, March 21 Bob Flynn Director, International Timber March 2, 21 Sydney March 5, 21 - Auckland South America: Agenda Brazil s dominance in the region Forest Industry and Exports Foreign investment in South American Timberland E. Grandis 11 years Klabin 2

Future Forestry Finance 21 The forest industry in South America is primarily based on plantations, with Brazil having a dominant position; 95% of plantations are in just 5 countries South America: Plantation Forest Area, 28 Peru 2% Colombia 2% Other 2% Venezuela 5% Brazil 54% Uruguay 6% Argentina 1% Chile 19% 3 Brazil has about 2/3 of the eucalyptus plantations in South America, and is by far the leader in eucalyptus cloning and afforestation in the world 4,5 4, 3,5 Eucalyptus Plantation Area in South America, 28 Thousand hectares 3, 2,5 2, 1,5 1, 5 Brazil Chile Argentina Uruguay Peru Other 4

Future Forestry Finance 21 Pine plantations are more evenly distributed than eucalyptus, but Brazil again is the leader; Chile has radiata pine, Brazil and Argentina have SYP Pine Plantations in South America, 28 Thousand Hectares 2, 1,8 1,6 1,4 1,2 1, 8 6 4 2 Brazil Chile Argentina Uruguay Venezuela Colombia 5 Thousand hectares 45 4 35 3 25 2 15 1 5 Change in Eucalyptus and Pine Plantation Area in Brazil, 2-28 2 28 New planting in Brazil, as in much of the world, has focused on eucalyptus, not on pine. Pine Eucalyptus 6

Future Forestry Finance 21 Even in Chile, new planting has shifted to more eucalyptus over pine 45 Chile: New Planting of Pine and Eucalyptus, 1994-28E 4 35 Radiata Eucalyptus 3 25 2 15 1 5 1994 1995 1996 1997 1998 1999 2 21 22 23 Thousand Hectares 24 25 26 27 28E 7 Thousand hectares 2 18 16 14 12 1 8 6 4 2 Brazil: Plantation Area of Species Other Than Pine and Eucalyptus, 28 Wattle Rubber trees Teak Parana pine Poplar Paricá Other Teak plantations are again popular in parts of Brazil, Ecuador, and Central America; there is minor interest in some other high value hardwoods 8

Future Forestry Finance 21 Environmental regulations and forest certification have been important for industry development 9 FSC is the leader in forest certification; some large companies developed national standards (PEFC), but now even they are pursuing FSC 6, Certified Forest Management in South America, 29 Thousand Hectares 5, 4, 3, 2, 1, FSC PEFC Chile Brazil Bolivia Uruguay Peru Guyana Argentina Other 1

Future Forestry Finance 21 Brazil s accounts for 2/3 of hardwood industrial roundwood harvest in South America --- not including its massive harvest for fuelwood/charcoal Paraguay 4% Other 7% Industrial Roundwood Harvest in South America, Hardwood, 28 Argentina 3% Uruguay 6% Brazil 68% Chile 12% Source: FAO 11 Brazil s total harvest of eucalyptus dwarfs that of other countries. 12 Eucalyptus Timber Harvest, 28 1 Million Cubic Meters 8 6 4 2 Brazil Chile Australia Uruguay Argentina 12

Future Forestry Finance 21 Brazil is also the leader in softwood timber harvest in South America, but Chile is not far behind Industrial Roundwood Harvest in South America, Softwood 28 Other.4% Colombia.7% Argentina 7.2% Brazil 54.8% Venezuela 2.2% Uruguay.6% Chile 33.9% 13 The softwood timber harvest in New Zealand and Australia trails both Brazil and Chile 6 Softwood Timber Harvest, 28 5 Million Cubic Meters 4 3 2 1 Brazil Chile Australia New Zealand 14

Future Forestry Finance 21 The Brazilians have not yet poured their efforts into breeding programs for pine as they have for eucalyptus...with a few exceptions 15 Uruguay has been the leading log exporter from South America in recent years, primarily pulplogs 6 Log Exports from South America, 28 5 Thousand Cubic Meters 4 3 2 1 Uruguay Guyana Ecuador Chile Argentina Colombia Other 16

Future Forestry Finance 21 One area where New Zealand and Australia are ahead of South America Thousand Cubic Meters 1 9 8 7 6 5 4 3 2 1 Log Export Volume in 29 South America Australia New Zealand 17 Uruguay also exports FSC certified eucalyptus sawlogs, primarily to Vietnam Thousand Cubic Meters 14 12 1 8 6 4 2 Uruguay Eucalyptus Sawlog Exports, 23-29 Volume Unit Value 12 1 8 6 4 2 US$ per Cubic Meter, FOB 23 24 25 26 27 28 29 18

Future Forestry Finance 21 Although log exports are minimal, S. America has become an important source of woodchip exports Woodchip Exports from South America, 2-29 6 Thousand BDMT 5 4 3 2 1 Chile Brazil Uruguay Argentina Ecuador ** ** = NZ + Australia 2 21 22 23 24 25 26 27 28 29 19 Brazil and Chile are the dominant exporters of wood products from South America 3 Wood Products Export Value, 28 25 2 Million US$ 15 1 5 Brazil Chile N Zealand Australia Uruguay Argentina Peru Ecuador Paraguay Bolivia Colombia 2

Future Forestry Finance 21 and Brazil and Chile are also the dominant exporters of pulp and paper 7 Pulp and Paper Export Value, 28 6 5 Million US$ 4 3 2 1 Brazil Chile Australia New Zealand Colombia Argentina Uruguay 21 Forest products export value from Brazil, Chile, and Australia was about 22% lower in 29 than in 28; in New Zealand, exports were down only 7% 8 Forest Products Export Value, 29 Million US$ 7 6 5 4 3 Paper Pulp Wood Products 2 1 Brazil Chile Australia New Zealand 22

Future Forestry Finance 21 In general, Brazil tends to be much more heavily dependent on the US market for wood products, while Chile maintains more diverse export markets 6 Brazil and Chile: Percent of Softwood Lumber Exports by Destination, 28 5 4 Brazil Chile 3 2 1 USA Oth Lat Am Europe Asia Mid East/ North Africa Other 23 Foreign ownership of plantation forests in South America ranges from 4% in Chile to 69% in Uruguay Foreign Ownership of Plantations, 29 Venezuela Uruguay Paraguay Ecuador Colombia Chile Brazil Argentina % 1% 2% 3% 4% 5% 6% 7% 8% 24

Future Forestry Finance 21 South American countries have not done well in recent third party ratings on Corruption and Ease of Doing Business Corruption Perception Index Ease of Doing Business Rankings New Zealand 1 New Zealand 2 Australia 8 USA 4 USA 19 Australia 9 Chile 25 Colombia 37 Uruguay 25 Chile 49 Brazil 75 Peru 56 Colombia 75 Guyana 11 Peru 75 PNG 12 Suriname 75 Uruguay 114 Argentina 16 Argentina 118 Bolivia 12 Paraguay 124 Note: PNG Guyana 126 Brazil 129 included for Ecuador 146 Ecuador 138 reference Paraguay 154 Suriname 155 PNG 154 Bolivia 161 Venezuela 162 Venezuela 177 Source: Transparency International Source: World Bank 25 Of the foreign-owned forest plantations in South America, about 2/3 are owned by manufacturing companies and 1/3 by financial investors (e.g. TIMOs) 16 Foreign Ownership of South American Plantation Forests, 29 14 Thousand hectares 12 1 8 6 4 2 Forest Industry FInancial Investors 26

Future Forestry Finance 21 Most (84%) of foreign investment in plantations by the forest industry has been focused in Brazil and Uruguay; about 4% is owned by Chilean companies 7 6 Foreign Investment in South American Plantation Forests by Forest Industry, 29 Overseas South American Thousand Hectares 5 4 3 2 1 Argentina Brazil Chile Colombia Uruguay Venezuela 27 Financial investors have also been primarily attracted to Brazil and Uruguay, with investments in Brazil growing most rapidly in 29-21 Plantation Forest Ownership by Foreign Financial Investors, 29 Uruguay 37.9% Argentina 6.% Ecuador 4.1% Colombia.4% Chile 7.6% Brazil 44.% 28

Future Forestry Finance 21 Based on planted area under management, GFP is the leader amongst TIMOs in South America, followed by Brookfield, then RMK and GMO RMK 7% Major Foreign Financial Investors in South American Plantations, Percent of Planted Forest Area, 29 Phaunos 2% GEF 4% Other 15% GFP 44% RMS 3% Brookfield 12% Harvard 6% GMO 7% 29 Pine sawlog prices have been remarkably stable in Chile for over a decade; Brazil s have been relatively stable since late 25 1998 Q1 = 1., Domestic Currency 5 4.5 4 3.5 3 2.5 2 1.5 1.5 Chile and Brazil: Pine Sawlog Price Index, 1998-29 Brazil 98-1Q 99-1Q -1Q 1-1Q 2-1Q 3-1Q 4-1Q 5-1Q 6-Q1 7-Q1 8-Q1 9-Q1 Chile 3

Future Forestry Finance 21 It isn t just timber...there has been a lot of recent investment activity with biomass energy in South America Chile has a national renewable energy standard, and projects are being developed to use even native forest wood to replace coal. Arauco already is using nearly 6 million tonnes of residues for biomass energy production. Uruguay a number of new biomass energy projects, including some by Weyerhaeuser and Four Winds, replacing expensive, imported, greenhouse gas-emitting fossil fuels. Paraguay --- Dedicated biomass (eucalyptus) plantations developed by Copetrol.account for roughly half the plantations in the country! But Brazil has more commercial wood energy plantations than the rest of the world combined... 31 Many new plantation projects are being developed in Brazil, tying timberland investments with bioenergy markets just a sample: COTRENE Interagrícola AgroBrasil Florestal Bunge and partners Nemus Forest Systems Phaunos Timber Fund Greenwood Management Global Forest Partners Timber Capital Bio Timber Brazil Claritas/Corus Cambium Global Timberlands Ramires Reflorestamentos Carvovale Green Par do Brasil Vale Florestar Amazonia Bertí Florestal Agri-Logic RMK Brookfield Asset Management Timber Value 32

Future Forestry Finance 21 Silvo-pastoral investments...ranchers swear their cattle gain more weight if plantation (eucalyptus) shade is available 33 Soybeans + Eucalyptus...some interesting agroforestry investments developing in Brazil 34

Future Forestry Finance 21 Conclusions Brazil dominates South America s plantation forest area and forest products production and exports, and has attracted the largest share of foreign investment. Brazil also presents the greatest number of opportunities for new investment, in both the forest industry and plantation development. Chile is the second most important country in South America, but the industry is dominated by two domestic companies. Uruguay has attracted an unusually large share of foreign investment, given its size and lack of forest industry. Other countries have a long way to go to attract foreign investors, and perceptions of corruption and country risk remain strong across much of the continent. 35 Questions? Bob Flynn Director, International Timber, RISI Phone: 1-253-565-4846 Email: rflynn@risiinfo.com Web site: www.risiinfo.com 36

Future Forestry Finance 21 EL CERRO For more information on South American plantation forestry, see RISI s 29 publication South American Tree Farm Update: Opportunities for Investment in Forest Industry and Biomass Energy Plantations, www.risi.com/satreefarm Photo courtesy of Evan Shield E. grandis in northern Uruguay October 27 : Age 13.6 Years Mean D.B.H.O.B. ca. 43 cm. 37