October 2010

Forestry industry

Investment opportunities in Uruguay

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1. Why invest in the Uruguayan forestry industry?

1.1. Attractive features of the country’s forestry industry

Uruguay is located at the same latitude as other major forestry developments in the southern hemisphere. Uruguay’s climate is similar to that of Australia, New Zealand, South Africa and the central regions of Argentina and Chile and features weather and soil characteristics that ensure very good levels of competitiveness on an international scale. For example, the rapid growth of Eucalyptus plantations enable shorter felling frequencies (starting from nine years) to provide proper quality levels for the final product.

Uruguay has a stable legal framework that is beneficial for investments in the industry and has a national good practices code for forestry to achieve sustainable production and to meet international requirements.1

The country features a suitable road network that enables connections to major production centers and staging areas at major ports.

Agriculture, forestry and pasture development are promoted to integrate management and development of forestry with livestock raising and agriculture activities. This enables a diverse range of products and staggered income: livestock, seed, harvesting and forage reserves in the short term, and quality wood in the medium and long term.

The sector has a 20-year history and qualified labor is available. Exports currently account for 13% of the country’s total exports.

Currently, 960,000 hectares of forestry plantations account for 5% of the national territory. However, only 24% of the area declared as forestry priority has been planted.

High quality wood is produced on Uruguayan plantations and is used for cellulose pulp production as well as for solid wood products.

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The National Good Practices Code for Forestry was passed in 2004. It was created by a working group consisting of

members from the National Forestry Bureau, the Labor and Social Security Inspector General, the National Environment Bureau, the National Institute for Agro-Livestock Research, the Forestry Department of the Agronomy College, the Association of Agronomists of Uruguay, the Association of Forestry Contractors of Uruguay and the Society of Forestry Producers. It can be found at http://www.mgap.gub.uy/Forestal/cod_fores.pdf.

08 Otoño

“The basic forestry complex in Uruguay has had strong growth over the past 15 years in all variables. Extraction, production, consumption and trade have grown and the productive chain has advanced to the extent that forests have matured. Likewise, the degree of differentiation of exported products has increased, as has access to larger and different markets.”

Source: 2009 Yearbook of the Office of Agro-Livestock Programming and Policy (OPYPA) at the Ministry of Livestock, Agriculture and Fishing.

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1.2. Attractive features for business

Suitable natural, geographic, economic, political and business environment characteristics. Uruguay outstands among other Latin American countries for its economic freedom and security.

Attractive cultural and educational conditions, including the use of several languages in addition to Spanish. Advanced communications and connectivity infrastructure.

Foreign investment receives the same treatment as domestic investment. Foreign investors do not require permits or prior authorizations. Local companies may be 100% foreign owned. Uruguay has agreements for the promotion and protection of investments with 27 countries, including Spain, United States, Finland, France and the United Kingdom.

There are no restrictions on the repatriation of capital, profits, dividends or interest. The currency exchange market is open and there are no limits on foreign currency trading. Investments can be made in any currency.

There are no restrictions on hiring foreign staff (except for companies located in Free Zones where 75% of employees must be local). Residency permits can be obtained in three months and anyone who has entered the country legally can obtain one and start working even during the request process. Citizens from most western nations do not require visas to visit the country.

A strategic geographic location at the heart of MERCOSUR (free trade area between Argentina, Brazil, Paraguay and Uruguay) and near Chile and Bolivia, with excellent river, sea, highway and air connections.

An attractive legal framework for trade that allows the use of individual enclaves or a combination of various modalities (Free Zones, Free Ports, Free Airport regimes and Bonded Warehouses), where no customs duties or taxes are due on imports or exports.

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2. Forestry industry in Uruguay

2.1. Major features The forestry industry in Uruguay consists of various activities that range from seed and seedling production to the final shipment of finished products. The sector includes at least four industrial chains: cellulose and paper, finished wood (treated round wood, sawn wood, boards, carpentry for construction, furniture, moldings, etc.), the chemical industry (resins, essential oils, bioplastics, etc.) and energy. Forestry activities, as well as the extraction and development of wood products, accounted for 3.8% of Uruguayan GDP in 2009. Activities in the forestry industry include:

Agriculture (forestry), which includes the production of reproductive material and seedlings in nurseries, tree planting and intermediate treatment for forests and harvesting.

Manufacturing activities.

Transport and logistics.

Figure 1: Forestry industry activities

AC

TIV

ITY

Agricultural Nurseries and reproductive material

Planted and native forests

Manufacturing

Mechanical transformation

Sawmills

Carpentry for construction

Boards

Chips and pellets

Panels

Cellulose - paper Pulp

Paper and cardboard

Energy

Logistics and transportation

Source: Uruguay XXI.

The Uruguayan forestry industry is characterized by a strong vertical integration that covers agricultural and industrial activities and all intermediate processes through the final sale of products. Some large export companies supply themselves with a large portion of raw materials in comparison to others that buy raw materials from third parties. The largest sawmills use mainly domestic raw materials and direct production towards foreign markets, while smaller mills focus mainly on the domestic market.

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Paper manufacturers produce both for foreign and domestic markets. These companies have their own pulp production mills for in-house supply for the paper production process. Electricity generation from forestry residue (biomass) is among the activities related to the industrial phase that became more relevant and have significant future prospects due to the increase in raw material supply and State policies in the area. Currently, some sector companies have electricity generation plants that use biomass. For example, UPM generates 110 MW with 32 MW of excess for the national grid. Bioener (a Urufor company) has a 12 MW capacity, while Weyerhaeuser has an installed capacity of between 10 to 12 MW. There are other examples as well.

2.2. Current legislation2

Plantations and other activities linked to forestry activities are regulated under law 15,939 dated 28th of December 1987 and regulatory decrees. This law establishes that natural and artificial forests in forestry priority areas declared as “protective” and “yielding”3 included in “quality wood projects” determined by the Ministry of Livestock, Agriculture and Fishing (MGAP), enjoy the following tax benefits:

Income derived from exploitation is not included in the calculation of Corporate Income Tax (IRAE).

Value or size of forestry priority areas will not be considered for the determination of the taxable amount of Wealth Tax (IP).

Exemption from rural real estate taxes (tax on land).4

To receive the aforementioned benefits, the Forestry Bureau (DGF) of the MGAP must approve the management and organization plan for the exploitation and regeneration of forests. Any modification of the management and organization plan must be previously approved by the DGF.

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Law 15,939 is available at http://www.mgap.gub.uy/Forestal/15.939.htm. Decree 220/06 dated 10 July 2006 is

available at: http://www.mgap.gub.uy/Forestal/DECRETO%20220_006%20Modificacion%20Decreto%20191_06.pdf. 3

In accordance with law 15,939, protective forests are defined as those that have the basic objective of conserving the

soil, water and other renewable resources. Yielding forests have the basic objective of wood productions and are of special national interest due to their location or type of wood or other forestry products that can be obtained from them. 4

Law 18,245 dated 27 December 2007 is available at:

http://www.mgap.gub.uy/Forestal/Ley18245ContribucionInmobiliariaRural.mht.

“Electricity generation from biomass will have sustainable growth due to its competitiveness and its alignment with Uruguay’s energy policy in terms of the incorporation of biomass energy to the energy matrix. By 2015, it is expected that 200 MW of biomass electricity from private investments will be incorporated.”

Source: Cellulose-Wood Forestry Complex (2008). Value Chains (I), Productive Board.

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2.3. Forested area

Map 1: Forestry priority soils - 2009

Source: Pike Consultora Forestal. Forestry activities in the country have grown in a sustained manner over the last 20 years. Despite being a relatively young sector, over the years the surface area has risen 30 times to approximately 950,000 hectares by 2010.5 In addition, some 750,000 hectares of native forest exist in the country, leading to a total forested area of 1.7 million hectares approximately. The total area deemed of forestry priority covers 4 million hectares,6 some 23% of the total agriculture-livestock area of the country (see Map 1). The type of soil, the climate and the distance to production departure points has an effect on forestry plantation

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Source: “Monitoring of Forestry Resources, National Forestry Inventory,” August 2010. This work is the result of the

first stage of national forestry inventory. In this stage, 26% of the total area of inventoried forests was studied. Of a total of 4,769 sample points proposed for all of Uruguay, 1,242 sample sites have been installed and studied, which represents an inventoried forested area of nearly 450,000 hectares. 6

Decree 191/006, available at http://www.mgap.gub.uy/Forestal/ModificacionDecreto452_988de16_06_06.pdf.

Major highways Secondary highways Forestry priority areas

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characteristics. This divides the country into three regions in accordance with criteria established by the DGF:

South-East Region: departments of Colonia, Flores, San José, Florida, Canelones, Montevideo, Lavalleja, Maldonado and Rocha.

North Central Region: departments of Artigas, Rivera, Tacuarembó, Durazno, Cerro Largo and Treinta y Tres.

West Region: departments of Salto, Paysandú, Río Negro and Soriano. The South-East region is closest to the port of Montevideo, favouring the departure of forestry products by sea. The area is strongly influenced by the sea, with an absence of extreme temperatures. This has led to a better adaptation of species sensitive to extreme temperatures, such as Eucalyptus globulus. The main purpose of plantations in this area is pulp production. Therefore the production cycle is short and requires little trimming.

The North Central region is the largest forested area with 46% of the total artificial forests in Uruguay.

This area has frosts in winter and higher temperatures in summer, and due to its sandy soil, it is appropriate for Eucalyptus grandis and Pinus species. Wood in this region is mainly produced for mechanical transformation.7 Major departure points for wood production from this region depend on product location and type and include Paysandú, Fray Bentos and Montevideo.

The West region also has frosts in winter and sandy loam to sandy soils. In this region, plantations of the Salicaceae, Eucalyptus and Pinus species coexist. These have a slightly lower yield in this area as compared to the northern region. The main destination for production from this area is wood pulp.8 Ports and bridges used for forest product transport include Fray Bentos, Nueva Palmira and Paysandú. Table 1: Total forested area and forestry priority area per region, in thousands of hectares - 2010

Region Departments Forested area as of August

2010

Forestry priority area

Forestry priority area available for

planting

North Central Artigas, Rivera, Tacuarembó, Durazno, Cerro Largo and Treinta y Tres

436 2,177 1,741

West Salto, Paysandú, Río Negro and Soriano

246 633 387

South-East Colonia, Flores, San José, Florida, Canelones, Montevideo, Lavalleja, Maldonado and Rocha.

287 1,304 1,017

Total 969 4,114 3,145

Source: Uruguay XI based on data from DGF of MGAP and Pike Consultora Forestal.

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This basically corresponds to the commercial strategy of the main companies of the region, such as Weyerhaeuser,

GFP, GMO and COFUSA. 8

By UPM.

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Most of Uruguay’s plantations are of the Eucalyptus and Pinus genera. 70% of the country’s total forested area corresponds to the Eucalyptus genus (with a majority presence of three subspecies), followed by Pinus with 28% of said area, leaving 1% of the Salicacea family.

Table 2: Species type according to region

Region Department Pinus Eucalyptus

grandis Eucalyptus

globulus

Other Eucalyptus

and Salicacea Total

North Central

Artigas, Rivera, Tacuarembó, Durazno, Cerro Largo and Treinta y Tres

43% 23% 26% 8% 100%

West Salto, Paysandú, Río Negro and Soriano

19% 42% 28% 11% 100%

South-East

Colonia, Flores, San José, Florida, Canelones, Montevideo, Lavalleja, Maldonado and Rocha

14% 6% 69% 11% 100%

Source: Uruguay XXI based on data from the DGF of MGAP.

2.4. Extraction and production Wood extraction in Uruguay had a strong growth until 2008, from 5.7 million m3 in 2005 to 9.4 million m3 in 2008. Due to the decline in global demand and a drop in export prices since the 2008 international crisis, extraction volumes in the country fell to 8.4 million m3 in 2009. This decline is tightly linked to the decline in wood extraction for pulp production. A decline was also registered in chip production, and to a lesser degree, in sawn wood and boards. Specifically, the decline in wood chip production was due to the fact that the main purchasers of this product, Japan and Finland, made no purchases in 2009. This may be associated to the temporary closure of some pulp mills due to the international crisis.

Table 3: Round wood extraction volume

ROUND WOOD EXTRATION (1,000 m3)

Product 2005 2006 2007 2008 2009

1 – WOOD FUEL, INCLUDING WOOD FOR CHARCOAL 1,973 2,111 2,062 2,210 2,210

2 – INDUSTRIAL ROUND WOOD (BULK WOOD) 3,729 4,254 5,111 7,230 6,173

Pieces for sawmills and boards 580 734 1,168 1,150 1,030

Pulp wood (round wood and split wood) 3,128 3,497 3,929 6,080 5,143

Other industrial round wood 21 23 14 0 0

TOTAL WOOD (1+2) 5,702 6,365 7,173 9,440 8,383

Source: Forestry Bureau (MGAP).

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Table 4: Production volume of wood-derived products

PRODUCTION FOR DOMESTIC CONSUMPTION AND EXPORTS

Product 2005 2006 2007 2008 2009

CHIPS (1,000 m3) 1,298 1,383 1,280 2,283 1,143

SAWN WOOD (1,000 m3) 268 293 308 284 264

WOOD BOARDS (1,000 m3) 3 50 162 175 142

PAPER AND CARDBOARD (1,000 metric tons) 113 113 107 107 101

WOOD PULP (1,000 metric tons) 34 34 50 1,129 882

Source: Forestry Bureau (MGAP) and National Customs Bureau of Uruguay.

2.5. Export sector9

Forestry accounted for 13% of Uruguay’s total exports in 2009 and has significant prospects for future growth. Despite the fact that the 2008 international crisis caused a drop in sector exports both in volume and value, exports still exceeded US$ 700 million in that year. For 2010, 2008 export values should be achieved or exceeded (US$ 1,200 million). The main export product of the industry was wood pulp (68% of the total), followed by wood chips (11%).

Chart 1: Forestry product exports in 2009 – US$ millions

Source: Uruguay XXI based on data from the Customs Bureau of Uruguay.

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See Appendix 2 for a table indicating the major export destinations of the sector in 2009.

10%

3%

11%

4%

5%68%

Paper and cardboard

Round wood

Chips

Sawn wood

Wood boards

Wood pulp

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Chart 2: Forestry product export performance – US$ millions10

2005 2006 2007 2008 2009

Paper and cardboard 54 56 52 66 69

Round wood 57 75 93 36 24

Chips 61 72 67 163 79

Sawn wood 23 28 30 30 26

Wood boards 1 0 34 47 32

0

20

40

60

80

100

120

140

160

180US$ millons

Source: Uruguay XXI based on data from the Customs Bureau of Uruguay.

Chart 3: Forestry sector export performance - thousands of metric tons11

2005 2006 2007 2008 2009

Round wood 1194 1492 1440 418 289

Chips 949 1087 984 1676 847

Sawn wood 96 98 90 72 59

Wood boards 1 33 75 88 73

0200400600800

10001200140016001800

Thousands of tons

Source: Uruguay XXI based on data from the Customs Bureau of Uruguay.

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Note: the chart does not include wood pulp as its values are outside the scale used. These values are presented in

Chart 4. 11

Note: idem.

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Chart 4: Wood pulp export performance12

Source: Uruguay XXI based on data from the Customs Bureau of Uruguay.

2.6. Logistics

2.6.1. Strategic geographic location in South America's southern region (Argentina, Bolivia, Brazil, Chile, Paraguay and Uruguay)

There are seven ports in Uruguay, two of which have ocean access: Montevideo and Nueva Palmira. Nueva Palmira specializes in bulk cargo, while Montevideo works mainly with containers.

The seaway consisting of the Paraná, Paraguay and Uruguay rivers facilitates river access for products to and from Asunción (Paraguay), Rosario and Santa Fe (Argentina) and eastern Bolivia (department of Santa Cruz). Both Nueva Palmira and Montevideo offer ocean-going access for this seaway.

An extensive highway network joins Montevideo to the region's major cities, facilitating truck transport. Three bridges on the Uruguay River connect the country to Argentina at the cities of Salto, Paysandú and Fray Bentos. Connections to Brazil are available at land border crossings at the cities of Bella Unión, Rivera, Río Branco and Chuy.

Approximately 57% of national highways are in very good condition and the Ministry of Transport and Public Works (MTOP) intends to raise this figure to 80% over the next five years. Likewise, MTOP plans to implement a monitoring and follow-up system for cargo transport through GPS technology.

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Export volume data was provided by the National Customs Bureau of Uruguay and average prices used were taken

from FAOSTAT. 2007: US$ 703/ton. 2008: US$ 790/ton. 2009: US$ 536/ton.

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867

48018

1097

852

0

200

400

600

800

1000

1200

2007 2008 2009

US$ Million Thousands of tons

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2.6.2. Upcoming investments in the industry

The departmental highway network is vital for forestry industry transport. As such, MTOP will invest US$ 7.3 million in the coming years for forestry roadway maintenance (construction, reconstruction and maintenance of departmental forestry corridors).

In 2010, Montevideo will have a modern terminal specializing in bulk cargo. Obrinel, a company established by the Christophersen and Saceem companies, will start construction at the end of 2010 and will later have a 20-year concession of a new terminal for wood chips and agro-industrial products in the port. The terminal will have a storage capacity for 160,000 metric tons of grain in silos and 80,000 metric tons of wood chips in staging areas.

The government’s objective is to turn Uruguay into a “Regional Logistics Pole” by 2030. The following major projects are planned:

o Development of commercial ports: in the La Paloma ocean port (in the department of Rocha on the Atlantic coast), piers are to be rebuilt to enable 300,000 metric tons of cargo movement annually. This will be of vital importance for wood exports from the eastern region of the country. In accordance with this objective, the port of Paysandú is already undergoing pier and dredging work to enable wood transport via river.

o Complementary investments to the actual Port of Montevideo (Puntas de Sayago): a National Port Administration´s Project includes the creation of a Logistics Port on a 103-hectare site in Puntas de Sayago, a coastal area near the Port of Montevideo. Work is being done to create a “strategic logistics center” based on the creation of a Free Port Area, a Free Zone Area and a third area for manufacturing. The project will entail the construction of highways, railway lines and a barge line to connect to the port, and will also serve as a warehouse for merchandise and containers in transit.

o The government has stated its intention to refurbish railway infrastructure. 1,200 kilometers of railway will be repaired with a required investment of US$ 300 million. It is expected that with the improvements, railway lines will be able to transport 3.5 million metric tons of cargo per year.

2.7. Recent investments in the forestry industry13

The forestry industry has seen explosive growth over the last few decades, attracting more than US$ 2,200 million in investments by world leaders in forestry products and domestic companies. These companies are linked to wood extraction and the industrial phase (boards, fibers, solid wood products, wood pulp, energy generation, etc.) The following are some of the major companies operating in Uruguay:

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Source: Wood pulp – wood forestry complex (2008). Value Chains (I), Productive Board. Forestry Agenda 2009. Rosario Pou & Asociados. Websites: www.upmuruguay.com.uy; www.weyerhaeuser.com; www.montesdelplata.com.uy; www.cofusa.com.uy; www.urupanel.com; www.af.com.uy; www.geosylva.com; www.harvest.com.uy; www.agrifox.com.uy.

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UPM

The UPM Company of Finland is one of the largest wood pulp manufacturers in the world. In 2009, UPM acquired the major portion of shares in Botnia S.A., which began operations in November 2007.

It is located on the shores of the Uruguay River, four kilometers north of the city of Fray Bentos. Production capacity is one million metric tons per year of bleached pulp from Eucalyptus short fiber. Pulp exports are shipped by barge from the mill to the deep water port at Nueva Palmira, and transferred to transoceanic ships for shipments to Europe and Asia. The company has a subsidiary company, “Compañía Forestal Oriental S.A.”, that provides most of the wood for the cellulose pulp production process (nearly 70% of raw materials comes from company owned forests).

WEYERHAEUSER

Weyerhaeuser, a U.S. company, is one of the largest forestry and wood companies in the world. It has operations in 13 countries and employs over 18,000 people worldwide.

Weyerhaeuser set up in Uruguay in 1996 by purchasing part of the shares of Colonvade S.A. In 2001, the company expanded its assets with the purchase of Los Piques S.A. from the West Fraser Timber Company of Canada and Associates. In 2006, Weyerhaeuser Uruguay was established and in 2007, the company obtained 100% of assets of the Colonvade S.A. and Los Piques S.A. companies.

Weyerhaeuser performs various activities in the sector, from plantations to tracking of final products. The company has 143,000 hectares of forested area as follows: 78,500 in Rivera-Tacuarembó and 64,500 in Cerro Largo-Treinta y Tres.

The company has a plywood factory in the department of Tacuarembó (Weyerhaeuser Productos S.A.) that is forecasted to produce 140,000 m3 of product this year and 310,000 m3 by 2011. It also has an electricity generation plant that is fed by sub-products of its own production process. The plant’s generation capacity is 12 megawatts and the company’s consumption needs are between five and six megawatts. The remainder can be sold to the government electricity distribution company.

“Botnia has developed a cellulose and forestry project in Uruguay. The reasons why Botnia decided to set up in Uruguay are the weather conditions, which are good for establishing and developing Eucalyptus plantations, and good human resources to develop and manage capital intensive projects. Uruguay has offered very clear and stable rules for investment. Since 1987, when the forestry law was approved in Uruguay, various administrations have left stable conditions for forestry development, and this has been very beneficial for the establishment of plantations.” RONALD BEARE, General Manager for Botnia Uruguay, which has invested approximately US$ 1,400 million. 2009.

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ARAUCO and STORA ENSO

Arauco (of Chile) and Stora Enso (of Sweden and Finland) companies have decided to increase their forestry activities in Uruguay by doubling forestry assets through Montes del Plata, a joint venture. The purchase of most of the assets in Uruguay of the ENCE Company of Spain has led to total forestry assets of approximately 250,000 hectares of land, of which 136,000 are forested. The transaction amount totaled US$ 344 million. Currently, the group is carrying out a feasibility study for a pulp mill in Punta Pereira on the shores of the La Plata River.

COFUSA (Compañía Forestal Uruguaya S.A.) and URUFOR

These companies produce, process and sell high quality Eucalyptus grandis wood. Both companies are located in northern Uruguay and are part of the same business group. At its industrial plant, Urufor processes sawtimber from COFUSA plantations to produce high quality sawn wood. The products are used for diverse applications to satisfy domestic and international market needs. Products are used for furniture, kitchens, moldings, construction materials, doors and windows. Today, Urufor exports to more than 15 countries in Asia, the Americas and Europe. Industrial investments have been revealed for an amount of US$ 25.8 million plus US$ 17 million for electricity generation.

URUPANEL

Urupanel is a Chilean company located in northern Uruguay. It began operations in 2004 and today has more than 500 employees. It is one of the top exporters of plywood in the country. Urupanel invested US$ 56 million in 2004 and US$ 20 million in 2007 for the installation of a new industrial plant to manufacture MDF plywood boards. The plant opened in 2009. In that year, exports in this area totaled US$ 30 million and of that total, 58% of products were exported to Mexico.

GLOBAL FOREST PARTNERS LP (GFP)

GFP firm makes and administers forestry investments for institutional investors. Currently, the fund manages a portfolio totaling more than US$ 2,000 million. GFP operates in Chile, Brazil, New Zealand, Australia, Singapore and Uruguay. Today, the company operates in Uruguay with four funds with investments of about US$ 150 million.

“Uruguay has exceptional conditions for fiber plantations and its forestry sector is developing rapidly. We are very satisfied for being able to participate in this project together with Stora Enso.” MATÍAS DOMEYKO, Arauco CEO.

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GMO RENEWABLE RESOURCES

GMO Renewable Resources is a U.S. company in Uruguay since 2001. GMO administers investment funds that have a branch (Renewable Resources) dedicated exclusively to forestry investments. Currently, the company administers three investment funds. The assets (plantations) are in northern Uruguay (departments of Rivera, Tacuarembó and Cerro Largo) with 37,000 hectares, of which 25,000 are planted. A total of US$ 90 million has been invested.

RMK TIMBERLAND GROUP

RMK Timberland group, established in 1981 in Georgia, U.S.A., is an investment fund focused exclusively on the forestry business. It operates as the commercial unit of Regions Morgan Keegan Trust and Morgan Asset Management. Its objective is the development of investment funds and general management of forestry resources in various regions in the world. The group began activities in Uruguay in 2005 with the creation of the Southern Cone Timber LLC fund and the establishment of Taurion S.A. Later, the group added plantation management with the Criollo Madera company (Monte Fresnos S.A.) and Bosques del Sur (Ponte Tresa S.A.). Wood production by these companies is used for cellulose pulp, sawn wood, energy and other uses for the domestic market and exports. Total assets of RMK in Uruguay are approximately 40,000 hectares, of which about 62% corresponds to forestry plantations located mainly of forestry priority lands.

Other companies:

PHAUNOS TIMBER FUND LIMITED: Phaunos is a British fund operating in Uruguay through Pradera Roja S.A, Caldrey S.A. and Aurora Forestal Limited companies. Pradera Roja S.A. owns 12,000 hectares of Eucalyptus plantations for the supply of cellulose pulp mills and sawn wood markets. A total of US$ 30 million has been invested up to the present date. Caldrey S.A., located in southern Uruguay, focuses on services to increase forestry productive capacity. A total of US$ 5 million has been invested. Aurora Forestal Limited focuses on planting mixed-age pine trees in Uruguay. The company has 19,500 forested hectares in the department of Rivera and performs operations in a sawmill in the department of Tacuarembó. Investments total US$ 35 million.

NEVOPARK: Nevopark Company invested US$ 7 million in 2007 for the installation and operation of a splitting mill to supply domestic and foreign demand for wood chips.

“In our judgment, all the conditions we expected to be able to invest were met. First, institutional security, with a clear forestry policy that is independent of administrations. Second, the country’s human resources. And third, the long-term vision for the sector in Uruguay.” ALBERTO VOULMINOT, Forestry Investment Director at GFP. 2009.

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CHIPPER: Chipper Company was born from the association of Foresur and Grupo Forestal companies in 2004. The Chipper Company has 40,000 hectares of Eucalyptus globulus plantations and a chipping mill capable of processing 470,000 BDMT (sales measurement unit equivalent to one ton of dry fiber). Investments made in the chip production mill in Montevideo totalize US$ 2.6 million. Production is exported to Japan, Sweden and Finland.

IPUSA: IPUSA is a domestic paper company that was acquired in 1994 by CMPC Holding Company of Chile. IPUSA Company invested US$ 1.4 million in 2006 and US$ 939,000 in 2007 for the construction of two paper manufacturing machines, round wood conversion lines, napkin conversion and institutional consumption product conversion.

AGRIFOX S.A.: Agrifox is a Uruguayan forestry company that has plantations in central and northern Uruguay. It began activities in Uruguay in 2005 and focuses on harvesting and exporting round wood. Major export destinations are Vietnam, China, India and the Philippines.

FORESTAL CAJA BANCARIA: Forestal Caja Bancaria began forestry activities in 1964, when it acquired 6,000 hectares in Paysandú for pine and eucalyptus plantations. Currently, the company carries out forestry, industrial and livestock activities on 18,000 hectares. In 2008, the company invested US$ 2.7 million in the construction of a new sawmill, expanded drying chambers, mobile machinery and improvements in the area of influence. The company has a sawn wood capacity of 100,000 m3 of round wood per year and a drying capacity of 20,000 m3 per year.

Industry-related service companies include:

PIKE CONSULTORA FORESTAL: Founded in 2002, Pike offers complete consulting services for forestry projects. Activities include: industrial opportunity evaluation studies, plantation valuations, wood availability reports, environmental impact evaluations, FSC certification and forest fire prevention plans.

AGROEMPRESA FORESTAL: A domestic company located in northern Uruguay, Agroempresa Forestal offers consulting services, plantation administration, planting services, brush control, ant control, pruning, etc.

GEOSYLVA: Starting activities in 2002, Geosylva Company works in forestry consulting, sales and services that include executive investment projects, business plans, forestry project evaluation, quality control, auditing, training for forestry management and chain of custody.

HARVEST: A joint venture between Phaunos Timber Fund Limited (PTFL) and Union Capital Group (UCG), Harvest Company offers services to the domestic forestry industry, mainly mechanized harvesting through a clear cutting system with processors, self-loading tractors and loaders.

CARBOSUR: Carbosur is a Uruguayan company founded in 2000. It offers specialized services in the area of climate change, with an emphasis on mitigating this global

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environmental problem. The company specializes in greenhouse gases inventories and offers emission inventory services and carbon footprint estimates for companies and their products. Carbosur has strategic alliances with Pike Consultora Forestal (Uruguay), Factor CO2 (a Spanish company specializing in climate change), Maradei Pike (Argentina) and two Guatemalan organizations (Energía y Medio Ambiente and Fundación Naturaleza para la Vida). It is also a member of Markit, one of the main registries for the creation and sale of carbon certificates.

MUNDIAL FORESTACION: Mundial Forestación is a Uruguayan company focused on producing Eucalyptus globulus genetic material. The company has a capacity for 30 million plants, seeds and clones and is one of the largest nurseries supplying the national market. According to company director Rogerio Aguiar, “traditional plantations of Eucalyptus globulus in Uruguay yields around 12 to 17 m3 per hectare per year. Using clones enables the possibility of doubling this production, adapting each clone to local conditions, while improving wood quality and allowing the identification of the most resistant ones to disease and the consequences of climate change.”

2.8. Industry perspectives

2.8.1. Global industry perspectives

Increase in world demand for wood products. Global demand for industrial round wood is forecasted to reach 2,164 million m3 per year by 2020.14 In 2005, demand was 1,683 million m3.

14 Source: State of the World’s Forests, 2009 – FAO.

“Financing of carbon bonds is a valuable instrument for promoting forestry plantations and for the incorporation of changes in forestry system management. One of the most well-known mechanisms is the Clean Development Mechanism (CDM) that obliges developed countries to reduce their greenhouse gas emissions. As such, a company that reduces CO

2 emissions can benefit by selling these

bonds to companies in developed countries, which are obligated to lower their greenhouse gas emissions. In Uruguay, UPM and Posco Uruguay S.A. are examples of companies that have already used the CDM in their investments. Nevertheless, there are other carbon financing systems, some of which are particularly advantageous for forestry projects. The most well known is the Voluntary Carbon Standard (VCS)*, which at a global level has had a strong impact over the past two years.”

Source: Daniel Martino, Director of the Carbosur company.

* The Voluntary Carbon Standard (VCS) was developed by The Climate Group, the International Emission Trading Association (IETA) and the World Business Council for Sustainable development (WBCSD), among other organizations, to establish standards and offer credibility to the voluntary emission reduction market.

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Major factors affecting long-term global demand for wood products:

Demographic changes: the world population is expected to increase from 6,400 million in 2005 to 7,500 million by 2020 and 8,200 million by 2030.

Continuing economic growth: global GDP rose from US$ 16 trillion in 1970 to US$ 47 trillion in 2005 (at 2005 prices and exchange rates), and is forecasted to increase to US$ 100 trillion by 2030.

Regional changes: from 1970 to 2005, most of GDP corresponded to developing economies. However, the rapid growth of developing economies, especially Asian economies, will lead to notable changes over the next 25 years.

Environmental policies and regulations: more forests will be excluded from wood production.

Energy policies: the use of biomass, including wood, is rising rapidly.

Other important factors for the future of wood products include: the decline of natural forest harvesting, conversion of planted forests, technological advances, increase in plantation productivity through improved genetics, decline in wood required due to increases in recycling, the wider use of compound products and production of cellulose biofuels. Source: State of the World’s Forests, 2009 – FAO.

Table 5: Real and forecasted consumption of forestry industry products by region - millions of m3

Sawn wood

Industrial round wood

Wood panels Paper and cardboard

2005 actual

2020 forecast

2005 actual

2020 forecast

2005 actual

2020 forecast

2005 actual

2020 forecast

Africa 12 26 68 88 3 4 7 14

Asia and the Pacific 84 113 316 498 79 161 128 234

Europe 121 171 494 647 70 99 101 147

Latin America and the Caribbean

32 50 166 181 9 12 16 24

North America 158 211 620 728 70 96 106 138

Western and Central Asia

13 23 19 22 9 18 8 14

World total 420 594 1,683 2,164 240 390 366 571

Source: State of the World’s Forests, 2009 – FAO.

19

Chart 5: Real and forecasted total consumption of forestry industry products by region - millions of m3

Source: State of the World’s Forests, 2009 – FAO.

Increase in global demand for environmental products and services. Policies

related to energy and climate change are leading to an increase in wood used as a

source for energy. Greater attention to “green development” and commercial

cellulose biofuel production will have an unprecedented impact on the forestry

industry. Greater attention to green development implies a new orientation for

the development of the forestry sector. “Planting trees, increasing investments in

sustainable forestry management, active promotion of wood in construction with

environmental criteria and renewable energy will be integral parts of green

development.”15

2.8.2. At the national level:

Future availability of forestry assets, due to the fact that 80% of the soils declared as forestry priority still have no plantations.

Forestry assets in the country are rising, measured in plantations that have not reached yet harvest time. In the short term, wood production will double to 12 million m3 per year. This implies a great potential for investments in the industrial sector, such as mechanical transformation for processing and exports of wood products and sub-products.

15 FAO report: State of the World’s Forests, 2009 – Rome.

0

500

1000

1500

2000

2500

Sawn wood Industrial round wood

Wood-based panels

Paper and cardboard

Real 2005 Forecast 2020

20

APPENDICES

Appendix 1

Domestic and foreign investment promotion

Foreign investors in Uruguay enjoy the same benefits as domestic investors and do not need prior authorization to set up in the country.

Law 16,906 (dated 7th of January 1998) declares that the promotion and protection of domestic and foreign investment is of national interest. Decree 455/007 updated the regulations of this law.

Investment projects in any industry that are submitted and promoted by the Executive Branch may use between 50% and 100% the amount invested as partial payment of corporate income tax, according to project classification. The corporate income tax rate is 25%.

In addition, moveable fixed assets and civil works are exempt from wealth tax and VAT (Value Added Tax) can be recovered for purchases of materials and services for the latter.

Trade agreements and investment protection

1. General trade agreements

Uruguay has been part of the World Trade Organization (WTO) since its creation in 1995 and is part of the Latin American Integration Association (ALADI, 1980) along with nine other South American countries plus Cuba and Mexico.

In the framework of ALADI, the Southern Common Market (Mercosur) was formed in 1991 with Argentina, Brazil and Paraguay. Mercosur became a customs union in 1995, with the free movement of goods, the elimination of customs duties and non-tariff barriers between countries, and a common external tariff for countries outside the bloc. Venezuela is currently in the process of joining Mercosur.

Within the framework of ALADI, Mercosur has signed trade agreements with other countries: Chile (1996), Bolivia (1996), Colombia, Ecuador, Venezuela (2004), India (2004), Peru (2005) and Israel (2007), all of which form respective Free Trade Areas, with tariff reduction schedules that should be completed no later than 2014/2019, according to the country.

Uruguay also signed a bilateral free trade agreement with Mexico (2003), which has enabled the free movement of goods and services between both countries since June 2004, with certain exceptions that end in 2014.

2. Investment protection agreements

Uruguay has signed investment security, protection and promotion agreements with 27 countries, including Spain, the U.S., Finland, France and the U.K.

Institutions

A significant number of institutions bring together diverse players in the productive chain. These have participated in varying degrees in the discussion and practice of tools and

21

policies for the industry, both in production as well as in environmental and social spheres. These institutions include:

Forestry Bureau (DGF): www.mgap.gub.uy/Forestal/DGF.htm

Forestry Producers Society (Sociedad de Productores Forestales): www.spf.com.uy

Wood and Related Areas Industrial Association (Asociación de Industriales de la Madera y Afines): www.adimau.com.uy

Forestry Producers of the East (Productores Forestales del Este - PROFODES): www.profodes.com

Research entities: (INIA www.inia.org.uy, LATU www.latu.org.uy, University of the Republic, private universities, among others)

Technical working groups, e.g., Wood Board.

Environmental and social non-governmental organizations (NGOs)

Wood and Furniture Competitiveness Forum (Foro de Competitividad de Madera y Muebles), which operates in the domestic and MERCOSUR spheres. It operates within the scope of the Industry Bureau and the Ministries of Industry of other MERCOSUR members.

Program to support competitiveness and export promotion for Small and Medium Enterprises. It has a competitiveness promotion and business development program for second and third degree transformation of wood (Promadera: www.promadera.com.uy).

National Environment Bureau (DINAMA): www.dinama.gub.uy.

22

Appendix 2

Table 6: Land sales for agriculture-livestock use. Number of sales, area sold and value (per year)

Year Number of

sales

Area sold Value

Total (thousands of

hectares)

Average (hectare)

Total (US$ millions)

Average (US$/hectare)

2005 2,872 846 295 613 725

2006 3,245 859 265 972 1,132

2007 3,277 676 206 968 1,432

2008 2,959 684 231 1,260 1,844

2009 1,847 323 175 753 2,329

Source: Ministry of Livestock, Agriculture and Fishing – Agriculture-Livestock Statistics Bureau based on information from the General Registry Bureau.

Table 7: Land leasing for forestry use Number of contracts, leased area and value - 2009

Use Number of contracts

Leased area Value

Total (hectares)

Average (hectares)

Total (US$ thousands)

Average (US$/hectare/

year)

Forestry 23 15,527 675 1,441 93

Source: Ministry of Livestock, Agriculture and Fishing – Agriculture-Livestock Statistics Bureau based on information from the General Registry Bureau.

Table 8: Costs of activities linked to the forestry sector – October 2009 – in US$

Source: Price Bulletin, October 2009. DIEA-MGAP.

1 - Transport

1.1 – By truck

Round wood: 251 to 450 km US$/ton 32

Round wood: 51 to 250 km US$/ton 19

Round wood: up to 50 km US$/ton 7

Round wood: more than 450 km US$/ton 43

1.2 – By rail

Wood US$/ton/100km 7

2 - Labor

2.2 – Minimal nominal wage with food and housing for forestry tasks

Foreman US$ 415

Daily allowance for food and housing US$ 3

Monthly allowance for food and housing US$ 74

Machine operator (daily) US$ 14

Specialized machine operator (daily) US$ 16

Common laborer (daily) US$ 10

Specialized laborer (daily) US$ 12

23

Table 9: Major destinations of Uruguayan forestry sector exports 2009

Product Country FOB US$ millions % of total

Round wood

Vietnam 10 43.7%

Spain 3 14.2%

Portugal 3 12.9%

Subtotal 17 70.7%

Total 24 100.0%

Chips

Spain 32 40.7%

Norway 26 32.8%

Sweden 11 13.6%

Subtotal 68 87.0%

Total 79 100.0%

Sawn wood

USA 8 30.8%

Indonesia 2 9.3%

China 2 9.1%

Subtotal 13 49.2%

Total 26 100.0%

Wood boards

Mexico 12 38.3%

USA 8 25.5%

UK 6 17.1%

Subtotal 26 80.9%

Total 32 100.0%

Paper and cardboard

Argentina 33 47.2%

Brazil 19 26.8%

Paraguay 6 8.1%

Subtotal 57 82.1%

Total 69 100.0%

Wood pulp Netherlands

16 237 49.4%

China 209 43.5%

Subtotal 446 93.0%

Total 480 100.0%

Source: Uruguay XXI based on data from the Customs Bureau of Uruguay.

16

Merchandise exported to the country includes all that has Rotterdam as the main destination. Merchandise is

normally reshipped to other countries, as the Netherlands is not necessarily the final destination for Uruguayan wood pulp.

24

Appendix 3

Forestry product certification

Forestry certification is an independent evaluation of activities of an organization in accordance with previously established external standards.

The Forest Stewardship Council (FSC) has developed an international standard for forestry management called Principles and Criteria (P&C). P&C requirements include environmental, social and economic impacts of forestry management. Forestry certification generally acts as an incentive to improve forestry management practices. There are certifying organizations that evaluate compliance with the requirements.

The following are two of the main companies involved in certifying forestry plantations in accordance with the FSC:

a) SGS (Societé Générale de Surveillance) is headquartered in Geneva, Switzerland

and has offices around the world, including Uruguay (SGS Uruguay, Ltda.) The

forestry certification program is entitled SGS QUALIFOR. SGS QUALIFOR is a

program with more than 1,000 chains of custody17 and more than 190 forestry

stewardship certifications worldwide. The program is currently active in more than

60 countries worldwide.

b) SmartWood is a program from the Rainforest Alliance conservation organization,

which is headquartered in New York and has activities in several countries,

including Uruguay. With regard to plantation certification, SmartWood is defined

as the “main not-for-profit certifying body” that “certifies all types of forestry

operations, including natural forests, plantations, large scale commercial

operations and small scale family and community woodlands.”

Map 2: FSC certified areas by region

Source: Forest Stewardship Council - “Global FSC certificates: Type and distribution”

17

The entire process of wood from manufacture to transformation and distribution.

25

Appendix 4

Quality wood in Uruguay

a) Cellulose pulp

65% of all industrial wood extraction is used to produce cellulose pulp. Eucalyptus is the most often used variety in the generation of short fiber. According to several national studies, for pulp bleached with a standardized ECF process, the Eucalyptus globulus, grandis, dunnii and maidenni species have gross pulp yields of between 51% and 53%. The following is the gross yield and basic apparent density for the various species of the Eucalyptus genus.

Table 10: Gross yield and basic apparent density for Eucalyptus spp

Species Gross yield at kappa 20

(%)* Basic apparent density

(g/cm3)

18

Eucalyptus globulus 54.5% 0.423

Eucalyptus grandis 51.7% 0.499

Eucalyptus dunnii 51.1% 0.520

Eucalyptus maidenii 51.4% 0.559

Note (*): laboratory Kraft process, variation parameter. Source: Technology Laboratory of Uruguay (LATU). Research performed by Project Department, 2009.

b) Solid wood and derivative products

The species Pinus taeda, Pinus elliottii and Eucalyptus grandis are the most widely used in solid sawn wood and derivative products. The following are average values of some of the mechanical properties and density of each of the aforementioned species.

Table 11: Average values of elastic modulus, rupture modulus and apparent current density

Species Elastic modulus

(Mpa)19

Rupture modulus

(Mpa)20

Apparent current density

(g/cm3)

Pinus taeda 8,120 64.2 0.403

Pinus elliotti 8,034 77.7 0.403

Eucalyptus grandis 11,900 86.1 0.463

Source: Technology Laboratory of Uruguay (LATU). Research performed by Project Department, 2009.

18 Relationship of weight to volume of the wood sample, without accounting for hollow interior spaces. 19 Measure of resistance to a change in shape or size under the action of various forces. Defined as the coefficient

between the per unit force of the surface and the deformation per unit of length. 20 Measure of maximum force per surface unit that a sample can withstand without breaking.

26

Levels of quality wood in Uruguay measured through the mechanical properties of elastic modulus (stiffness) and rupture modulus are higher than regional levels. In particular, Eucalyptus grandis has higher values than the same species in Brazil and Argentina.

Chart 6: Comparative of Eucalyptus grandis wood from Uruguay, Australia, Argentina and Brazil – Elastic and rupture modulus

Source: Technology Laboratory of Uruguay (LATU). Research performed by Project Department, 2009.

16500

1190410800 10300

0

5000

10000

15000

20000

E.grandis (Australia)

E.grandis (Uruguay)

E.grandis (Brazil)

E.grandis (Argentina)

Elastic modulus of Eucalyptus grandis (Mpa)

120

86 82 76

0

50

100

150

E.grandis (Australia)

E.grandis (Uruguay)

E.grandis (Argentina)

E.grandis (Brazil)

Rupture modulus of Eucalyptus grandis (Mpa)

27

Uruguay at a glance (2009)

Official name República Oriental del Uruguay (Oriental Republic of Uruguay)

Location South America, bordering Argentina and Brazil

Capital Montevideo

Surface area 176,215 km

2. 95% of the territory has soil suitable for agriculture and

livestock activities. Population 3.3 million

Population growth 0.3% (annual)

Per capita GDP US$ 9,458

Per capita GDP (PPP) US$ 13,019

Currency Uruguayan peso ($)

Literacy 98%

Life expectancy at birth 76 years

Form of government Democratic republic with presidential system

Political divisions 19 departments

Time zone GMT - 03:00

Official language: Spanish

Main economic indicators 2005-200921

2005 2006 2007 2008 2009

Annual GDP growth rate 7.5% 4.3% 7.5% 8.5% 2.9%

GDP (PPP), US$ millions 32,048 34,602 38,235 42,543 43,551

GDP, US$ millions (current) 17,367 20,035 24,262 32,207 31,606

Exports (US$ millions), goods and services22

5,085 5,787 6,936 9,291 8,551

Imports (US$ millions), goods and services 4,693 5,877 6,775 10,217 7,775

Trade surplus (US$ millions) 393 -90 166 -926 796

Trade surplus (% of GDP) 2.3% -0.5% 0.7% -2.8% 2.5%

Current account surplus (US$ millions) 42 -392 -212 -1,502 258

Current account surplus (% of GDP) 0.2% -2.0% -0.9% -4.7% -0.8%

Overall fiscal balance (% of GDP) -0.4% -0.5% 0.0% -1.4% -2.2%

Gross capital formation (% of GDP at current prices) 16.5% 18.6% 18.6% 20.2% 19.1%

Gross national savings (% of GDP) 17.6% 16.9% 19.0% 17.9% 17.1%

Foreign direct investment (US$ millions) 847 1,493 1,329 1,840 1,139

Foreign direct investment (% of GDP) 4.8% 7.5% 5.4% 5.7% 3.6%

Exchange rate peso / US$ 24.5 24.1 23.5 20.9 22.5

Reserve assets (US$ millions) 3,071 3,097 4,121 6,329 8,373

Unemployment rate (% of EAP) 12.2% 11.4% 9.7% 7.9% 7.7%

21

Source: GDP data is taken from IMF. Foreign trade, FDI, exchange rate, international reserves and foreign debt data is

taken from the Central Bank of Uruguay. Population growth, literacy, unemployment and inflation data is taken the National Statistics Institute (INE). 22

2008 and 2009 data includes a partial estimate of productive activity in free zones and information from the CUTI-

coordinated survey for software related activities.

28

Investor Services

About Us

Uruguay XXI is the country’s investment and export promotion agency. Among other functions, Uruguay XXI provides no cost support to foreign investors, both those who are evaluating where to make investments as well as those currently operating in Uruguay.

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Uruguay XXI is the first point of contact for foreign investors. Services we provide include:

Macroeconomic and industry information. Uruguay XXI regularly prepares reports on Uruguay and the various sectors of the economy.

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www.uruguayxxi.gub.uy/investinuruguay

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