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Insights on the Changes Operated in Forest Value-
Chain Management in South America
26 September 2014
Presentation Topics
• Overview forestry sector in South America
• Future trends in the forestry sector in South America
• Brazilian forestry sector highlights and forest management by
Fibria Pulp
Overview forestry sector in South America
Overview forest sector in South Am.
• The Amazon rainforest occupies 30,9% of the area of the
South American continent, including territory belonging to
nine nations
• This presentation will not focus on the Amazon
rainforest management and wood products, but on
planted forests
• The first commercial forest plantations started in the
early 1900´s, with the main purpose to supply wood
sleepers for the railways and also firewood for the trains
• Since the 60´s the forest industry started to rely on
planted forests to grow and generate products (pulp,
sawnwood, wood charcoal, etc.)
• The two main species planted were Pinus spp. (tropical
pine from Central America and radiata pine and loblolly
pine from North America) and Eucalyptus spp. (from
Australia)
4
History of forest sector in South Am.
• For the successful establishment of the forest industry the
Government played an important role implementing forestry
legislation and giving financial support (tax incentives, etc.)
for the entrepreneurs and investors
• The Universities and Research Centres played the main
role to adapt the exotic tree species and improve
productivity, through tree breeding programs and developing
forest management techniques (nursery, silviculture,
harvesting, etc.)
• The international benchmarking was also important, where
researchers from South America (mainly Brazil and Chile)
visited other nations with tradition in Forestry (USA,
Germany, Australia, Finland, Sweden, New Zealand, South
Africa) to learn new techniques
5
History of forest sector in South Am.
• Development of good forestry technical skills was very important for the development of
the sector, therefore the implementation of Forestry Schools was crucial for this process
6
1940 1950 1960 1970 1980 1990
CHI
QS51-100
QS World University Rankings by Subject 2013 - Agriculture & Forestry
COL
QS101-150
CHI
QS101-150
BRA
QS101-150
CHI
QS101-150
BRA
QS24
BRA
QS51-100
BRA
QS47
From 1971 to 1982, the
UFPR Forestry School had
a cooperation agreement
with the University of
Freiburg
Planted forest x tax incentives in Brazil
7
0
100
200
300
400
500
600
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
Pla
nte
d A
rea (
'000 h
a)
Euca
Pine
period of tax incentives
Positive impact of the Government as the main driver for planted forest establishment through
tax incentives from 1961 until 1987 in Brazil
Source: ABRAF Statistics 2010
History of forestry sector development
8
50-60
60
70-80
80-90
90
2000
2004
Industrialization of the wood
Events Decade
Wood market & sub-products
Economic return of the forests
Development Cycles
Economic, environmental and social
return of the planted forests
SustainableEconomicOperational
Government’s political strategy
Formation of the forest base
Harvesting of the planted forest
F. BaseFormation
ForestryBusiness
SustainableForestryBusiness
Planted Forests Development in South America (mainly Brazil and Chile)
Eco-efficient forest management
The importance of involving all the different stakeholders in the forestry value chain
9
• No place for companies doing their business alone without interacting actively with the communities and all stakeholders where they operate
• Great loss comes from not doing this:
o In 2008 Aracruz (now Fibria) in Brazil lost 10,000 ha of plantations nearby their pulp mill to the Indians´ community (the Government requested the company to transfer the land)
o A person unhappy with a big forestry company in Chile initiated a criminal forest fire that burned 5,000 ha of planted forests in Dec/2011, also destroying a laminated lumber factory
• Certification helps but it is not enough, we need fulltime skillful employees doing this P.R. work
South American forestry value chain
10
35%
39%
10%
16%
Source: ABRAF 2012
Forest products production percentages are related with Brazilian data from 2012 – only considering planted forests
South American forestry value chain
11
Wood consumption by main products in Brazil in the domestic market and exported (Source: ABRAF 2012)
Wood Consumption Domestic Market External Market
Exports
Domestic
Pulp (35,2%)
Wood panels (7,1%)
Sawn wood (16,1%)
Wood charcoal, firewood, others (38,7%)
Aggomerate (2,7%)
Main players in the forest sector
• Total production (m3 x 1,000) of main products from planted forests
in South America in the last 11 years: Roundwood, Sawnwood, Wood
chips and particles, Wood residues, Wood-based panels
• 30% increase in volume production in 11 years. 88% of the production
is concentrated in the top 4 countries (Brazil, Chile, Argentina,
Colombia). That are also in the top 5 economies in the continent
Source: FAO Forestry Statistics 2014
12
• Total production (Metric ton x 1,000) of main products from planted
forests in South America in the last 11 years: Paper and paperboard,
Recovered paper, Wood charcoal, Wood pulp
• 40% increase in tonnage production in 11 years. 93% of the production
is concentrated in the top 4 countries (Brazil, Chile, Argentina,
Colombia) - that are also the top 5 economies in the continent
Main players in the forest sector
Source: FAO Forestry Statistics 2014
13
Pulp & paper development in Brazil
14
60%
128%
Source: RISI, ABRAF 2012
Source: ABRAF 2013
Main market pulp producers in the world
15
Fibria location and main figures (1Q14)
25
7.1
7.0
2.4
2.4
16
Fibria pulp mills – 5.3 million tonnes/year
25
17
Future trends in the forestry sector in South America
Forest ownership is changing …
Past - Current Model
Forestry industry controls the land and forest.
Forestry industry leases land and plants the forest.
Partnership between forest industries.
Outgrower scheme (with technical support)
Current - Future Model
Evolution of the current model.
Build clusters in different regions.
Attract small investors
(farmers, private investors, etc).
Consider the hypothesis that the forest base
doesn’t need to be a fixed asset (cost of
capital > return).
Consider that in the future it will have a
steady state between wood production and
consumption.
Attracts institutional investors - TIMOs
(insurance companies and pension funds).
Focus on the core business (pulp&paper, etc.)
Keep and control a strategic resource&
Reduce cost of capital
Objective: secure the raw material with known costs and in a market of wood scarcity Objective: secure the raw material as part of
a known cost in a stable and balanced wood market
A transition is happening in the model of land and forest ownership
19
Country rank for new pulp projects
Country
Forest Assets – Planted forests Potential forCost
bench-
marking
Social +
envir.
risks
Country risk
Attractive-ness
for investmentArea,
(1000 ha)
FAO
Area,
(1000 ha)
Other
Potential
productivity
(m3/ha/a)
Predominant
land ownershipAcquisition New assets
WB riskpremium
CPICountry
riskBusiness climate
Argentina 1 394 1 200 High Private Medium High Medium Medium N/A 2.9 C B Interesting
Brazil-HWD**7 418
4 516 High Private Medium High Medium Low34.9% 3.7 A3 A4
Interesting
Brazil-SWD** 1795 High Private Medium High Medium Low Interesting
Uruguay 978 750 Medium Private Medium Medium Medium Low 3.4% 6.9 A4 A4 Interesting
Colombia 405 328 Medium Private Low Medium Medium High N/A 3.5 A4 B Later
Ecuador 167 Medium ? Low Medium Low Medium N/A 2.5 C C Later
Peru 993 Low ? Low Low Low Low N/A 3.5 A4 B Later
Paraguay 48 High Private Low High Low Medium N/A 2.2 C C Later
Chile 2 384 2 600 Medium Private Medium Low Medium Low N/A 7.2 A2 A2 No interest*
Venezuela - - Medium State Low Low Medium High N/A 2.0 C C No interest
Bolivia 20 High Customary Low Medium Low Medium 9.5% 2.8 C C No interest
Guyana 0 - Medium State Low Low Low Medium 10.2% 2.7 D N/A No interest
French Guiana 1 Medium ? Low Low Low Low N/A N/A N/A N/A No interest
Surinam 13 Medium State Low Low Low Low N/A N/A N/A N/A No interest
* Chile is classified as No interest because there isn’t much land available in the country for big projects in forestry
** 2009 data – ABRAF report
Country analysis to establish a rank of attractiveness for investment in new pulp projects
20
Country rank for new pulp projects
Country analysis to establish a rank of attractiveness for investment in new pulp projects
Source: Pöyry 2009
21
Foreigner investment in the Brazilian
forestry sector (1996-2005)
1st
2nd
3rd
4th
USD 4.8 billion(82% by top 4)
7% TIMOs
891 500 ha planted 14% TIMOs (125 thousand ha)
Source: Marco Tuoto, Master Thesis (2007)
22
Scale of Latin American timberlands
investment opportunities (as at 2010)
23
Example of timberlands investment targets
in South America (as at 2010)
24
Planted forest productivity x returns
High productivity of Eucalyptus and Pine plantations and short rotation (6-7 years for Eucaand 10-12 years for Pine) are key components of the profitability of pulp and paperproducers in South America
Source: ABRAF 2012
(Brazil)
(MAI)
25
actual
potential
Planted forest productivity ... Are we
reaching a ceiling?
1970’s 2010’sm3/ha.a
Planted Forest Productivity in Brazil (MAI)
Source: Pöyry 2013
26
3PG Model of Eucalyptus GrowthLimits (mainly climate factors)
Land availability – how many ha still
available for planted forests in Brazil?
Source: ULCOS Study (2005). European Cooperative
ULCOS = Ultra–Low Carbon dioxide(CO2) Steelmaking
• Criteria: areas without forest cover or
current use; with < 80 inhab./km2; and
rainfall > 800 mm/a
• Before validation = 111 MM ha
• After validation = 67 MM ha
• Estimatives from other studies = 85, 41, 30,
15 MM ha90% usable surface
(grass land)
50% usable surface
(savannas)
MT
21%
TO
16%
MA
15%PI
12%
27
South America currently presents two competing
political & economic framework approaches
28
Easy of doing business index
29
Before investing in Latin America it is important to understand the complexity of the tax
and legal systems, and the bureaucracy that is needed to run the business.
Source: International Monetary Fund 2009 (closer to 1 is the best)
Easy of Doing Business in Some South American Countries comparing with USA
An eye on the future… bio-based fuels,
chemicals and new materials
30
Sugarplatform
Oil & Fatsplatform
Bioplastics
Surfactants
Lubricants
Solvents
Bio-based fuels &
chemicals
Coca Cola’s plant bottle Disposable plates & cups Automotive interior
Detergents Healthcare & cosmetics Industrial cleaners
Marine oils Chainsaw lubricants Drilling fluids
Paint & coatings Inks De-icing agents
e.g tall oil rosins, ethylene, lactic acid, propylene glycol, propanediol, farnesene, succinic acid, butanediol
The time when available timberland was cheap, the wood cost was low and the yields wereincreasing rapidly year after year is over. Therefore pulp companies and forest owners aresearching for other options to add value to their business
One of the options being studied is to generate biofuel and chemicals from wood and forestresidues. Transforming pulp mills into bio-refineries
Brazilian forestry sector highlights and forest management by Fibria Pulp
Brazilian forestry sector statistics
32
Source: IBÁ 2013
Beginning of a new cycle for planted
forests (2012-2020)
Planted forest location in Brazil
25
The end of cheap wood in Brazil?
25
10
20
30
40
50
60
70
80
90
100
110
120
Development of hardwood pulpwood cost delivered at mill
USD/m³sob, real terms 2012
Finland – Birch
Brazil – Euca
US South – Mixed HW
Note: Deflator used for real prices US WPISource: Pöyry 2013
34
War against wood cost inflation!
25
Source: Pöyry 2013
35
Fibria wood cost inflation
25
Focus on always remain below the IPCA/INCAF inflation index – the main strategy to reduceoperational costs is through innovation and new technologies, focused on improving theyield of the forests, mechanize as much as possible and the improve the productivity of themachines (silviculture, harvesting and transportation)
Index 2007=100
100
120
140
160
2007 2008 2009 2010 2011 2012 2013 2014 RF
• Labor
• Fertilizers
• Pesticides
• Fuel
• etc…
INCAF - Brazilian Wood Cost Index
FIBRIA - Fibria Wood Cost Index
IPCA - Brazilian Inflation
36
Capital Expenditure (CAPEX) during the rotation (7 years). Main challenge is to reduce costs of the
operations happening in the first 2 years, without compromising the success of the plantation establishment
Maintenance
Fertilizer
PesticidesForestry protection
Soil preparation
Seedling
1
59%
2
24%
3
5%
4
4%
5
3%
6
3%
7
2%
Planting or
sprouding
Harvesting
and
logistics
Opex
The information contained herein is for the exclusive use of Fibria Celulose SA, and may not be transferred without authorization from the Company.
Base date: July, 2014. It does not include depreciation.
Fibria CAPEX during the rotation
37
Reducing costs with new technologies -The
Future of Forestry project
• How can evolving technologies and techniques support Fibria to
improve the forestry efficiency?
• What are the potential economic, social and environmental
implications of applying these innovative technologies?
Phase 1
2010
Phase 2
2011 / 2015
15 technological avenues
Goal: Capture NPV R$ 735 million
38
FX USD:BRL = 2.40
FX EUR:BRL = 3.08
(as at 25/09/14)’
Future of Forest – Curve Capture
Expected savings until 2015 from the Future of Forest projects
39
90 % Mechanized70 % Mechanized
• additional 20% mechanized area
• Aprox. additional 450,000 m³ wood
• Harvesting cost reduced from 52,1 R$/m3
to 32,0 R$/m³
• Reduction of 4,0 R$/adt
NVP R$ 66 million
Annual Saving R$ 5 million
Harvester + Forwarder with winch for steep
harvesting in Jacareí area
40
Innovation in log transportation
In the Fibria Forestry Implement Project (FFIP), the company invested in R&D to develop a new trailer to
transport logs. The prototype was successfully tested and by the end of 2014 the company will have 25
trucks with the new trailers (composition of 3 trailers per truck). Fibria is getting a patent for the FFIP.
UAV - unmanned aerial vehicle
• 3 years of development – waiting new law with the
approved regulations to start operations
• Increase productivity up to 700 ha/day
• Forest view from above - census
42
• Products for quality control:
– Survival rate
– Management of Weeds
– Validation of Coppice
– Cartographic survey
Survival rate Report
Coppicing
Maping
UAV – for forest monitoring, products
43
Enables visualization of
wood piles in 3D
and conducting volume
estimation
UAV – potential use in the future
44
The value chain of the Forestry Industry has
opportunities to be explored
LAND
VALUE CHAIN OF THE FORESTRY INDUSTRY
FOREST FINAL USES
Land
What is the best final
use for investments in land?
What is the best
final use for wood ? Furniture Ind.
Charcoal
Pulp
Standing
timber
Power
MDF, particle board
Pellets
Biofuels
Other
Businesses
Sale to third parties
Bio-Products
Paper
Lease land
Wind power
Forestry
45
Aware of these opportunities, Fibria has been
investigating a series of technologies
Tec
hn
olo
gic
al M
atu
rity
Economic Attractiveness
Technology A
Technology B
Technology E
Technology F
Pyrolysis
Technology D
Priority 1
P-Oil
Priority 2
RelativeMarket Size
Source: Fibria Bio-Strategy Project
Economic Attractiveness
Technology Fibria
Pyrolysis Effective participation: Ensyninvestment
Gasification On going studies
Pelletization Little attractive under current conditions
Cellulosic Ethanol On going studies
Bio-chemicals On going studies
Bio-polymers On going studies
Lignoboost Pilot equipment
Carbon Fiber Strategic partnership
46
Conceptual Layout – Bio-Oil Plant
47
Future growth prospects
25
48
