Forestry Industry (Oct 2010)
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Forestry Industry (Oct 2010) Forestry Industry (Oct 2010) Document Transcript

  • October 2010 Forestry industryInvestment opportunities in Uruguay
  • 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. “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. 1 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. 2
  • 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. 3
  • 2. Forestry industry in Uruguay2.1. Major featuresThe forestry industry in Uruguay consists of various activities that range from seed andseedling production to the final shipment of finished products. The sector includes atleast four industrial chains: cellulose and paper, finished wood (treated round wood,sawn wood, boards, carpentry for construction, furniture, moldings, etc.), the chemicalindustry (resins, essential oils, bioplastics, etc.) and energy. Forestry activities, as well asthe extraction and development of wood products, accounted for 3.8% of Uruguayan GDPin 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 Nurseries and reproductive material Agricultural Planted and native forests Sawmills Carpentry for construction ACTIVITY Mechanical transformation Boards Manufacturing Chips and pellets Panels Pulp Cellulose - paper Paper and cardboard Energy Logistics and transportationSource: Uruguay XXI.The Uruguayan forestry industry is characterized by a strong vertical integration thatcovers agricultural and industrial activities and all intermediate processes through thefinal sale of products.Some large export companies supply themselves with a large portion of raw materials incomparison to others that buy raw materials from third parties. The largest sawmills usemainly domestic raw materials and direct production towards foreign markets, whilesmaller mills focus mainly on the domestic market.4
  • Paper manufacturers produce both for foreign and domestic markets. These companieshave their own pulp production mills for in-house supply for the paper productionprocess.Electricity generation from forestry residue (biomass) is among the activities related tothe industrial phase that became more relevant and have significant future prospects dueto the increase in raw material supply and State policies in the area. Currently, somesector companies have electricity generation plants that use biomass. For example, UPMgenerates 110 MW with 32 MW of excess for the national grid. Bioener (a Uruforcompany) has a 12 MW capacity, while Weyerhaeuser has an installed capacity ofbetween 10 to 12 MW. There are other examples as well. “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.2.2. Current legislation2Plantations and other activities linked to forestry activities are regulated under law15,939 dated 28th of December 1987 and regulatory decrees. This law establishes thatnatural 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).4To receive the aforementioned benefits, the Forestry Bureau (DGF) of the MGAP mustapprove the management and organization plan for the exploitation and regeneration offorests. Any modification of the management and organization plan must be previouslyapproved by the DGF.2 Law 15,939 is available at http://www.mgap.gub.uy/Forestal/15.939.htm. Decree 220/06 dated 10 July 2006 isavailable 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 thesoil, water and other renewable resources. Yielding forests have the basic objective of wood productions and are ofspecial national interest due to their location or type of wood or other forestry products that can be obtained fromthem.4 Law 18,245 dated 27 December 2007 is available at:http://www.mgap.gub.uy/Forestal/Ley18245ContribucionInmobiliariaRural.mht.5
  • 2.3. Forested areaMap 1: Forestry priority soils - 2009 Major highways Secondary highways Forestry priority areasSource: 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 timesto approximately 950,000 hectares by 2010.5 In addition, some 750,000 hectares of nativeforest exist in the country, leading to a total forested area of 1.7 million hectaresapproximately.The total area deemed of forestrypriority covers 4 million hectares,6some 23% of the total agriculture-livestock area of the country (see Map1).The type of soil, the climate and thedistance to production departure pointshas an effect on forestry plantation5 Source: “Monitoring of Forestry Resources, National Forestry Inventory,” August 2010. This work is the result of thefirst stage of national forestry inventory. In this stage, 26% of the total area of inventoried forests was studied. Of atotal of 4,769 sample points proposed for all of Uruguay, 1,242 sample sites have been installed and studied, whichrepresents 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.6
  • characteristics. This divides the country into three regions in accordance with criteriaestablished 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 offorestry products by sea. The area is strongly influenced by the sea, with an absence ofextreme temperatures. This has led to a better adaptation of species sensitive to extremetemperatures, such as Eucalyptus globulus. The main purpose of plantations in this area ispulp 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 artificialforests in Uruguay.This area has frosts in winter and higher temperatures in summer, and due to its sandysoil, it is appropriate for Eucalyptus grandis and Pinus species. Wood in this region ismainly produced for mechanical transformation.7 Major departure points for woodproduction 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 slightlylower yield in this area as compared to the northern region. The main destination forproduction from this area is wood pulp.8 Ports and bridges used for forest producttransport include Fray Bentos, Nueva Palmira and Paysandú.Table 1: Total forested area and forestry priority area per region, in thousands of hectares- 2010 Forested area Forestry priority Forestry Region Departments as of August area available for priority area 2010 planting Artigas, Rivera, Tacuarembó, North Central Durazno, Cerro Largo and 436 2,177 1,741 Treinta y Tres Salto, Paysandú, Río Negro and West 246 633 387 Soriano Colonia, Flores, San José, Florida, South-East Canelones, Montevideo, 287 1,304 1,017 Lavalleja, Maldonado and Rocha. Total 969 4,114 3,145Source: Uruguay XI based on data from DGF of MGAP and Pike Consultora Forestal.7 This basically corresponds to the commercial strategy of the main companies of the region, such as Weyerhaeuser,GFP, GMO and COFUSA.8 By UPM.7
  • Most of Uruguay’s plantations are of the Eucalyptus and Pinus genera. 70% of thecountry’s total forested area corresponds to the Eucalyptus genus (with a majoritypresence of three subspecies), followed by Pinus with 28% of said area, leaving 1% of theSalicacea family.Table 2: Species type according to region Other Eucalyptus Eucalyptus Region Department Pinus Eucalyptus Total grandis globulus and Salicacea Artigas, Rivera, Tacuarembó, North Durazno, Cerro Largo and 43% 23% 26% 8% 100% Central Treinta y Tres Salto, Paysandú, Río Negro West 19% 42% 28% 11% 100% and Soriano Colonia, Flores, San José, Florida, Canelones, South-East 14% 6% 69% 11% 100% Montevideo, Lavalleja, Maldonado and RochaSource: Uruguay XXI based on data from the DGF of MGAP.2.4. Extraction and productionWood extraction in Uruguay had a strong growth until 2008, from 5.7 million m3 in 2005to 9.4 million m3 in 2008. Due to the decline in global demand and a drop in export pricessince the 2008 international crisis, extraction volumes in the country fell to 8.4 million m 3in 2009. This decline is tightly linked to the decline in wood extraction for pulpproduction.A decline was also registered in chip production, and to a lesser degree, in sawn woodand boards. Specifically, the decline in wood chip production was due to the fact that themain purchasers of this product, Japan and Finland, made no purchases in 2009. This maybe associated to the temporary closure of some pulp mills due to the international crisis.Table 3: Round wood extraction volume 3 ROUND WOOD EXTRATION (1,000 m ) 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 8,383Source: Forestry Bureau (MGAP).8
  • Table 4: Production volume of wood-derived products PRODUCTION FOR DOMESTIC CONSUMPTION AND EXPORTS Product 2005 2006 2007 2008 2009 3 CHIPS (1,000 m ) 1,298 1,383 1,280 2,283 1,143 3 SAWN WOOD (1,000 m ) 268 293 308 284 264 3 WOOD BOARDS (1,000 m ) 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 882Source: Forestry Bureau (MGAP) and National Customs Bureau of Uruguay.2.5. Export sector9Forestry accounted for 13% of Uruguay’s total exports in 2009 and has significantprospects for future growth. Despite the fact that the 2008 international crisis caused adrop in sector exports both in volume and value, exports still exceeded US$ 700 million inthat year. For 2010, 2008 export values should be achieved or exceeded (US$ 1,200million). 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 10% 3% Paper and cardboard Round wood 11% Chips 4% 68% Sawn wood 5% Wood boards Wood pulpSource: Uruguay XXI based on data from the Customs Bureau of Uruguay.9 See Appendix 2 for a table indicating the major export destinations of the sector in 2009.9
  • Chart 2: Forestry product export performance – US$ millions10 US$ millons 180 160 140 120 100 80 60 40 20 0 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 32Source: Uruguay XXI based on data from the Customs Bureau of Uruguay.Chart 3: Forestry sector export performance - thousands of metric tons11 Thousands of tons 1800 1600 1400 1200 1000 800 600 400 200 0 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 73Source: Uruguay XXI based on data from the Customs Bureau of Uruguay.10 Note: the chart does not include wood pulp as its values are outside the scale used. These values are presented inChart 4.11 Note: idem.10
  • Chart 4: Wood pulp export performance12 1200 1000 800 1097 600 400 867 852 200 480 13 18 0 2007 2008 2009 US$ Million Thousands of tonsSource: Uruguay XXI based on data from the Customs Bureau of Uruguay.2.6. Logistics2.6.1. Strategic geographic location in South Americas 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 regions 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.12 Export volume data was provided by the National Customs Bureau of Uruguay and average prices used were takenfrom FAOSTAT. 2007: US$ 703/ton. 2008: US$ 790/ton. 2009: US$ 536/ton.11
  • 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 industry13The forestry industry has seen explosive growth over the last few decades, attractingmore than US$ 2,200 million in investments by world leaders in forestry products anddomestic companies. These companies are linked to wood extraction and the industrialphase (boards, fibers, solid wood products, wood pulp, energy generation, etc.) Thefollowing are some of the major companies operating in Uruguay:13 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.12
  • UPMThe UPM Company of Finland is one of the largest wood pulp manufacturersin the world. In 2009, UPM acquired the major portion of shares in BotniaS.A., which began operations in November 2007.It is located on the shores of the Uruguay River, four kilometers north of thecity of Fray Bentos. Production capacity is one million metric tons per year ofbleached pulp from Eucalyptus short fiber. Pulp exports are shipped by barge from themill to the deep water port at Nueva Palmira, and transferred to transoceanic ships forshipments to Europe and Asia. The company has a subsidiary company, “CompañíaForestal Oriental S.A.”, that provides most of the wood for the cellulose pulp productionprocess (nearly 70% of raw materials comes from company owned forests). “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.WEYERHAEUSERWeyerhaeuser, a U.S. company, is one of the largest forestryand wood companies in the world. It has operations in 13countries and employs over 18,000 people worldwide.Weyerhaeuser set up in Uruguay in 1996 by purchasing part of the shares of ColonvadeS.A. In 2001, the company expanded its assets with the purchase of Los Piques S.A. fromthe West Fraser Timber Company of Canada and Associates. In 2006, WeyerhaeuserUruguay was established and in 2007, the company obtained 100% of assets of theColonvade S.A. and Los Piques S.A. companies.Weyerhaeuser performs various activities in the sector, from plantations to tracking offinal products. The company has 143,000 hectares of forested area as follows: 78,500 inRivera-Tacuarembó and 64,500 in Cerro Largo-Treinta y Tres.The company has a plywood factory in the department of Tacuarembó (WeyerhaeuserProductos S.A.) that is forecasted to produce 140,000 m 3 of product this year and 310,000m3 by 2011. It also has an electricity generation plant that is fed by sub-products of itsown production process. The plant’s generation capacity is 12 megawatts and thecompany’s consumption needs are between five and six megawatts. The remainder canbe sold to the government electricity distribution company.13
  • ARAUCO and STORA ENSOArauco (of Chile) and Stora Enso (of Sweden and Finland) companies have decided toincrease their forestry activities in Uruguay by doubling forestry assets through Montesdel Plata, a joint venture. The purchase of most of the assets in Uruguay of the ENCECompany of Spain has led to total forestry assets of approximately 250,000 hectares ofland, 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 onthe shores of the La Plata River. “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.COFUSA (Compañía Forestal Uruguaya S.A.) and URUFORThese companies produce, process and sell high qualityEucalyptus grandis wood. Both companies are located innorthern Uruguay and are part of the same business group. At its industrial plant, Uruforprocesses sawtimber from COFUSA plantations to produce high quality sawn wood. Theproducts are used for diverse applications to satisfy domestic and international marketneeds. Products are used for furniture, kitchens, moldings, construction materials, doorsand windows. Today, Urufor exports to more than 15 countries in Asia, the Americas andEurope. Industrial investments have been revealed for an amount of US$ 25.8 million plusUS$ 17 million for electricity generation.URUPANELUrupanel is a Chilean company located in northern Uruguay. Itbegan operations in 2004 and today has more than 500employees. It is one of the top exporters of plywood in thecountry. Urupanel invested US$ 56 million in 2004 and US$ 20 million in 2007 for theinstallation of a new industrial plant to manufacture MDF plywood boards. The plantopened 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. GFPoperates in Chile, Brazil, New Zealand, Australia, Singapore and Uruguay. Today, thecompany operates in Uruguay with four funds with investments of about US$ 150 million.14
  • GMO RENEWABLE RESOURCESGMO Renewable Resources is a U.S. company in Uruguay since2001. GMO administers investment funds that have a branch(Renewable Resources) dedicated exclusively to forestryinvestments. Currently, the company administers threeinvestment funds. The assets (plantations) are in northern Uruguay (departments ofRivera, Tacuarembó and Cerro Largo) with 37,000 hectares, of which 25,000 are planted.A total of US$ 90 million has been invested. “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.RMK TIMBERLAND GROUPRMK Timberland group, established in 1981 in Georgia, U.S.A., is an investment fundfocused exclusively on the forestry business. It operates as the commercial unit ofRegions Morgan Keegan Trust and Morgan Asset Management. Its objective is thedevelopment of investment funds and general management of forestry resources invarious regions in the world. The group began activities in Uruguay in 2005 with thecreation 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 (MonteFresnos S.A.) and Bosques del Sur (Ponte Tresa S.A.). Wood production by thesecompanies is used for cellulose pulp, sawn wood, energy and other uses for the domesticmarket 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 prioritylands.Other companies:PHAUNOS TIMBER FUND LIMITED: Phaunos is a British fund operating in Uruguaythrough Pradera Roja S.A, Caldrey S.A. and Aurora Forestal Limited companies. PraderaRoja S.A. owns 12,000 hectares of Eucalyptus plantations for the supply of cellulose pulpmills and sawn wood markets. A total of US$ 30 million has been invested up to thepresent date. Caldrey S.A., located in southern Uruguay, focuses on services to increaseforestry productive capacity. A total of US$ 5 million has been invested. Aurora ForestalLimited focuses on planting mixed-age pine trees in Uruguay. The company has 19,500forested hectares in the department of Rivera and performs operations in a sawmill in thedepartment of Tacuarembó. Investments total US$ 35 million.NEVOPARK: Nevopark Company invested US$ 7 million in 2007 for the installation andoperation of a splitting mill to supply domestic and foreign demand for wood chips.15
  • CHIPPER: Chipper Company was born from the association of Foresur and Grupo Forestalcompanies in 2004. The Chipper Company has 40,000 hectares of Eucalyptus globulusplantations and a chipping mill capable of processing 470,000 BDMT (sales measurementunit equivalent to one ton of dry fiber). Investments made in the chip production mill inMontevideo totalize US$ 2.6 million. Production is exported to Japan, Sweden andFinland.IPUSA: IPUSA is a domestic paper company that was acquired in 1994 by CMPC HoldingCompany of Chile. IPUSA Company invested US$ 1.4 million in 2006 and US$ 939,000 in2007 for the construction of two paper manufacturing machines, round wood conversionlines, napkin conversion and institutional consumption product conversion.AGRIFOX S.A.: Agrifox is a Uruguayan forestry company that has plantations in central andnorthern Uruguay. It began activities in Uruguay in 2005 and focuses on harvesting andexporting round wood. Major export destinations are Vietnam, China, India and thePhilippines.FORESTAL CAJA BANCARIA: Forestal Caja Bancaria began forestry activities in 1964, whenit acquired 6,000 hectares in Paysandú for pine and eucalyptus plantations. Currently, thecompany carries out forestry, industrial and livestock activities on 18,000 hectares. In2008, 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 m 3 of round wood per year and adrying capacity of 20,000 m3 per year.Industry-related service companies include:PIKE CONSULTORA FORESTAL: Founded in 2002, Pike offers complete consulting servicesfor forestry projects. Activities include: industrial opportunity evaluation studies,plantation valuations, wood availability reports, environmental impact evaluations, FSCcertification and forest fire prevention plans.AGROEMPRESA FORESTAL: A domestic company located in northern Uruguay,Agroempresa Forestal offers consulting services, plantation administration, plantingservices, 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, forestryproject evaluation, quality control, auditing, training for forestry management and chainof custody.HARVEST: A joint venture between Phaunos Timber Fund Limited (PTFL) and Union CapitalGroup (UCG), Harvest Company offers services to the domestic forestry industry, mainlymechanized harvesting through a clear cutting system with processors, self-loadingtractors and loaders.CARBOSUR: Carbosur is a Uruguayan company founded in 2000. It offers specializedservices in the area of climate change, with an emphasis on mitigating this global16
  • environmental problem. The company specializes in greenhouse gases inventories andoffers emission inventory services and carbon footprint estimates for companies and theirproducts. Carbosur has strategic alliances with Pike Consultora Forestal (Uruguay), FactorCO2 (a Spanish company specializing in climate change), Maradei Pike (Argentina) and twoGuatemalan organizations (Energía y Medio Ambiente and Fundación Naturaleza para laVida). It is also a member of Markit, one of the main registries for the creation and sale ofcarbon certificates.MUNDIAL FORESTACION: Mundial Forestación is a Uruguayan company focused onproducing Eucalyptus globulus genetic material. The company has a capacity for 30million plants, seeds and clones and is one of the largest nurseries supplying the nationalmarket. According to company director Rogerio Aguiar, “traditional plantations ofEucalyptus globulus in Uruguay yields around 12 to 17 m3 per hectare per year. Usingclones enables the possibility of doubling this production, adapting each clone to localconditions, while improving wood quality and allowing the identification of the mostresistant ones to disease and the consequences of climate change.” “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 2 greenhouse gas emissions. As such, a company that reduces CO 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.2.8. Industry perspectives2.8.1. 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.17
  • 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 - millionsof m3 Industrial round Paper and Sawn wood Wood panels wood cardboard 2005 2020 2005 2020 2005 2020 2005 2020 actual forecast actual forecast actual forecast actual 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 32 50 166 181 9 12 16 24 the Caribbean North America 158 211 620 728 70 96 106 138 Western and Central 13 23 19 22 9 18 8 14 Asia World total 420 594 1,683 2,164 240 390 366 571Source: State of the World’s Forests, 2009 – FAO.18
  • Chart 5: Real and forecasted total consumption of forestry industry products by region -millions of m3 2500 2000 1500 1000 500 0 Sawn wood Industrial round Wood-based Paper and wood panels cardboard Real 2005 Forecast 2020Source: 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.”152.8.2. 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.19
  • APPENDICESAppendix 1Domestic and foreign investment promotionForeign investors in Uruguay enjoy the same benefits as domestic investors and do notneed prior authorization to set up in the country.Law 16,906 (dated 7th of January 1998) declares that the promotion and protection ofdomestic and foreign investment is of national interest. Decree 455/007 updated theregulations of this law.Investment projects in any industry that are submitted and promoted by the ExecutiveBranch may use between 50% and 100% the amount invested as partial payment ofcorporate income tax, according to project classification. The corporate income tax rate is25%.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 protection1. General trade agreementsUruguay has been part of the World Trade Organization (WTO) since its creation in 1995and is part of the Latin American Integration Association (ALADI, 1980) along with nineother South American countries plus Cuba and Mexico.In the framework of ALADI, the Southern Common Market (Mercosur) was formed in1991 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-tariffbarriers 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 othercountries: Chile (1996), Bolivia (1996), Colombia, Ecuador, Venezuela (2004), India (2004),Peru (2005) and Israel (2007), all of which form respective Free Trade Areas, with tariffreduction schedules that should be completed no later than 2014/2019, according to thecountry.Uruguay also signed a bilateral free trade agreement with Mexico (2003), which hasenabled the free movement of goods and services between both countries since June2004, with certain exceptions that end in 2014.2. Investment protection agreementsUruguay has signed investment security, protection and promotion agreements with 27countries, including Spain, the U.S., Finland, France and the U.K.InstitutionsA 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 and20
  • policies for the industry, both in production as well as in environmental and socialspheres. 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.21
  • Appendix 2Table 6: Land sales for agriculture-livestock use. Number of sales, area sold and value (peryear) Area sold Value Number of Total Year Average Total Average sales (thousands of (hectare) (US$ millions) (US$/hectare) hectares) 2005 2,872 846 295 613 725 2006 3,245 859 265 972 1,132 2007 3,277 676 206 968 1,432 2008 2,959 684 231 1,260 1,844 2009 1,847 323 175 753 2,329Source: Ministry of Livestock, Agriculture and Fishing – Agriculture-Livestock Statistics Bureau based on informationfrom the General Registry Bureau.Table 7: Land leasing for forestry use Number of contracts, leased area and value - 2009 Leased area Value Number of Average Use Total Average Total (US$ contracts (US$/hectare/ (hectares) (hectares) thousands) year) Forestry 23 15,527 675 1,441 93Source: Ministry of Livestock, Agriculture and Fishing – Agriculture-Livestock Statistics Bureau based on informationfrom the General Registry Bureau.Table 8: Costs of activities linked to the forestry sector – October 2009 – in US$ 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$ 12Source: Price Bulletin, October 2009. DIEA-MGAP.22
  • Table 9: Major destinations of Uruguayan forestry sector exports 2009 Product Country FOB US$ millions % of total Vietnam 10 43.7% Round wood Spain 3 14.2% Portugal 3 12.9% Subtotal 17 70.7% Total 24 100.0% Spain 32 40.7% Chips Norway 26 32.8% Sweden 11 13.6% Subtotal 68 87.0% Total 79 100.0% USA 8 30.8% Sawn wood Indonesia 2 9.3% China 2 9.1% Subtotal 13 49.2% Total 26 100.0% Mexico 12 38.3% Wood boards USA 8 25.5% UK 6 17.1% Subtotal 26 80.9% Total 32 100.0% Argentina 33 47.2% Paper and cardboard Brazil 19 26.8% Paraguay 6 8.1% Subtotal 57 82.1% Total 69 100.0% 16 Netherlands 237 49.4% Wood pulp 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 isnormally reshipped to other countries, as the Netherlands is not necessarily the final destination for Uruguayan woodpulp.23
  • Appendix 3Forestry product certificationForestry certification is an independent evaluation of activities of anorganization in accordance with previously established externalstandards.The Forest Stewardship Council (FSC) has developed an international standard for forestrymanagement called Principles and Criteria (P&C). P&C requirements includeenvironmental, social and economic impacts of forestry management. Forestrycertification 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 inaccordance 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 regionSource: Forest Stewardship Council - “Global FSC certificates: Type and distribution”17 The entire process of wood from manufacture to transformation and distribution.24
  • Appendix 4Quality wood in Uruguaya) Cellulose pulp65% of all industrial wood extraction is used to produce cellulose pulp. Eucalyptus is themost often used variety in the generation of short fiber. According to several nationalstudies, 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%. Thefollowing is the gross yield and basic apparent density for the various species of theEucalyptus genus.Table 10: Gross yield and basic apparent density for Eucalyptus spp Gross yield at kappa 20 Basic apparent density Species 3 18 (%)* (g/cm ) Eucalyptus globulus 54.5% 0.423 Eucalyptus grandis 51.7% 0.499 Eucalyptus dunnii 51.1% 0.520 Eucalyptus maidenii 51.4% 0.559Note (*): laboratory Kraft process, variation parameter.Source: Technology Laboratory of Uruguay (LATU). Research performed by Project Department, 2009.b) Solid wood and derivative productsThe species Pinus taeda, Pinus elliottii and Eucalyptus grandis are the most widely used insolid sawn wood and derivative products. The following are average values of some of themechanical properties and density of each of the aforementioned species.Table 11: Average values of elastic modulus, rupture modulus and apparent currentdensity Elastic modulus Rupture modulus Apparent current density Species 19 20 3 (Mpa) (Mpa) (g/cm )Pinus taeda 8,120 64.2 0.403Pinus elliotti 8,034 77.7 0.403Eucalyptus grandis 11,900 86.1 0.463Source: 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 coefficientbetween 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.25
  • Levels of quality wood in Uruguay measured through the mechanical properties of elasticmodulus (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 andBrazil – Elastic and rupture modulus Elastic modulus of Eucalyptus grandis (Mpa) Rupture modulus of Eucalyptus grandis 20000 (Mpa) 16500 150 120 15000 11904 100 10800 10300 86 82 10000 76 5000 50 0 0 E.grandis E.grandis E.grandis E.grandis (Australia) (Uruguay) (Brazil) (Argentina) E.grandis E.grandis E.grandis E.grandis (Australia) (Uruguay) (Argentina) (Brazil)Source: Technology Laboratory of Uruguay (LATU). Research performed by Project Department, 2009.26
  • Uruguay at a glance (2009) Official name República Oriental del Uruguay (Oriental Republic of Uruguay) Location South America, bordering Argentina and Brazil Capital Montevideo 2 176,215 km . 95% of the territory has soil suitable for agriculture and Surface area 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 ($) Literacy 98% Life expectancy at birth 76 years Form of government Democratic republic with presidential system Political divisions 19 departments Time zone GMT - 03:00 Official language: Spanish Main economic indicators 2005-200921 2005 2006 2007 2008 2009Annual GDP growth rate 7.5% 4.3% 7.5% 8.5% 2.9%GDP (PPP), US$ millions 32,048 34,602 38,235 42,543 43,551GDP, US$ millions (current) 17,367 20,035 24,262 32,207 31,606 22Exports (US$ millions), goods and services 5,085 5,787 6,936 9,291 8,551Imports (US$ millions), goods and services 4,693 5,877 6,775 10,217 7,775Trade surplus (US$ millions) 393 -90 166 -926 796Trade surplus (% of GDP) 2.3% -0.5% 0.7% -2.8% 2.5%Current account surplus (US$ millions) 42 -392 -212 -1,502 258Current 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 1,139Foreign 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 22.5Reserve assets (US$ millions) 3,071 3,097 4,121 6,329 8,373Unemployment 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. 27
  • Investor ServicesAbout UsUruguay 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 whereto make investments as well as those currently operating in Uruguay.Our Investor ServicesUruguay 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. Tailored information. We prepare customized information to answer specific questions, such as macroeconomic data, labor market information, tax and legal aspects, incentive programs for investments, location and costs. Contact with key players. We provide contacts with government agencies, industry players, financial institutions, R&D centers and potential partners, among others. Promotion. We promote investment opportunities at strategic events, business missions and round tables. Facilitation of foreign investor visits, including organization of meetings with public authorities, suppliers, potential partners and business chambers. Publication of investment opportunities. On our website, we periodically publish information on investment projects by public entities and private companies. www.uruguayxxi.gub.uy/investinuruguay invest@uruguayxxi.gub.uy28