WOODY BIOMASS FOR THE ENERGY SECTOR IN BRAZIL

1. WOODY BIOMASS FOR THE ENERGY SECTOR IN BRAZIL Manoel Rodrigues Neves April, 2012 manoel.neves@poyry.com

2. Agenda 1 Woody Biomass for the Energy Sector 2 Investment Opportunities PÖYRY

3. Energy Matrix – Comparison Global Energy Matrix Brazilian Energy Matrix 2% 16% 3% 19% 78% 82% Source: RENEWABLES GLOBAL STATUS REPORT PÖYRY

4. Brazilian Energy Matrix Renewable Energy Share of Brazil Final Energy Consumption, 2011 Nuclear 2% Wind 1% Fossil Fuels 16% Biomass 5% Hydropower 76% Renewable Energy 82% • Even though most of Brazilian energy comes from renewable sources, there is a large growth potential for the woody biomass market. PÖYRY

5. Brazilian Energy Investments Projection Current and Foreseen Installed Capacity by Source Approved Projects Planned Projects Source: EPE – Energy Research Business PÖYRY

6. Biomass Matrix We are facing a paradigm shift • Biomass has been the focus of most industries in Brazil and the world • A 40% growth in biomass demand is foreseen until 2019 40% Source: EPE – Energy Research Business PÖYRY

7. Forest Planted Area Planted Area (thousand ha) - 2012 267 1.3 Planted Forests : ≈ 6,5 Mha 800 22 594 23 2,631 235 ABRAF 2012 573 1,362 Industrial Wood Consumption ≈ 170 M m³ PÖYRY

8. Brazilian Forest Based Industries – Eucalyptus Demand Forecast 2012 – 2020 Eucalyptus demand by sector (million m³) Growth/y → 8.2% Growth/y → 5.7% Volume demand (million m³) Area demand (ha) Current Demand 223.7 6.1 2020 Future Demand 2012 179.6 4.9 Current Potential Supply 44.1 1.2 Deficit PÖYRY

9. Woody Biomass Woody Biomass Products Charcoal Wood Chips Briquettes Residues Logs Pellets PÖYRY

10. Energy Wood Primary Markets • Charcoal Industry • Main Markets • Power Generation • Green Energy Market • Wood Pellets • International Trend PÖYRY

11. Charcoal Industry – Brazilian Overview Brazil is the biggest charcoal producer and consumer of the world. • 88% of the total production is targeted towards the iron and steel industry • This industry is one of the main drivers of the economy. It represents 3% of the total steel produced in the world, and 51% in Latin America PÖYRY

12. Charcoal Industry – Brazilian Overview • Almost the total production aims the internal market • From 2000 to 2008 the charcoal consumption growth had been 3,5% per year. From 25 to 33 million mdc¹ • From 2009 to 2010 the charcoal consumption decreased 35% due to the global economy crisis • In 2011 Brazil produced around 27 million mdc¹ of charcoal (69% from planted forests) PÖYRY 1 mdc = 1 cubic meter of charcoal

13. Charcoal Industry – Pig Iron Industrial Clusters PÖYRY

14. Charcoal Industry – Minas Gerais Scenario • Minas Gerais State concentrates the main players of the charcoal industry • The State consumption is around 60% of the total charcoal produced in Brazil • The State has around one million ha of energy forests (total 1.4 million ha of Eucalyptus) • The energy oriented planted forest additional area should reach about 300 thousand hectares in 2020, considering the historical industrial demand growth of 3.5% PÖYRY

15. Charcoal Industry – Carajás Scenario • From 1998 to 2007 the demand increased from 4 million to 10 million mdc per year • It is foreseen that the native wood residues will represent a maximum 20% of the total demand in 2020 • If the production of charcoal gets back to 2007 levels (10 million mdc) there will be an area gap of around 150 thousand ha. Future Planted Forest (1,000 ha) Balance / Deficit • After the crisis the charcoal demand decreased to around 6 million mdc per year • In 2009, about 70% of the total charcoal came from native wood residues 185 Demand 151 336 Supply PÖYRY

16. Charcoal Industry – MatoGrosso do Sul Scenario • Mato Grosso do Sul is the most recent pig iron cluster in Brazil • The installed capacity is around 750 thousand tons of pig iron per year, which demands 13,5 thousand ha of plantations per year • Assuming a sustainable forest management, the current planted area deficit is around 50 thousand ha Energy forest planted area balance (1,000ha) Balance / Deficit Demand Supply • It is expected that the native wood share of the charcoal production in 2020 would not exceed 10% • The energy dedicated forest planted area totals 30 thousand ha PÖYRY

17. Charcoal Industry – Thermal Power Plants in Brazil • The Brazilian charcoal based thermoelectric industry is still very incipient. There are only 3 plants in Brazil • Most of the investments aim the pig iron and iron alloys market • One announced project is located in the State of Minas Gerais Source: ANEEL PÖYRY

18. Energy Wood Primary Markets • Charcoal Industry • Main Markets • Power generation • Green Energy Market • Wood Pellets • International Trend PÖYRY

19. Thermal Energy – Grains Processing • The National grain harvest, 2011/2012, should reach 158,4 million tons. • The energy for heat and steam is largely demanded in the grain production process • Woodchips is and will remain as the main fuel • Oil, diesel, and electricity are less viable fuels (environmentally and economically) PÖYRY

20. Thermal Energy – MT Current and Projected Scenario • Mato Grosso is the largest grain processor in Brazil • The grain harvest, 2011/2012, will likely reach 34,9 million tons, almost 23% of the total produced in the country • It is projected a demand increase from “green consumers” of almost 90% of the total market share in 2020 • 7 million m³sob of firewood in 2015 • 9 million m³sob of firewood in 2020 Firewood Projected Balance PÖYRY

21. Thermal Energy – Wood Residues • The thermal energy trend, based on wood residues, is to increase, since the projected planted area is believed to follow the economy growth PÖYRY

22. Energy Wood Primary Markets • Power Generation • Green Energy Market • Charcoal Industry • Main Markets • Wood Pellets • International Trend PÖYRY

23. Western Europe Russia Eastern Europe North America China South America Oceania Wood Pellet Market • Although the largest pellet production capacities are forecast to remain in Europe, the strong competition for raw material in this continent will drive an increasingly demand by imports from regions with a biomass surplus. Global Pellet Production and Consumption – 2010, 2015 and 2020 Japan & Korea Production Consumption PÖYRY

24. Wood Pellet Market Global Trade Flows in 2010 400 1,100 500 3,300 500 50 Trade flows in 1,000 tonnes, >50,000 Current Emerging * Intra Western European net trade PÖYRY

25. Potential Pellet Market - EU • The mandatory EU target of 20% renewable energy by 2020 requires considerable investments on biomass use. • Wood is a significant source of fuel • Large Economies have a high burden, e.g. UK • 66% of the European energy has biomass as main source • Limited sources of renewable energy • It will be challenging to meet the targets, despite the efforts and political will EU Countries Target PÖYRY

26. Brazilian Main Players PÖYRY

27. Main Players Major Pellet Producers – Present and Projected The pellet supply structure can change significantly in the next five years. . Pellet Production Capacity by 2015 Investment Intention Projects Announced Suzano Energia Renovável Intrinergy German Pellets JCE Group Magnolia Biopower VAPO Vyborgskaya Cellulose Graanul Invest Plantation Energy Australia Lantmännen Agroenergi Pacific Bioenergy 2009 Planned 0 500 1.000 1.500 2.000 1,000 metric tonnes PÖYRY

28. Short Rotation Wood Crops • Eucalyptus Short Rotation forests present high yield • The forest plantation is established in highly dense condition • In Brazil, the species that have been used are special clones of Eucalyptus • Eucalyptus were chosen envisioning the potential of multiple cycles (coppice species) PÖYRY

29. Conventional Forestry Energy Oriented Short Rotation Forestry Short Rotation Wood Crops – Fundamentals • Regular Clone • Regular spacing between trees (3x3 m) • Forest Yield~ 45 (m³/ha/year) • Harvest in 7 years • Low Lignin content • (regular calorific value) • Can be used to make pulp or generate energy. • Special Clone • Short spacing between trees (high forest density; 3 x 0,5 m up to 1 m) • Forest Yield ~ 70 (m³/ha/year) • Harvest in 2 – 3 years • High Lignin content • (high calorific value) • Cannot be used to produce pulp. PÖYRY

30. Short Rotation Wood Crops - SWOT Genetically modified Eucalyptus strains offer opportunities for new players in the pellet industry to increase efficiency of the supply chain and to overcome the typical problem of increasing biomass transport cost at larger production capacities. PÖYRY

31. Crash Course - Agenda 1 Woody Biomass for the Energy Sector 2 Investment Opportunities PÖYRY

32. Brazil’s Potential for Investments in Bioenergy • High productivity (yield) • The energy consumption shall increase 9,4% in 2011 along with the economy growth (ANEEL – 2010) • The energy consumption shall increase an average 4,8% per year until 2020 • The current percentage of biomass in the Brazilian energy matrix is 6,5%. It is forecasted to be around 14% in 2020 • Biomass is considered a good source to supply the energy demand: • relatively low investment costs • socially right • environmental friendly PÖYRY

33. Brazil – Eucalyptus Market Balance Scenario A - Announced Plants Scenario B - Expected Plants 33 PÖYRY

34. Brazil – Eucalyptus Market Balance Emerging Market Mature Market Developing Market Supply Current Demand 34 Planned Demand PÖYRY Deficit

35. Opportunities for Investments in Brazil • Market Development Level → Low • Risk → High • Opportunities → High • Market Development Level → Medium to High • Risk → Medium • Opportunities → High • Market Development Level → High • Risk → Low • Opportunities → Low (spot) PÖYRY

36. Opportunities for Investments – Minas Gerais • The main woody biomass market in Brazil • The planted area growth, from 2009 to 2011, was around 8% • It holds itself 60% of the national consumption of charcoal • It presents a planted area of 1.4 million ha (1.0 million ha energy oriented) • MG has a potential to have 6 million ha planted in the future, aiming energy forests • The Pig Iron sector, despite the crisis, has registered, in 2011, an increase in demand and consequently a price rise • MG presents a strategic site location attending several different markets PÖYRY

37. Opportunities for Investments – Minas Gerais • MG has high established goals to decrease the consumption from native forests • Between 2008 and to 2011 – 45% of the total consumption might have been sourced from native forests • Between 2013 and to 2016 – 10% of the total consumption • From 2017 – 5% of the total consumption • Future projects are required to attend the 2017 goal PÖYRY

38. Opportunities for Investments – MatoGrosso do Sul • Early Stage Market for the energy sector • Fibria, Eldorado, Ramires, Vetorial, and Brookfield are some of the players that have envisioned this market • Solid drivers for Timberland investment Planted Area Evolution (thousand ha) PÖYRY

39. Opportunities for Investments – Maranhão, Tocantins, Piauí • MA - Suzano has announced an expansion, on its pulp and paper plants. The project is expected to be ready in 2013 in Maranhão • MA - has potential areas to plant totaling around 10 million ha • PI - has potential areas to plant totaling about 8 million ha • TO - has potential areas to plant summing up around 11 million ha Eucalyptus area evolution (Thousand ha) PÖYRY

40. Opportunities for Investments – South Region • The South Region of Brazil holds a consolidated market • There is not a big range of investment chances besides some spot opportunities • Creativity is the key word in this developed market PÖYRY

41. THANK YOU! CONTACT: MANOEL NEVES MANOEL.NEVES@POYRY.COM (55) (11) 3472 6957 PÖYRY