The World Forestry Center’s Who Will Own the Forest ... · Emerging Supply Constraints Consumer ... 450 Scenario 1 ... arise along socio-economic development of the country. Strict

Timberland Investment OpportunitiesThe World Forestry Center’s Who Will Own the Forest? Conference; Portland, Oregon Petri Lehtonen, Indufor Oy

Copyright © 2010 Indufor Oy

September 22, 2010

Agenda

1. Introduction

2. Drivers in timberland investments

3. Why to invest in emerging markets?

4. Opportunities and challenges – cases by region

5. Conclusions

Copyright © 2010 Indufor Oy 2

Indufor and Timberland Investments

• Indufor was founded in 1980 to provide independent advisory services in forest and forest industry development.

• Today Indufor is one of the world’s leading consulting companies in the fields of sustainable forestry and forest industry with global operations serving both private and public sector clients.

• This presentation outlines key drivers in timberland investments, emerging market opportunities and challenges and investment cases by regions based on Indufor’s own experience.

Copyright © 2010 Indufor Oy3

Indufor Presence in Emerging Forest Regions as of 2 010Indufor has had long-term presence in:

- Brazil 1988 -

- Laos/Vietnam 1996 -

- Tanzania/Mozambique 1988-

- Russia 1985-93; 2003-

- Indonesia 1992

- China 2004-


Agenda

1. Introduction




5. Conclusions


Drivers

Increasing Capital Requirements and hence Investment Opportunities

Demand for Sustainable Forestry Products Increases

Emerging Supply Constraints

Consumer Preferences

Growing Demand for Sustainable Forest’s Products and Services

Investment OpportunitiesProducts Increases

Policy Trends

Climate Change

Preferences

Growing Demand for Forestry Products and Services• Current world population of 6.7 billion people is projected to grow to 9 billion people in 2040

• Increasing per capita demand for paper and wood products in emerging markets

• Energy wood from sustainable forests is a carbon neutral alternative for fossil energy

• Growing demand for eco-system services from forests, most prominently carbon sequestration

• Increasing demand for non-timber forest products such as oils, fruits, nuts, and medical plants

Global real GDP development and round wood consumption, 1960-2008

1 US census Bureau, International Data Base, June 2008 Update

Note: Industrial roundwood, excludes firewood.

Sources: FAO and IMF (prepared by Indufor)

Emerging Supply Constraints

• Natural forest area continues to decline

• Timber supply from natural forests is declining, illegal logging being curbed down

• Plantations are expanding but their supply does not keep up with demand growth

• Supply shortages foreseen in Asia

• China is by far the world’s largest importer of round wood. Round wood and

Roundwood supply and demand outlook for China, 2000-2020e

wood. Round wood and wood pulp come increasingly from the Southern Hemisphere

• Increasing consumption and dependency on imported wood is evident in many places in Asia.

Source: National Bureau of Statistics of China, Indufor

Consumer Preferences

• Desire for healthier and greener materials

• Concern about climate change

• Demand for biodegradable material

• Increasing share of companies with procurement policies accepting only sustainable wood products

• Concern about loss of biodiversity due to dwindling tropical forests

Policy Trends

Green procurement

Green building initiatives

Protective Policies

• The EU Forest Law Enforcement, Governance and Trade (FLEGT) action• The US Lacey Act

World Primary Energy Demand by Fuel, 450 Scenario1

Bio-energy related policies • 20% of EU energy consumption to

come from renewable resources by 2020

• Renewable Portfolio Standards for most US utilities and Renewable Fuel Standards in US

1. International Energy Agency (IEA), World Energy Outlook 2008. The 450 ppm scenario depicts a world in which collective policy action is taken to limit the long-term concentration of GHG in the atmosphere to 450 ppm CO2e by 2020.

Climate Change

• Forests could potentially contribute with one-third to the reduction of Green House Gases reduction goal.

• The world has extensive marginal lands available for reforestation activities.

• No conflict with food production as

Global GHG abatement cost curve for the forestry sector

Abatement cost€ per tCO

• No conflict with food production as these lands are generally not suitable for agriculture.

Source 1: IPCC 2007

Source 2: McKinsey Global GHG Abatement Cost Curve v2.0

Abatement potentialMtCO2e per year

Agenda

1. Introduction




5. Conclusions


Mature vs. Emerging Timberland Markets

Mature markets Emerging markets

North America, Oceania, Europe (exl. Russia)

• High quality forest management• Freehold land• No significant entry and exit barriers• Increasing timberland prices• Relatively good level of liquidity

Latin America, Asia, Africa, Russia

• Potential for high productivity in tropics• Potential for low production costs • Potential for managerial and technological improvements• Emerging markets for forest products• Restitution and governments outsourcing management


• Relatively good level of liquidity• Dynamically expanding bioenergysector

management

Mature vs. Emerging Timberland Markets

Mature markets Emerging markets

North America, Oceania, Europe (exl. Russia)

• Limited opportunities for greenfield• Mature markets of traditional forest products• Too high timberland prices?

� Low risks

Latin America, Asia, Africa, Russia

• Leasehold land (excl. Latin America)• Land tenure questions• Legal, social and environmental issues

� High or medium risks (huge range between cases)

� Likelihood of high profits if the risks are


� Low risks � Likelihood of high profits

decreasing

� Likelihood of high profits if the risks are well addressed and managed

� The most attractive part of new timberland investments

40%

50%

60%

70%

Softwoodlumber

Softwoodpulp

Hardwoodpulp

Softwoodplywood

Birchplywood

Paper-board Paper

Wood

cost %

of total

Mechanical wood industries

and pulp production towards

raw material sources

Paper production

closer to consumers

Wood Cost as a Location Driver


0%

10%

20%

30%of total

production

cost

Location

Plantations, ports Paper product consumers

2006 Q4

Commercial forest

Concentration of

consumption

� Growing importance of plantations as raw material source

Commercial Forests and Consumption of Forest Produc ts


plantations as raw material source

� Plantations cover marginal share of the global forests (< 5%)

� 30-35% of world’s industrial wood comes from forest plantations

� Wood supply from forest plantation is estimated to satisfy 40-45% of the industrial wood demand by year 2020Source: FAO

Fast Growing Plantation Area in 2006, Million ha

Asia

18.2North America

Europe

5.0


Total

55.1 million ha

18.2North America

17.0

Latin America

9.9

Africa

1.4

Oceania

3.6

Fast Growing Plantation Area in 2016, Million ha

Asia

19.4North America

Europe

5.0


Total

59.8 million ha

19.4North America

17.0

Latin America

13.2

Africa

1.6

Oceania

4.6Plantation area growing fast in Latin America and Oceania

Modest growth in Asia and Africa

Stable situation in North America and Europe

Indonesian Roundwood Supply from Natural Forests and Planta-tions, 1994-2005

6

8

10

12

14

16

18

20

mil

lio

n m

3


0

2

4

6

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Natural forests Industrial plantations

Agenda

1. Introduction




5. Conclusions


General Characterization of Underlying Forest Inves tments Climate: Some Countries in Emerging Europe

Forest assetsSocial and environmental issues

Legal issues

Potential investments

RussiaWorld’s largest forest asset.

Criticism by NGOs of unsustainable and illegal practices –sensitive issues and not well known by outsiders. Forest certification not

Lease under Forest Code.

Acquisition of concession rights in natural conifer forests and investment in wood processing facilities.


Forest certification not yet significant, however expanding quickly.


Forest assets

Social and environmental issues

Legal issues


Romania Deal flows after restitution of pre-Communist property rights.

Restitution process has created lots of smallholders that do not comply always with forest law.

None Acquisition of existing forest assets requires having to deal with several smallholders.


rights.


Forest assets

Social and environmental issues

Legal issues


Baltic: Estonia, Latvia,Lithuania

Increasing deal flows after restitution of pre-Communist property rights.

Restitution process has created lots of smallholders that do not comply always with forest law. No major environmental issues.

None Acquisition of existing forest assets requires having to deal with several smallholders.


rights.

General Characterization of Underlying Forest Inves tments Climate: Some Countries in Latin America

Forest assetSocial and environmental issues

Legal issues


BrazilThe highest potential globally in terms of productivity and new plantation establishment. Land prices is certain areas

Concentration of large land holdings criticized by NGOs. Conflicts take place. Environmental issues generally well taken care of.

Some restrictions on size of land that can be foreign owned

Acquisition of existing plantation assetsGreenfield investment in privately owned land and new plantation establishment


certain areasaccelering.

owned



Legal issues


UruguayHigh productivity and reasonable potential for new plantations –land price

Concentration of large land holdings in few industrial scale companies criticized. No significant environmental risks in professionally managed plantations. 57% of

Restrictions on foreign ownership of land need careful

Acquisition of existing plantation assets (mainly eucalyptus)Greenfield investment in privately owned land and new plantation establishment


land price accelerating.

plantations. 57% of plantations certified with FSC.

careful navigation.



Legal issues


ArgentinaHigh productivity and large areas available for new plantations.

Concentration of large land holdings criticized.

Luxembourg blacklisted.

Acquisition of existing plantation assets Greenfield investment in privately owned land and new plantation establishment


General Characterization of Underlying Forest Inves tments Climate: Some countries in Asia


Legal issues


ChinaHigh demand for forest products–high timber price.

Environmental issues not fully addressed. Some criticism may arise along socio-economic development of the country.

Strict regulatory regime on investment structuri

Possibilities for acquisition with lease arrangements of Government owned plantations. Local partners and good relations with state authorities needed.


structuring.

authorities needed.

General Characterization of Underlying Forest Inves tments Climate: Some countries in Asia


Legal issues


Vietnam

High demand for forest products –elevating timber price. Available plantations are dispersed and low productivity.

Land lease arrangements with the state and local farmers.

Foreign land ownership not permitted.

JV with current forest holders and investment in wood processing and expansion through tree farming and new plantations


low productivity.

General Characterization of Underlying Forest Inves tments Climate: Some countries in Africa


Legal issues


TanzaniaLease arrangement with the Government.

No significant environmental risks in professionally managed plantations.

Structuring land use rights on acceptable terms.

Get involved through Government Private Sector Involvement program. Invest in wood processing facilities. Expand plantations through tree farming and new plantations.


new plantations. Partnership approach required.

General Characterization of Underlying Forest Inves tments Climate: Some countries in Africa


Legal issues


Mozambique

Developing infrastructure (still poor) has attracted several forest investors to start experiments in

Clearing of native vegetation need to be avoided at all cost. There will be people living within the large concession areas.

Foreigners must have an investment project duly approve

Lease arrangement with the Government. Phase 1: Acquire concession land for green field plantation establishment. Phase 2: Establish wood processing facilities.


experiments in the country.

approved for acquiring land rights.

processing facilities. Partnership approach required.

Agenda

1. Introduction




5. Conclusions


Investment Opportunities

• Investment opportunities in sustainable forests are globally available and numerous

• Only about 1/10 of the total available forest area is investor owned. Therefore, the theoretical investment universe is enormous.

• The number of skilled and experienced forest managers is sufficiently large to tap the investment potential

• Demand and areas of application for wood and other forestry products and services are risingrising

� Most of the new untapped investment universe is fou nd from emerging markets with demanding challenges and rewarding opportunities.

Documents

The World Forestry Center’s Who Will Own the Forest ... · Emerging Supply Constraints Consumer ... 450 Scenario 1 ... arise along socio-economic development of the country. Strict