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

2. April, 2012 PÖYRY 21 Woody Biomass for the Energy Sector Investment Opportunities 2

3. April, 2012 PÖYRY 3 Source: RENEWABLES GLOBAL STATUS REPORT 3% 19% 78% 16% 2% 82% Brazilian Energy MatrixGlobal Energy Matrix

4. April, 2012 PÖYRY 4 Renewable Energy Share of Brazil Final Energy Consumption, 2011  Even though most of Brazilian energy comes from renewable sources, there is a large growth potential for the woody biomass market. Wind Biomass Hydropower 1% 5% 76% Renewable Energy 82% Fossil Fuels 16% Nuclear 2%

5. April, 2012 PÖYRY 5 Source: EPE – Energy Research Business Current and Foreseen Installed Capacity by Source Approved ProjectsPlanned Projects

6. April, 2012 PÖYRY 6 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

7. April, 2012 PÖYRY 7 2671.3 22800 23594 2352,63 1 1,362573 Planted Forests : ≈ 6,5 Mha Industrial Wood Consumption ≈ 170 M m³ Planted Area (thousand ha) - 2012 ABRAF 2012

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

9. April, 2012 PÖYRY 9 Pellets Charcoal Wood Chips Logs Residues Briquettes

10. April, 2012 PÖYRY 10 Wood Pellets − International Trend Wood Pellets − International Trend Power Generation − Green Energy Market Power Generation − Green Energy Market Charcoal Industry − Main Markets Charcoal Industry − Main Markets

11. April, 2012 PÖYRY 11  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 Brazil is the biggest charcoal producer and consumer of the world.

12. April, 2012 PÖYRY 12  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 mdc ¹  From 2009 to 2010 the charcoal consumption decreased 35% due to the global economy crisis  In 2011 Brazil produced around 27 million mdc ¹ of charcoal (69% from planted forests) 1 mdc = 1 cubic meter of charcoal

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14. April, 2012 PÖYRY 14  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%  Minas Gerais State concentrates the main players of the charcoal industry

15. April, 2012 PÖYRY 15  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  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.  From 1998 to 2007 the demand increased from 4 million to 10 million mdc per year Future Planted Forest (1,000 ha) 185 336 151 Supply Demand Balance / Deficit

16. April, 2012 PÖYRY 16  Mato Grosso do Sul is the most recent pig iron cluster in Brazil  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  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) Supply Demand Balance / Deficit

17. April, 2012 PÖYRY 17 Source: ANEEL  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

18. April, 2012 PÖYRY 18 Power generation − Green Energy Market Power generation − Green Energy Market Charcoal Industry − Main Markets Charcoal Industry − Main Markets Wood Pellets − International Trend Wood Pellets − International Trend

19. April, 2012 PÖYRY 19  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)

20. April, 2012 PÖYRY 20  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 m ³ sob of firewood in 2015  9 million m ³ sob of firewood in 2020 Firewood Projected Balance

21. April, 2012 PÖYRY 21  The thermal energy trend, based on wood residues, is to increase, since the projected planted area is believed to follow the economy growth

22. April, 2012 PÖYRY 22 Power Generation − Green Energy Market Power Generation − Green Energy Market Charcoal Industry − Main Markets Charcoal Industry − Main Markets Wood Pellets − International Trend Wood Pellets − International Trend

23. April, 2012 PÖYRY 23  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. Russia Oceania China South America North America Eastern Europe Western Europe Global Pellet Production and Consumption – 2010, 2015 and 2020 Japan & Korea ProductionConsumption

24. April, 2012 PÖYRY 24 1,100 500 400 3,300 50 Trade flows in 1,000 tonnes, >50,000 * Intra Western European net trade Current Emerging Global Trade Flows in 2010

25. April, 2012 PÖYRY 25  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

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27. April, 2012 PÖYRY 27 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 1,000 metric tonnes 05001.0001.5002.000 Pacific Bioenergy Lantmännen Agroenergi Plantation Energy Australia Graanul Invest Vyborgskaya Cellulose VAPO Magnolia Biopower JCE Group German Pellets Intrinergy Suzano Energia Renovável 2009Planned

28. April, 2012 PÖYRY 28  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)

29. April, 2012 PÖYRY 29  Regular Clone  Regular spacing between trees (3x3 m)  Forest Yield~ 45 (m ³ /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 (m ³ /ha/year)  Harvest in 2 – 3 years  High Lignin content  (high calorific value)  Cannot be used to produce pulp. Conventional Forestry Energy Oriented Short Rotation Forestry

30. April, 2012 PÖYRY 30 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.

31. April, 2012 PÖYRY 311 Woody Biomass for the Energy Sector Investment Opportunities 2

32. April, 2012 PÖYRY 32  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

33. April, 2012 PÖYRY 33 Scenario B - Expected PlantsScenario A - Announced Plants

34. April, 2012 PÖYRY 34 Mature Market Developing Market Emerging Market Supply Current Demand Planned Demand Deficit

35. April, 2012 PÖYRY 35  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)

36. April, 2012 PÖYRY 36  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

37. April, 2012 PÖYRY 37  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

38. April, 2012 PÖYRY 38  Early Stage Market for the energy sector  Fibria, Eldorado, Ramires, Vetorial, and Brookfield are some of the players that have envisioned this market Planted Area Evolution (thousand ha)  Solid drivers for Timberland investment

39. April, 2012 PÖYRY 39  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)

40. April, 2012 PÖYRY 40  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

41. April, 2012 PÖYRY 41 CONTACT: MANOEL NEVES MANOEL.NEVES@POYRY.COM (55) (11) 3472 6957 THANK YOU!