global trends for investments in forestry &...

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Global Trends for Investments in Forestry & Bio-Energy

by Don Roberts, Vice-Chairman, CIBC October 17, 2011 MegaFlorestais Working Group Oaxaca, Mexico

Agenda

1. Context

2. Impact of the Great Recession

3. Is Forest Products a Sunset Industry?

4. Global Fiber Markets

5. Investment Trends in Bio-Energy

6. Case Study: Renewable Fuel Oil from Biomass

Appendix:

Levelised Cost of Electricity – How Does Bio-energy Currently Compare?

| 3

Context

The Global Landscape

Over the past decade the global forest sector was experiencing some of the most fundamental changes in markets and public policies since the end of the Colonial Era.

For example:

Explosion of the Asian wood deficit…

Fundamental forest tenure reforms in Russia, China, India…

Revolution in electronic communication…

Expansion of the bioenergy sector…

Prospective pricing of carbon…

………and then came the Great Recession – the worst in over 70 years.

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Impact of the Great Recession

| 5

Global Consumption of Softwood Lumber

Source: FAO Annual Market Review 2010 – 2011.

Big Dichotomy

2005 (million m3)

2009 (million m3) % Change

Global 320 242 24%

NA 129 67 48%

Europe 101 79 22%

China 9.8 20.4 108%

| 6

Global Consumption of Wood Pulp


Big Dichotomy

2005 (million tonnes)

2009 (million tonnes) % Change

Global 178 160 10%

NA 70.3 55.8 21%

Europe 55.0 47.4 14%

China 12.5 19.8 58%

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Global Consumption of Paper & Paperboard


Big Dichotomy

2005 (million tonnes)

2009 (million tonnes) % Change

Global 362 374.1 3%

NA 98.6 77.2 22%

Europe 97.6 92.1 6%

China 64.4 90.2 40%

| 8

Global Demand for Roundwood


2005 (million m3) 2009 (million m3) % Change

Global Demand 3,560 3,270 -8%

Industrial (coniferous & non-coniferous)

1,720 1,420 -17%

North America 618 403 -35%

Europe 517 440 -15%

China 125 121 -3%

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Is Forest Products a Sunset Industry?

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Longer-Term Outlook

Inevitably, there will be an economic recovery.

What is the longer term outlook for forest products?

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0

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1961 1967 1973 1979 1985 1991 1997 2003 2008 2014 2020

Global exports are growing faster than demand because demand is growing fastest in countries that are not self-sufficient in forest products.

Value of World Exports of Forest Products - Growing at 8.5% per Year

Data Source: FAOSTAT Projections: Exponential Least Squares

US$ Billions

Current Global Recession

$267 BILLION

$147 BILLION

$228 BILLION

$6 BILLION

Trend Projection

| 12 Source: FOEI

Basis for Global Growth

Per Capita Consumption of Paper & Board (2010)

247239

217

72

59

4335

208 6

0

50

100

150

200

250

300

North

America

Japan W. Europe China World Latin

America

E. Europe S. + E.

Asia

Africa Asian CIS

(K

g/

Cap

ita)

Global economic growth is concentrated in those regions which currently have the lowest per capita consumption of forest products. Consumption in the developing world will drive future global demand due to faster increases in economic growth and population.

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0

50

100

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350

2000 2010 2020 2030 2040 2050

Kg

/Ca

pit

a

W. Europe

E. Europe

Asian CIS

China

Japan

S.+E. Asia

North America

Latin America

Africa

World

Note: 2010-2050 are forecasts Source: FOEI

Per Capita Consumption of Paper & Board (2000-2050E)

Basis for Global Growth

Rising per capita consumption and population in the developing world will more than offset the declines in the developed countries.

| 14

China – Fiber Imports Estimate 2011

Approximately 35 million m3, or 33% of this amount, will be sourced from N.A.

Source: International WOOD MARKETS Group Inc., CIBC Estimates.

Logs 41.7 million (m3) 41.7 million (m3)

Lumber 20.6 million (m3) 20.6 million (m3)

Pulp 11.3 million (tonnes) 45.2 million (m3)

TOTAL 107.5 million (m3)

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China

China’s fiber deficit is expected to grow to between 150 million m3 and 170 million m3 by 2015.

Source: CNDRC & Chinese Society of Forestry.

| 16

The global forest industry is NOT a “Sunset Industry”.

However,

There is a geographic shift in global growth;

Important segments of the industry are in long-term decline;

Transformational change is required to ensure a sustainable forest industry

Developing the bio-energy market will be key for the industry’s future.

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Global Fiber Markets

| 18

Pulpwood Fiber: Global Cost Comparison

There are large differences in the cost of pulpwood around the world. As a result, it matters where you invest

If you are a consumer of pulpwood, the U.S. South is the most attractive region - it is the largest, and lowest cost source of commercial pulpwood in the world.

The strongest price signal to grow more trees is in China - ~ triple the price in the lowest cost regions.

$0

$20

$40

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$200

U.S

. S

outh

Au

str

alia

W. C

an

ad

a

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Ze

ala

nd

E.

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na

da

U.S

.

No

rth

we

st

Bra

zil

Fra

nce

Sw

ede

n

Ge

rma

ny

US

$/O

DM

T

$0

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$200

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Ru

ssia

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ou

th

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rth

we

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Ch

ile

E.

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na

da

Ind

on

esia

Fra

nce

Bra

zil

Au

str

alia

Fin

lan

d

Sw

ed

en

Sp

ain

Ge

rma

ny

Ch

ina

US

$/O

DM

T

Source: Wood Resources International, CIBC World Markets Inc.

Average Delivered Non-Conifer Roundwood Fiber Prices Q2/2011

Average Delivered Conifer Chip Fiber Prices Q2/2011

| 19

Trend in Global Pulpwood Prices

Around 2000, the trend in global wood prices was reversed – it went from negative to positive.

We think the upward trend will continue (subject to cyclical swings).

$60

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1988

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US

$/O

DM

T

Conifer Conifer (Real) Linear (Conifer) Linear (Conifer (Real))

$60

$70

$80

$90

$100

$110

$120

$130

$140

$150

1988

1989

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2001

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2004

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2006

2007

2008

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US

$/O

DM

T

Non-Conifer Non-Conifer (Real) Linear (Non-Conifer) Linear (Non-Conifer (Real))

Global Average Prices for Non-Conifer Pulpwood Global Average Prices for Conifer Pulpwood


| 20

Regional Trends in Pulpwood Costs

Low cost regions in S. America have been experiencing a significant increase in their relative cost of market wood since 2003/4. This is especially true for non-conifer pulpwood in Brazil due to rising land costs and an appreciating currency.

0

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Brazil U.S. South Finland E. Canada

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Chile W. Canada Finland U.S. South E. Canada

Nominal US$ Price Indexes of Non-Conifer Pulpwood: Regional Comparison

Nominal US$ Price Indexes of Conifer Pulpwood: Regional Comparison


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Investment Trends in Bio-Energy

| 22

What Drives The Economics of Bio-energy?

Four key variables shape the economics of investing in bio-refiners:

1. The delivered cost of biomass (50%-70% of the variable cost)

2. The conversion technology

3. The price of fossil fuels

4. Public Policy (including the price on carbon)

Given the trends in these key variables, the long-term outlook for bio-energy/chemicals is positive. In the mean time, there is considerable uncertainty in each of these variables

| 23

Bio-Energy is classified into two forms.

Biofuels

Liquids

Biomass

Solids & gases

Mainly in the form of wood & agricultural residues.

Historically, most investment has been for plants to produce biofuels.

Since 2009, biomass-based energy has been more important.

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China

24%

Other

27%

Italy

3%

Mexico

0.24%

Japan

5%

Brazil

5%

Germany

7%

United Kingdom

9%

India

12%

United States

8%

Global Biomass Investment Trends

Global Asset Financing in Biomass (2005-2010)1

1 Source: Bloomberg New Energy Finance.

Global investments in energy plants using biomass have hovered around $10 B/year since 2007 – much more consistent than for biofuels.

China is the leader, followed by India then the UK and USA.

China’s NDRC is targeting to increase biomass power from <6GW in 2010 to 24 GW by 2020 (estimated cost ~$70 billion

EU expects to double biomass capacity by 2020 to ~26 GW (~$50 Billion)

Brazil likely to spend at least $55 billion for power & cellulosic ethanol to use bagasse

Cumulative Growth in Biomass Asset Financing1

1% -3 -

$6.0B

$9.0B

$9.8B

$10.9B$10.6B $10.4B

2005 2006 2007 2008 2009 2010

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Mexico

0.001%

Spain

4%China

3%Netherlands

3%

United Kingdom

2%

Germany

2% France

2%Canada

2%

United States

37%

Other

21%

Brazil

24%

Global Biofuels Investment Trends

Global Asset Financing in Biofuels (2005-2010)1


The U.S. and Brazil dominate the global investments in biofuels.

Feedstock is primarily corn or sugar cane.

Since peaking at almost $23 B in 2007, global investments have fallen sharply to <$5 B. in 2010.

Cumulative Growth in Biofuel Asset Financing1

215% 19% -28% -61% -25%

$4.8B

$6.4B

$16.4B

$22.8B

$19.2B

$6.1B

2005 2006 2007 2008 2009 2010

| 26

Global Non-Food Based Biofuel Investments


Due to the global recession, investments in non-food based bio-fuels have fallen to about 1/10th from their peak in 2008.

The U.S dominates the investments in this field, with more than one-half of the total.

We expect the aggregate investment to significantly ncrease over the next 5-10 years, with most of the rise occurring in the United States and Brazil.

Cumulative Growth in Non-food Based Biofuels Asset Financing1

248% 415% 58% -116% -25%

259mm344mm

2,108mm

1,380mm

268mm

77mm

2005 2006 2007 2008 2009 2010

Asset Financing in Non-food Based Biofuels by Country (2005-2010)1

Belgium

2%

Brazil

2%

Australia

3%

Trinidad & Tobago

4%

Finland

3%

Canada

3%

Italy

4%

United States

55%

China

7%

Netherlands

6%

Other

11%

| 27

0

5

10

15

20

25

30

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2008 2010 2012 2014 2016 2018 2020 2022

(b

illi

on

gallo

ns)

Conventional Biofuel Cellulosic Any Advanced Biodiesel

U.S. Government’s Renewable Fuel Standard - 2

Current US policy has mandated a level of demand that well exceeds available supply

Top Refiners have significant purchase obligations

Non-Food-Based Bio-Fuels

RFS2 Mandate (in ethanol equivalence)

Potential Renewable Fuels Spend (RFS2 by 2022)

(US$ billions)

Source: U.S. EPA, Company Website.

$4.3

$4.5

$4.9

$6.0

$7.6

$8.6

$9.4

$11.4

$11.7

$11.9

Sunoco

Koch Industries

CITGO

Chevron

Marathon

BP

Shell

ConocoPhillips

Valero

ExxonMobil

Objective is to stimulate the production of “next-generation bio-fuels”

• One of the few federal initiatives to have bi-partisan support.

• Specific technological pathways must be approved by the EPA.

• The feedstock must come from a renewable and sustainably managed resource.

• Requires 21 billion gallons of advanced bio-fuels by 2022.

•Up from 1 bgal in 2010

•2022 target must include at least 16 bgal of advanced cellulosic bio-fuel

•Annual interim targets, with 5.5 bgal in 2015

RFS- 2 creates a broad and sizable market in the U.S. for cellulosic fuels with numerous motivated potential customers

| 28

Global Non-Food-Based Biofuels Investments


Woody biomass accounts for only a small fraction (5%) of the feedstock currently used to produce bio-fuels from non-food materials.

Agriculture residues, Non-food grasses and Animal Fats account for the majority.

It is important for forestry officials to think outside their traditional “forestry silos”. Global Asset Financing in Non-Food-Based Biofuels

(2005-2010)1

Non-food Oleaginous

Crops

12%

Animal Fats / Tallow

24%

Agriculture Residues

27%

Municple /

Industrial Waste

4%

Non-food Grasses

27%

Forestry Residues

5%Organic Waste

1%

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Case Study: Renewable Fuel Oil From Biomass

by Ensyn Inc.

| 30

Pyrolysis - Deployment

Case Study

Technology Readiness for Biomass to Power (EPRI 2010)

Source: EPRI Biopower Generation White Paper, February 2010.

| 31

Commercially Proven Breakthrough Technology

Ensyn’s Fast-Pyrolysis process is the only commercially operating biomass to liquid fuels technology – Renewable Fuel Oil (RFO)

Red Arrow Products Company

Commercialized in 1989

Four operating facilities

Food ingredients and liquid fuels market

Ivanhoe Energy


1,000 BDTPD

Heavy oil facility

Petroleum upgrading

Renfrew Facility


100 BDTPD

Renewable Fuels

Over 100 million liters (30 million gallons) of Renewable Fuel Oil (RFO) produced to date

Case Study

| 32

Flexibility to Use a Wide Variety of Abundant and Low-Cost Feedstocks

Woody biomass has historically shown much less volatility and price inflation compared to other commodities and feedstocks

RFO can also be produced from other forms of biomass (e.g.bagasse, oil palm residues) which are a fraction of the cost of woody biomass.

Low Cost Abundant Feedstocks Woody Biomass: Low Cost and Stable Pricing

Hardwoods & Softwoods

Whitewood & Bark

Sawmill and Other Operational Residue

Agriculture Residue: Oil Palm and Sugar Cane Residues

Case Study

Source: Wood Resources Quarterly (wood chip prices); Bloomberg (other commodities). Data as of end of Q2 2011.

Prices indexed to 100 @ Q1 2000

50.0

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2000

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2011

Q1

20

00

= 1

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Q1

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00

= 1

00

Soy Oil SugarOil CornU.S. PNW Chips U.S. South ChipsW. Canada Chips

| 33

Cost Structure, US$ / BOE Equivalent, 10% Unleveraged Pretax IRR

$-

$10.00

$20.00

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$50.00

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$30.00 $50.00 $70.00

Feedstock Cost (USD / ODMT)

US

$ /

Barr

el

of

Oil

Eq

uiv

ale

nt

EBIT

Depreciation 20 yrs Straight Line

Cash Cost

Cost Competitive with Traditional Hydrocarbon Technologies

Joint venture between Ensyn and Honeywell has resulted in a significant reduction in costs.

Given biomass price of $50/ODMT, the cost of RFO is now $84/barrel of oil equivalent1

Unleveraged Plant Pre Tax IRR: Feedstock Pricing ($/ODMT) vs. Fuel Pricing ($/barrel) Excluding RINs1

Case Study

1 Source: Management.

Total cost (including 10% return on capital) of $84/barrel

| 34

$2.59

$2.32

$1.90

$0.62

($0.24)

Significant Cost Advantage Over Other Biopathways

Low cost biopathway able to compete with traditional hydrocarbons and other forms of bio-fuel.

Significant Production Cost Advantage

Case Study

Source: Management estimates; Feedstocks converted to Ensyn RFO equivalence on an energy basis.

Estimated Production Costs (not including subsidies)

$/Gallon RFO (normalized by energy content) B

iod

iesel

En

syn

Co

rn

Eth

an

ol

Su

gar E

than

ol

Feedstock @ $50/ODMT

Net of RINs of $0.86 if in the United States

| 35

Blue – Chip Network of Strategic Partners, Joint Venture Partners and Shareholders

JV Partners

Off-take Agreements Shareholders

Strategic Partnerships

Case Study

http://www.premium-re.com.my/

http://www.cat.com/home

http://www.ivanhoeenergy.com/

http://www.redarrowusa.com/

http://www.collenergia.com/index.html

http://www.ensyn.com/

| 36

Case Study

Leveraging Joint Ventures

Joint Venture between Ensyn, Honeywell and Premium Renewable Energy to produce power and transport fuels from oil palm biomass in Malaysia ($5/ODMT)

Roughly 60 million tonnes of biomass is produced yearly by the Malaysian palm oil industry:

32 million tonnes is in the form of empty fruit bunches and fiber:

This could produce 11 million tonnes of pyrolysis oil/year;

Equivalent of 41 million barrels of crude oil;

Annual revenue of ~$3 billion at today’s prices

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Appendeces

| 38

Appendix A: Levelised Cost of Electricity ($US/MWh)

In Q2 2011, the cheapest source of power generation in most jurisdictions remains the conventional thermal sources. However, the gap is narrowing with low-cost renewables

For each form of renewable energy, there is a range of cost estimates which reflect differences in technology, scale and location

Based on traditional technologies, bio-energy is in the middle of the cost curve for generating electricity

How will bio-energy’s relative position change in the future?

$294.7

$217.7

$237.6

$182.4

$162.9

$163.3

$159.8

$158.3

$86.3

$85.5

$73.6

$47.3

$81.2

$61.1

$70.1

$45.5

$57.4

$53.3

$645.0

$508.8

$433.0

$365.3

$334.3

$317.5

$275.2

$256.5

$211.1

$188.7

$163.9

$135.0

$114.2

$107.5

$80.6

$69.2

$67.1

$60.3

$0 $50 $100 $150 $200 $250 $300 $350 $400 $450 $500 $550 $600 $650 $700

Marine - Wave

Marine - Tidal

STEG - Parabolic Trough

STEG - Parabolic Trough + Storage

PV - c-Si Tracking

PV - c-Si

Wind - Offshore

PV - Thin Film

Biomass - Gasification

Biomass - Anaerobic Digestion

Biomass - Incineration

Municipal Solid Waste - Incineration

Geothermal - Binary Plant

Wind - Onshore

Coal Fired

Landfill Gas

Natural Gas CCGT

Geothermal - Flash Plant

Source: Bloomberg New Energy Finance. , CIBC World Markets Inc.

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Appendix B: Bio of Don Roberts

Mr. Roberts is a Vice-Chairman of Wholesale Banking, and Managing Director in Investment Banking with CIBC World Markets Inc.. He leads the bank’s Renewable Energy & Clean Technology Team. Don also provides senior coverage for companies in the Global Forest Products Industry

In 2011, Mr. Roberts was chosen by Corporate Knights Magazine as the individual in the Financial Services sector who contributed the most to sustainable development in Canada

During a sabbatical year in 2009 Mr. Roberts designed and guided the Future Bio-Pathways Project on behalf of the Forest Products Association of Canada

Prior to assuming his current position, investor surveys consistently ranked Don among the top equity research analysts covering the North American forest products industry over a 18 year period. Previous to entering the financial services industry he was Chief Economist for the Canadian Forestry Service. In addition to his work with CIBC World Markets Inc., Don is also

An Adjunct Professor in the Department of Forest Resource Management at the University of British Columbia (Vancouver);

On the Board of Directors, Rights and Resources Institute (Washington, D.C.); and,

Serves in an advisory capacity for a range of government, industry, and NGO groups.

Mr. Roberts has a Bachelor’s degree in Agricultural Economics from the University of British Columbia, a Master’s degree in Forestry Economics from the University of California at Berkeley, and both an MBA and doctoral studies in International Finance and Economics from the University of Chicago. He is also a certified Board Director with the Institute of Corporate Directors.

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