Mexico’s Market Potential for Finnish companies – Forest Industry Finpro Mexico January 2008

/ 2 / © Finpro ry Investment grade and IP protection agreements Investment grade and IP protection agreements Dollar dependent currency 110 million consumer market Strategic location Network of free trade agreements with > 43 countries Network of free trade agreements with > 43 countries Competitive and young labor force Stable economic and political environment Efficient hub from a transportation and logistical perspective Mexico at a glance as a market area and production location 14th largest economy in the world 2nd commercial partner of the USA

/ 3 / © Finpro ry Background The Mexican forest sector has grown by 1000% with the help of governmental support. During the last 15 years the GDP of the forest sector has contributed with 10-12% of the production of the primary sector (farming, cattle, fishing and silvicultural sectors). Mexico is no longer one of the countries with high deforestation (before Mexico was #5, after year 2005 it is #12 according to an enquiry by FAO). Historically in Mexico the production of wood has been based on the exploitation of the natural forests. Now the problem with the gap between the production and consumption is being battled by a governmental program PRODEPLAN to support the production of the commercial plantations, whose production is predicted to increase radically within the next 2-3 years. Market Characteristics

/ 4 / © Finpro ry The Mexican Forest Sector is of increasing interest to Finnish companies Finland has played and important role in the development of the Mexican forest sector and there has been bi-lateral cooperation in the forestry sector since the end of 1960’s. Mexico has an official Strategic Plan for Forestry 2000–2020, which was done by a group of Finnish consultant and financed by the Inter- American Development Bank (IDB). This cooperation has created an excellent base for the development of commercial relations as the Finnish technology is known and well respected. The Finnish exports have not been significant and it has not been easy to find proper representatives / distributors. The situation has gotten much better in this respect as the market for the technologies has increased. Now there are several Finnish forest technology suppliers entering the market. The Free Trade Agreement between Mexico and EU has also helped the commercial relations with Finland. Market Characteristics

/ 5 / © Finpro ry Almost 70 % of the Mexican territory is potentially classified as forest land. These million hectares consist of: 38 million ha of temperate forests 16 million ha of tropical forests 87.7 million ha of desert type vegetation (cactus, shrubs and bushes) 22 million ha have commercial timber potential according to FAO Mexico is ranked in 11th place worldwide for areas with productive forest lands. Each year these forests grow from 25 to 30 million m³ of wood. There are severe problems of illegal forest activities and bad management in the natural forests and therefore the productivity is relatively low. Since 1990s Mexican government has invested strongly in the development of commercial plantation industry as Mexico has many competitive advantages and needs to be more self sufficient in wood and paper. By 2004 private companies had received 32% of the governmental resources, while the rest was divides between 1517 projects. Source: OECD Health Data Market Characteristics

/ 6 / © Finpro ry By the end of 2006 there were in Mexico about 140,000 ha of commercial plantations (it is important to note that in 1997 there were 20,000 ha) About 110,000 ha of the 140,000 ha have been established with the support of the PRODEPLAN program (Commercial Plantations Development Program, part of the National Forest Commission), which supports with up to 700 USD per ha planted The main species used are tropical eucalyptus, melina, red cedar, teak, pines, eucalyptus and pink cedar and the main use of the product of the plantations are wood panels, pulp and saw products. Currently 4 % (5,000 ha) of the commercial plantations are at the production phase and about 40 % in final harvesting and the rest are in thinning phase. It has been estimated that there is a potential for 4,000,000 – 5,000,000 ha of commercial plantations in Mexico (comparison Brazil 6-7 M ha, Chile 2M ha) Plantations are starting to acquire the machinery required for the harvesting and production phase. Commercial Plantations Market Characteristics

/ 7 / © Finpro ry Commercial Plantations – Perspectives YearProduction (m³)Observations ,000Eucalyptus (80 %), melina (20%), for cellulose, sawmills and wood boards ,000 (prognosis)Eucalyptus (70 %), melina (30%), for cellulose, sawmills and wood boards ,000 (prognosis)Eucalyptus (60 %), melina (20%), teak (10%), pine (10%) for cellulose, sawmills and wood boards ,000,000 (prognosis)Eucalyptus (50 %), melina (15%), teak (10 %), pine (10 %), red cedar and caoba (15 %) for cellulose, sawmills and wood boards 2030 onwards18,000,000 (prognosis)Eucalyptus (50 %), melina (15%), teak (10 %), pine (10 %), red cedar and caoba (10 %), others (5 %) for cellulose, sawmills and wood boards

/ 8 / © Finpro ry Natural Forests (”Ejidos”) 80 % of the forest lands belong to Ejidos and Communities, 15 % of the forests is private property and 5 % is government property. The ejido system is a process whereby the government promotes the use of communal land shared by the people of the community. Under the ejido system, the land is owned by the government and is supported by a national bank. The production of the natural forests is around 7,000,000 m³/y. For many communities the wood production is the most important source of income. For the most part the level of mechanization in the natural forests is very low and rudimentary. The machinery used varies from traditional extraction cranes to portable power saws. The harvesting process is usually manual and the machinery used consists normally of chainsaws and cranes. The special program of CONAFOR for the forestry development is called PRODEFOR. The idea of this program is to develop and financially support the whole process in natural forests from harvest to the final product. The purpose and aim of the program is also to facilitate the modernization of the harvesting process and help the forest owners to acquire new machinery. Market Characteristics

/ 9 / © Finpro ry Market opportunities The future of forestry is very promising, because Mexico has both the location and productive land for commercial forestry. Forests have also been socially and politically recognized as vital to produce water, control soil erosion, and regulate the climate. In Mexico there is no such integrated model as in Brazil: Plantations → Paper factories → Ports, and this is exactly where the opportunity is. The forest sector is transforming totally due to the appearance and growth of the commercial plantations. Many plantation owners are looking into the opportunity to have their own plants too. In many of the Ejidos the harvesting is already in process and there will be tremendous need for more modern technology in the next 2–3 years. In most of the commercial plantations the biggest need for new technology for harvesting and transporting the wood will be within the next 5–10 years. Finpro Mexico has identified needs for new products and solutions primarily within the following segments in the Mexican forest sector: Silviculture, harvesting, transportation Board and paper production Sawmill industries

/ 10 / © Finpro ry Silviculture, harvesting and transportation Sector Characteristics Due to the support programs the planting activities have increased and mechanized harvesting has started. The market for the products is growing rapidly and also stumpage prices are high. There are good market opportunities, especially in the plantation sector. Sales prospects identified by Finpro forest nursery technologies chippers debarking equipment loading equipment small scale forest harvesting equipment harvester – forwarders lighter transport technology forest planning systems forest measurement forest consultancy Market opportunities

/ 11 / © Finpro ry Packaging board and tissue paper from recycled fiber Sector Characteristics The board and paper production in Mexico is aprox. 4.3 million tons per year. The most important grades are liner and corrugating boards (1.8 Mt/y) and tissue papers (0.8 Mt/y). Fiber supply is based on recycled fiber. Mexico uses over 4.1 million tons per year of recycled fiber and the number is growing. Sales prospects identified by Finpro The suppliers of technologies for these products have an interesting opportunity in Mexico. Market opportunities

/ 12 / © Finpro ry Sawmill industries Sector Characteristics Mexico produces 3.1 Mm3/y of sawn timber. Over 90 % production is from softwood. The production has expanded mainly through small and medium size investments. Sawing of small stems has increased and this is done with largely improper equipment. In medium size sawmills the wood treatment is still not developed and waste treatment is mainly manual. Sales prospects identified by Finpro Small and medium size portable sawmills. Circular saw blades. Wood treatment technology. Waste treatment technology. Market opportunities

/ 13 / © Finpro ry Finpro Mexico at Your Service Finpro México Oficina Comercial de Finlandia Monte Pelvoux 111, 4 Piso Col. Lomas de Chapultepec México D.F. Mexico Phone Fax Nina Jaakkola Head of Trade Center Mobile: Finpro Mexico is ready to partner up with you to make your landing soft and to discover all the business opportunities in the market:  Market access consulting, market studies and local partnering  In depth site selection for production  Subcontracting and local supplier search (local sourcing)  Establishment services for sales and service offices/subsidiaries  Regional strategy development for Latin America  Analysis of import / export programs  Assistance in negotiations  Reputation analysis of potential partners  Tailor made programs / assignments Finpro Mexico also covers Colombia, Central America Venezuela, and Caribbean Islands