and Future Trends SIXTEENTH ANNUAL Asian Conference 2 June 2015 George Kuru

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Indonesia Plantation ti Pulp and Paper Sector Current Situation and Future Trends SIXTEENTH ANNUAL Asian Conference 2 June 2015 George Kuru Ata Marie Group Ltd

Republic of Indonesia

Country Overview It is an archipelago comprising ii thousands of islands Indonesia has a land area of 181,115,690 ha the world s 15 th largest Indonesia is the world's fourth most populous country with an estimated populationof of over 252 million people Republic with a democratically elected legislature and president

Cultural Perspective Multi cultural, diverse, complex. Approximately 300 distinct native ethnic groups and 742 different languages and dialects. Worlds largest population of Muslim practitioners but also has significant populations of Christians, Buddhists,and Hindus.

Economy The Indonesian economy nominal GDP of US$928.274 billion in 2012, the world's 16th largest economy. Estimated nominal per capita GDP in 2012 was US$3,797. GDP growth averaged 6.2% between 2010 2013. The country hasextensive naturalresources resources, including crude oil, natural gas, tin, copper, and gold. Significant agriculturalandforestry and sectors.

Extent of Forest and Other Wooded land Source: Global Forest Resources Assessment, Country Report, Indonesia. FAO Report FRA2010/095 Rome, 2010

Forest Designation and Management Source: Global Forest Resources Assessment, Country Report, Indonesia. FAO Report FRA2010/095 Rome, 2010

Indonesia Pulpwood Concessions

Indonesia Pulp and Paper Plantation Companies Group Location T otal C oncession Areas Dry land Peat land Company E s timates Grand Total P lantation Area Estimates P lanned 2014 New Planting SINARMAS / AP P AP R IL Kalimantan 596,464 95,227 691,691 145,000 180,000 S umatera 970,170 1,030,944 2,001,114 855,000 120,000 Kalimantan 301,952 42,700 344,653 110,000 210,000 S umatera 383,598 712,395 1,095,993 535,000 90,000 MHP / PT TEL S umatera 436,994 647 437,641 100,000 15,000 CHEMONE Kalimantan 194,377 0 194,377 5,000 95,000 DJARUM Kalimantan 310,101 8,085 318,186 25,000 125,000 KORINDO Kalimantan 98,667 0 98,667 60,000 0 ME DC O Papua 141,370 29,074 170,445 0 125,000 MO DE R N Papua 78,144 3,959 82,102 0 50,000 SUMITOMO Kalimantan 109,945 172,438 282,383 30,000 120,000 HRB (Aka UFS ) Kalimantan 260,694 0 260,694 30,000 0 KIANI NUSANTARA Kalimantan 187,000 0 187,000 52,000 0 Total 4,069,476 2,095,469 6,164,946 1,947,000 1,130,000 Provincial E s timates SUMATRA KALIMANTAN PAPUA Grand Total 1,790,762 1,743,986 3,534,748 1,490,000 225,000 2,059,200 318,450 2,377,651 457,000 730,000 219,514 33,033 252,547 0 175,000 4,069,476 2,095,469 6,164,946 1,947,000 1,130,000

43% of Plantations in Indonesia Located on Peat Lands Peat lands are an unique component of pulp plantations in Indonesia Environmentally quite controversial Sustainability of peat land plantation are questionable Peat land plantations are essential to the pulp industry at the moment, but will have less importance in the future as most new plantations ti will be on dry lands.

Heavy Reliance on Barge Transport

Indonesia Pulp and Chip Mills

Indonesia Pulp Production Mill Group Capacity Estimated Production 2013 Potential pulp log consumption (capacity) Current Capacity Tonnes of pulp/year m3/year PT Indah Kiat Pulp and Paper APP 2,300,000 2,200,000 10,350,000 PT Lontar Papyrus Pulp and Paper 800,000 750,000 3,600,000 Riau Andalan Pulp and Paper APRIL 2,800,000 2,200,000 12,600,000 PT Toba Pulp Lestari 200,000 200,000 900,000 PT Tanjung Enim Lestari TEL / Marubeni 500,000 350,000 2,250,000 PT Kiani Kertas Nusantara Group 500,000 2,250,000 PT Kertas Kraft Aceh 135,000 607,500 Total 7,235,000 5,700,000 32,557,500 Future New Capacity PT OKI Pulp & Paper Mills APP 2,000,000 9,000,000 Misc 2 4,000,000 9 18,000,000 Total 4 6,000,000 18 27,000,000 Sources: 1. Annual Review of Woodchip Statistics 2014. RISI. In preparation. 2. Personal communications

Annual Pulp Wood Consumption 40.00 35.00 30.00 Annual Pu ulp Wood Consum mption (m3) 25.00 20.00 15.00 10.00 5.00 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Timber from natural forest Timber from Plantations

MAJOR INDONESIAN PAPER PRODUCT PRODUCERS DJARUM Bukit MuriaJaya(BMJ) Karawang Specialty papers (cigarette) and packaging ID consumes 195 billion cigarettes/yr APRIL Riau Andalan Pulp & Paper (RAPP) Kerinci Printing and copying paper 850,000 MT / Year ASIA PULP & PAPER GROUP Purinusa Ekapersada Bandung - Corrugated carton box Semarang - Paper packaging and carton packaging Indah Kiat Pulp and Paper Perawang - Paper from virgin fiber 1,200,000 MT / Year Serang - Recycled paper products (board grade) - 1,570, 000 MT / Year Tangerang - Colored paper for virgin fiber - 105,000 MT / Year Lontar Papyrus Pulp and Paper Industries Jambi - Tissue from virgin fiber approx. 100,000 MT /Year Pindo Deli Karawang 1 - Jumbo Roll Tissue, Art Board Karawang 2 - Photocopy paper, jumbo roll & converted tissue - Capacity Karawang mills 1,117,000 MT / Year Perawang - Tissue roll - 400,000 MT / Year Tjiwi Kimia Surabaya - Paper and stationary, both from virgin and recycle fiber - 1,677,000 MT / Year Ekamas Fortuna Malang - Recycle paper board grade products 180,000 MT / Year The Univenus Cikupa - Converted tissue products Perawang - Tissue jumbo rolls Surabaya - Converted tissue products Medan - Converted tissue products

Indonesia Chip mills Factory Name Province Location Ownership Capacity of chipping (BDT) Production End Use - Domestic estimate 2013/14 pulp mill or chip (BDT/yr) export? Dumai Riau Province, Sumatra Dumai APRIL 500,000 0 Built to supply Rizhao but has also barged chips to Kerinci PT Sarana Bina Semesta Alam (SBSA) PT Kutai Chip PT Chipdeco Inti Utama East Kalimantan East Kalimantan East Kalimantan Tj Karas, Mahakam River, Kbptn Kutai Kertanegara Kariangau, Balikpapan Bay, Balikpapan p City. Tarakan Island Sinar Mas Forestry. (legally outside of APP) 900,000 500,000 APRIL 1,000,000 1,000,000 Sinar Mas Forestry (legally outside of APP) 70,000 0 Export Export, especially to APP Hainan Export to APRIL Rizhao PT Manunggal Anugerah Lestari (MAL) South Kalimantan Pulau Laut, Kbptn Kotabaru Original plan was for APP Coal 750,000 0 export but also sell domestic (on barges) PT Bintuni Utama Murni Wood Industries Papua Kbptn Teluk Bintuni Local 100,000 Mangrove high 50,000 density chip for specialist papers Original plan was for 500,000000 chip export but may sell Bian River, Kbptn PT Medcopapua Papua MEDCO Group 0 domestic on barges Merauke 200,000 pellets due to ship loading problems PT Korindo Central Kalimantan Export chip. Oji's new Kapitan River, Kbptn Oji / PT Korindo 500,000 250,000 pulp mill Nantong, Kotawaringin Bara China and Japan Summary 4,520,000 1,800,000 1,670,000 40% 37%

Indonesia Wood Chip Exports (Million BDMt) 2 1.8 1.6 Steady increase in woodchip dhi exports 1.4 1.2 1 0.8 0.6 2010 60% 2011 39% 2012 7% 2013 27% 2014 22% 2015 Q1 >100% 0.4 0.2 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Indonesia Future Trends in Chipwood / Pulp / Paper Sectors Transition to 100% plantation wood by 2017. Tightening of domestic wood chip supply / demand situation in medium term. Existing pulp mills are unlikely significantly expand Opportunities for existing paper production to expand considerably Exportwoodchip likely to be redirected for domestic use What are the plans of smaller plantation companies? Some of the of smaller plantation companies are likely to be acquired by the pulpmill companies The smaller plantation companies are unlikely to have sufficient wood to build a BHKP mill on their own. Groundwood pulp mills "refiner mechanical" pulp (RMP), "thermomechanical" pulp (TMP) and chemi thermomechanical pulps (CTMP) are being considered given the smaller wood requirements of these mills and the low cost of energy in Indonesia (cheap thermal coal). Smaller plantation companies Move to non chipwood forest plantations rubber, biomass, charcoal

Demise of Acacia mangium Acacia mangium is the dominant species for wood fiber production in Indonesia A. mangium has proven to be a reliable species but with limited production potential. Increases in pests and diseases over time are markedly impacting on the long term viability of A. mangium as a plantation species Many companies are replacing their A. mangium plantations with Eucalyptus

Acacia mangium Typical Acacia mangium moderate growth rates (25MAI), multi leaders, variable growth, high mortality, poor form.

Three headed hydra (1) Ganoderma philippii

Three headed hydra (2) Stem wilt: Ceratocystis

Three headed hydra (3) Monkey damage Sumatran macaque Oranghutans

Rise of Eucalyptus Early plantings of E. grandis,, E. uropylla,, E. camaldulensis etc in Indonesia largely failed. Exceptions APRIL haveestablishedworld established class E. grandis, E. uropylla plantations at high altitude on volcanic soils. After a long period of R&D, Indonesian industry has established E. pellita as a viable and competitive plantation species Rapidlyincreasinggrowth increasing growth rates, improving density and pulping characteristics, and improved resilience against pests and diseases

Eucalyptus pellita grown from Seed Eucalyptus pellita has been successfully grown from seed in Korindo for 15 20 years. Growth rates of approximately 25 m3/ha/year. Low risk plantation development strategy but limited scope for productivity improvement.

A New Paradigm Intensively Managed Eucalyptus pellita clones Rapid genetic improvement through clonal propagation of E. pellita. Hybridizing with E. grandis, E. urophylla, E. tereticornis Intensive site preparation, weed control and fertilizer regimes to improve plantation performance. Improved operational efficiencies through mechanization.

Plantation Potential Plantation growth potential highly correlated to annual rainfall All Indonesian plantations have high levels of year round rainfall i.e. high plantation ti growth potential

1 st Generation Eucalyptus pellita clones 1 st generation Eucalyptus pellita clones. Tall but reduced DBH growth. Very light crowns. Significant variability and some mortality.

2 nd Generation Eucalyptus pellita Clones Sinar Mas has been a leader in the development of clonal Eucalyptus pellita. Now developing 2 nd generation of Eucalyptus pellita clones. Rapid improvement in MAI, tree form, and wood density and wood properties.

Hybridization Going forward, hybridization offers significant potential for further enhancement of growth and yield, ild wood density and pulp recoveries. Hybridizing with E. grandis, E. urophylla, E. tereticornis This picture shows a 16 month old first generation E. pellita x E. tereticornis hybrid growing on dry site in PNG. demonstrating significantly enhanced growth and pest resistance. it

Historically Poor Performance of Plantation Management Relatively low tech approach to plantation operations High level of manual labor / low productivity rates / high costs Social / community issues with encroachmentand and firerisk risk. Neglect of environmental values

Low Tech Approach to Harvesting

Historical Low Tech Approach to Transport

Eucalyptus Requires More Intensive High Tech Management Approach

Improved Operational Efficiency and Effectiveness Increasing focus in Indonesia in improving operation efficiency and productivity: Investment in R&D to improved effectiveness and efficiency of silvicultural Increased mechanization of silviculture and harvesting Research into improving logistics through new transportation t ti technologies and In field chipping

Improving Social Performance Minimizing social conflict and associated resource losses and improving worker productivity and welfare Application of FPIC program according to best practices Implementation of participatory planning and community development programs Programs and training to protect worker welfare and increase worker skills and productivity Transparent and evidenced based reporting of social performance

Improving Environmental Performance Implementing credible and substantive sustainable environmental management High conservation value forest assessments HCV Improved mapping of natural resources HCS Integrated Forest Management Planning IFMP Land use planning based on sound environmental principles Transparent and evidence based reporting of environmental performance

Plantation Performance

Cost of Production 600 500 BHKP Cash Costs Delivered to Western Europe (CIF) FEB 2012) Chemicals Energy Labour Maintenance Other Mill Costs Freight Marketing and Sales Wood 400 (USD/ADT) Cost ( 300 200 100 0 Source: PWC / Hawkin Wright Indonesia Brazil Chile China The Indonesian mill costs are very competitive however the delivered cost of wood fiber is significantly ifi higher h than its main competitors. The transition to Eucalyptus should result in reduced average plantation costs per tonne and significantly improve cost competiveness of the industry.

Delivered Cost of Wood 75 DELIVERED WOOD COSTS AS PERCENTAGE OF TOTAL PULP PRODUCTION COST % OF PU ULP PRODUC CTION COST 70 65 60 55 50 Brazil Chile Indonesia 2012Q1 2012Q2 2012Q3 2012Q4 2013Q1 2013Q2 Source: WQI ex Fisher Institute

Future of Indonesian Industry High productivity sustainable plantation management Significantly improving growth rates (50%+ gain on dry lands) Full utilization of land resources (12% gain) Improving workforce productivity (25% gain) Commercial pay off Long-term security of fibre supply based on 100% plantation wood Lower cost of wood (10-30% reduction) Market pay off Market recognition of sustainability programs Securing existing markets in Asia and Pacific Better access to high value markets in Nth America / Europe (10-15%)

THANK YOU Contact: t George Kuru Ata Marie Group Ltd Web: www.ata marie.com Email: george.kuru@ata marie.co.id