UNCLAS MONTEVIDEO 000316

SIPDIS
SENSITIVE

STATE PLEASE PASS USTR

E.O. 12958: N/A
TAGS: EINV ETRD PREL PGOV UY
SUBJECT: ENCE Sells Forestry Holdings, New Owners Announce an
18-Month Review of Uruguay's Largest-ever Planned Investment


1. (SBU) SUMMARY: Spanish forestry firm ENCE announced on May 22 the
sale of most of its forestry plantations to a consortium formed by
Finnish-Swedish Stora Enso and Chilean Arauco, and that it will not
continue with plans to build a $1.2 billion cellulose plant. Stora
Enso/Arauco announced they would reevaluate the size and the
location of the future plant, for which site development was already
underway. ENCE's projected investment, which would have been the
largest in Uruguay's history, had raised adamant opposition in
neighboring Argentina and stoked political frictions between the GOA
and the GOU on top of the ongoing dispute related to the Botnia pulp
mill. END SUMMARY.

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ENCE sells investments in Uruguay and cancels long-promised plant
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2. The participation of Spanish forestry firm ENCE in Uruguay's
forestry boom came to a sudden halt on May 22, when it announced the
sale of most of its forestry plantations (274,000 acres) and
investments to a consortia formed by Finnish-Swedish Stora Enso and
Chilean Arauco. The sale, valued at $340 million, put an end to
ENCE's longstanding plan to undertake the largest investment in
Uruguay's history: a major pulp mill worth $1.25 billion. Stora
Enso/Arauco announced they would reevaluate the size and the
location of the future plant. ENCE kept 74,000 acres of Eucalyptus
plantations, a sawmill, and two medium-sized chipping operations to
supply its Spanish-based plants with chips. A representative of
U.S. forestry company Weyerhaeuser told emboff that the sale of
ENCE's forestry holdings was expected, but that the partnership
between Stora Enso and Arauco was not anticipated. While
unexpected, he said Stora Enso and Arauco already have a joint
venture in Brazil and this land purchase makes their forestry
holdings more diverse and balanced. There is probably still room in
Uruguay for a second pulp mill.

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ENCE's erratic activities in Uruguay
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3. ENCE began operations in Uruguay in 1990 by purchasing land and
planting pine and eucalyptus. In 2003, it launched a rive

rside port
terminal on the Uruguay River (near the city of Fray Bentos) and
began building a chipping plant in Montevideo. Also in 2003, it
announced the construction of a major cellulose plant near Fray
Bentos that would be operational by 2008. The announcement aroused
strong opposition in Argentina, especially from people living in the
town Gualeguaychu (on the opposite shore of the Uruguay River) who
feared the ENCE plant, along with the eventually completed Botnia
plant, would pollute the river. Gualeguaychu activists began a
blockade of the bridge connecting Uruguay and Argentina which
continues until now. Arguing that the plant was too close to
Botnia's, in September 2006, ENCE's president Jose Arregui announced
that ENCE would relocate its planned plant to Colonia (on the shore
of the Rio de la Plata and farther away from Argentina). Arregui
also announced the doubling of the project's size to $1.25 billion.
In January 2008 ENCE obtained the permissions to relocate and begin
constructing its plant. Excavation work was underway.

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Background on the growing importance of forestry in Uruguay
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4. The forestry sector is one of the most important and fastest
growing sectors of Uruguay's economy. Spurred by an extremely
favorable climate and good soils, good market conditions and
sectoral government policies adopted in the late 1980's, forestry
plantations in Uruguay jumped from 4,000 acres/year in 1988 to
125,000 acres/year in 2008 (with a peak of 200,000 acres per year in
1998). There are currently about 2.1 million acres of planted
forests and another 7.5 million acres reserved for future forestry
activities. Uruguay continues to attract the attention of major
paper companies that are either in the process of establishing
themselves (Stora Enso, Arauco), or scouting prospects (Nippon
Paper, Portucel). Over the last two decades Uruguay has received
over $3 billion in investments in forestry, and forestry products
will soon become one of the top three exports.

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Stora Enso's plans
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5. ENCE's sale of its Uruguayan project to Stora Enso reduces from
three to two the number of pulp mills in Uruguay's near future.
Notwithstanding, the chances that the mill will indeed be
constructed increase with this purchase, and the acquisition of
ENCE's forested areas (together with that already owned by the
Finnish company) gives Stora Enso the critical mass necessary to
begin the industrialization process. While ENCE already had
concluded their feasibility studies and had obtained the necessary
environmental permits to construct its plant in Colonia, Stora Enso

had traditionally been looking at Uruguay's interior for the
development of its project. Immediately after the purchase, Stora
Enso announced it would begin new investment and feasibility studies
that will require from twelve to eighteen months' work.


MATTHEWMAN