BRITISH COLUMBIA

Fortress Paper looks at partial conversion of Thurso mill back to paper pulp

10/02/2013 10:05 EDT | Updated 01/23/2014 06:58 EST
Fortress Paper may return its specialty cellulose mill in Quebec to producing pulp for paper as prices for dissolving pulp — largely used by the Chinese textile industry to make rayon for clothes — continue to fall.

The plant in Thurso, Que., near Ottawa, was converted from paper grades in 2011 just after prices peaked for dissolving pulp.

Since then, prices have plummeted by more than a third to about US$880 per tonne, while paper and specialty pulp prices have surged.

Chief executive Chadwick Wasilenkoff expects the mill's annual 200,000 tonne capacity will be directed entirely to the dissolving pulp market over the long-term, but that 20 to 60 per cent of the output could be converted to paper and unspecified specialty pulp for six to 12 months.

"It just happens to be, that right now, we're looking at it from an opportunistic potential," he said from Vancouver.

Forest Paper spent $120 million in capital costs to convert the mill that employs 375 people. Other grades of dissolving pulp are used in cigarette filters, cellophane, chemical additives and LCD screens. It is also used by pharmaceutical companies and the food industry as a binding agent.

In addition to fetching lower prices, dissolving pulp is more costly to produce because it uses more fibre and chemicals, while the extra processing time also reduces output by up to 25 per cent.

Before making any conversion, Fortress will conduct tests to ensure the quality of the product, confirm the cost structure and work out pricing with customers. Wasilenkoff said a decision on whether to proceed could come in about a month and be completed at very little cost.

Paul Quinn of RBC Capital Markets said Fortress (TSX:FTP) faces several challenges with the conversion. Switching to hardwood pulp would put it up against new capacity from South America, while plans for a short-term conversion could undermine its ability to develop a customer base willing to pay full price.

He called the conversion "a move of desperation" in light of a possible dumping tariff from China.

"The strategy makes sense if you are going to lose less money or actually gain money by doing it, but you're not going to pull that trigger until you know what the export tax is," he said.

But Wasilenkoff said he's confident that the eight-month dumping investigation by China, set to wrap up at the end of this year, will not impose 15 per cent duties.

He said China's allegation of dumping by Canada, the United States and Brazil stems from its use of one importation code for all grades of dissolving pulp, including high-end products that command more than US$1,600 per tonne.

Meanwhile, Fortress announced Wednesday that it has begun delivering power to Hydro-Quebec's grid after completing the required testing for the cogeneration facility at Thurso.

Wasilenkoff said the power deliveries will reduce costs by $80 per tonne and increase annual pre-tax operating earnings (EBITDA) by $15 million to $17 million.

The first power transfer took place late Tuesday night, about 10 months late. The delays, caused largely by equipment problems, are expected to cost Fortress about $1 million in penalties or $3,000 per day. The cost of the cogeneration project has more than doubled to $130 million.

Fortress also said it will submit a tender for a new power supply agreement with Hydro-Quebec for its Global Cellulose Mill in Lebel-sur-Quevillon, Que., to replace one that expired.