LONDON
,
November 9, 2012
(Industry Intelligence Inc.)
–
Although there are numerous conversions and planned conversions of kraft pulp mills to the manufacture of dissolving pulp (DP), this sector should not be entered into lightly, said speakers at the second annual “Investing in Cellulose” conference.
The conference, organized by CelCo Cellulose Consulting of Geneva was held in London on Nov. 5 in conjunction with this week’s annual London Pulp Week gathering.
Speakers addressed issues regarding both commodity and specialty DP, including financial concerns, supply and demand, end-users, conversions from kraft to DP production, alternatives to DP, and sustainability.
Regarding commodity (91-92 alpha) DP, used for manufacturing viscose, sources this week told Industry Intelligence Inc. that the spot price in China has dropped into the low $900s/tonne and even below. In recent months it had fallen to $1,100/tonne, then to $1,000/tonne. Such prices are generally considered to be below the costs of manufacturing.
These prices, along with operational issues, have left Fortress Paper Ltd.’s recently converted DP mill in Thurso, Quebec, struggling. On Nov. 2 the company reported a third quarter net loss of C$18.9 million compared to a C$7.2 million loss a year ago, with sales down 13.1%. The company cited extended maintenance and an unplanned shut for recovery boiler repairs at the Thurso mill as among its issues. (Fortress Paper also produces specialty papers and security paper products at two other mills.)
After the release of the financials, shares of Fortress Paper dropped 40% in heavy trading, to C$7.84 (down C$5.20), reported the Edmonton Journal on Nov. 5, which added that the stock had traded as high as C$62 in February 2011 “as investors bought into the Fortress story promoted by (CEO) Chad Wasilenkoff.”
The Thurso mill started up in Dec. 4, 2011, but has not yet reached full capacity. In a Nov. 5 research note, TD Securities paper and forest products industry analyst Sean Steuart, noting the company’s “steep losses”, commented that the third quarter operating rate of 58% had deteriorated from 70% in the second quarter.
Speaking at the London conference about the DP industry from an investment perspective was Richard Bassett, Managing Partner of Charlestown Investments, which acquired, restarted, and then sold the DP mill in Port Alice, British Columbia (Neucel Specialty Cellulose), and then acquired the Cosmopolis, Washington, DP mill, now called Cosmo Specialty Fibers.
Some of the matters regarding DP supply and demand are not likely to play out as expected, Basset said. “At the commodity end there will be a correction. People will drop out and prices will rise,” said Bassett, adding that producers “that don’t have the engineering capability or culture will go down and stay down.”
There is a lot of “mal-investment” in the DP industry, “some planned, some executed, some in the talking stages,” Bassett said. “How much can be converted without taking people down with you in a market of 5 million tonnes? The boom turns to bust, people go bankrupt.”
If producers of new DP operations set expectations over a number of years, then investors will wait it out, said Bassett, describing the investment horizon into DP as unlikely to be less than five years. However, it’s another story if investors are given unrealistic expectations, he said.
As an example, there have been unrealistic commodity DP price projections compared to costs of production, which are “above $900 (per tonne) for everybody,” he said.
Bassett also criticized the notion of linking prices of northern bleached softwood kraft (NBSK) pulp and DP. “There is no correlation” and each is driven by markets, not cost curves, he said.
Commenting on the rapidly falling Fortress stocks, Bassett said it is a very difficult scenario if companies run out of money sooner than expected. In the worst-case, companies can become permanently unprofitable, he said, questioning the likelihood that financially troubled operations would be able to get the money they need to keep operating.
Reacting to Bassett’s speech, a purchaser for a major DP buyer told Industry Intelligence that he expects the Thurso mill to continue operating no matter who owns it and that he would want to continue buying pulp from the mill.
As for 91-92 alpha DP producer Aditya Birla Group’s recently purchased pulp mill in Terrace Bay, Ontario, which restarted Oct. 9 with production of NBSK pulp, Vijay Kaul, an adviser to Birla, said at the London conference that the mill is targeted for conversion to DP in 2015.
This is the timeline Birla has had all along. Industry Intelligence Inc. sources have noted that until 2015, Birla won’t need the DP, which is targeted for internal use, but that meanwhile, NBSK prices are currently very low and costs are so high as to make Terrace Bay’s NBSK operations unprofitable.
Kaul said Birla has learned from previous conversions of mills to DP, such that when the Terrace Bay mill is converted, it will not have to be shut down at all because Birla expects to accomplish the DP tie-in in just 24 hours.
For a new DP operation to reach necessary quality can take anywhere from one or two months to as long as six months or one or two years, depending on the processes, Kaul added.
As for specialty DP, Derek Budgell, Ph. D., a cellulose derivatives chemist and vice president of business development with specialty DP producer Tembec Inc., said at the conference that the market for all of the high-purity cellulose products is expected to grow, and he noted that Tembec, Buckeye Technologies Inc., and Rayonier Inc., all established DP producers, have expansion plans totaling 270,000 tonnes/year.
But Budgell said there are significant barriers to entry into this “incredibly diverse” $3.5 billion market, and that expansions, being so capital intensive and requiring so much technical knowledge, should not be undertaken lightly.
He noted that specialty DP has to be customized for each customer, that the end markets are highly specialized, that customer support must be critical and continuous, that qualification by potential customers can take years, that there can be trade secret considerations, and that sustainability is an issue.
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