Fortress Paper says duties will cause long-term harm to Canadian pulp sector

Fortress Paper says dumping duties being imposed by China will increase short-term demand and prices for dissolving pulp used primarily to make clothing, but pose a serious danger long term for the sector in Canada, the United States and Brazil.

Chief executive Chadwick Wasilenkoff said viscose producers have let their stocks of dissolving pulp deplete in anticipation of the announcement of duties, including the 13 per cent levy applied to Fortress, Tembec (TSX:TMB) and two private Canadian producers on the East Coast.

“Following the announcement, we believe many will now need to restock, likely causing a short-term boost to both demand and prices,” he said Wednesday during a conference call about third-quarter results.

Wasilenkoff added that all producers supplying China who are liable to pay these duties will be “anxious” to increase pricing.

Chinese dissolving pulp producers are also announcing price increase in an attempt to pass on their increased costs to customers. But the CEO said that despite the increases the mills in China will still operate at a “cash-negative position.”

“For dissolving pulp prices to return to more normalized levels, this will require an increase in the price of viscose stable fibre, which in light of competition from other textiles, seems unlikely in the very short term,” he told analysts.

Longer term, he said the “punitive” duties will have a “dramatic impact” on the dissolving pulp sector by likely deterring investments and leading to indefinite suspension or cancellation of projects.

Some mills may switch back to fluff pulp production or paper-grade pulp production, just as Fortress plans to do at its mill in Thurso, Que.

Wasilenkoff said the company plans to respond to the Chinese interim duty by Friday and expects auditors will visit the plant by the end of the month to review the numbers it provided to defend its argument that it didn’t dump.

The Vancouver-based company said it has contacted various levels of the federal government to obtain support for its fight against the duty before a final decision expected to be released in February.

Fortress Paper missed analyst expectations even though its net losses were cut by more than a third to $12.4 million in the third quarter on a large increase in revenue.

Excluding one-time items, the Vancouver-based company lost $15.6 million or $1.07 per share from continuing operations, two cents below analyst forecasts. It lost $23.2 million or $1.61 per share last year.

Revenues for the period ended Sept. 30 were $53.2 million, up 38 per cent from $38.3 million, but down from $60 million in the second quarter.

Pre-tax operating losses were $7.3 million, compared with $5.65 million forecast by analysts polled by Thomson Reuters.

The dissolving pulp segment lost $6.6 million while its European-based bank notes segment generated $1.6 million in EBITDA. Corporate costs contributed a $2.3-million loss.

Fortress said its dissolving wood pulp segment used to make cloth, cellophane, tires and other products experienced another difficult quarter because of depressed market prices, delays in completing its co-generation facility in Thurso, Que., and maintenance issues.

In addition to shifting production at the mill near Ottawa back to northern bleached hardwood kraft pulp, the company is evaluating the impact of the Chinese duties on its cellulose mill project planned for Lebel-sur-Quevillon, Que.

Paul Quinn of RBC Capital Markets said the results were below expectation due to operational and maintenance issues at Thurso and higher than expected pulp costs.

The analyst expects European and South African producers not impacted by duties will chase the higher Chinese prices, leaving the North American and Brazilians to take share in other markets.

“It could resemble musical chairs for commodity dissolving pulp producers in 2014,” he wrote in report.

On the Toronto Stock Exchange, Fortress shares closed at $5.16, up 19 cents, or 3.8 per cent on Wednesday.