Fortress Paper still undecided about plans to convert its Lebel-sur-Quevillon, Quebec, mill to dissolving pulp production, continues to explore strategic options for project, also evaluating impact of China's interim anti-dumping duties

LOS ANGELES , November 14, 2013 () – Fortress Paper LLC still has not decided on what it will do with its stalled proposal to convert the Lebel-sur-Quevillon, Quebec, mill to dissolving pulp production, based on the company’s third-quarter report.

If anything, the company might be even more hesitant about the project now than it was before, following a decision by China last week to impose interim anti-dumping fees on dissolving pulp imports from Canada, Brazil and the U.S.

That decision is likely to significantly reduce the supply of dissolving pulp and lead to a price increase in the short- to mid-term, Fortress Paper stated in its third-quarter earnings report, which was released on Nov. 13.

It could also cause a “long-term deterrent effect on supply dynamics,” if the interim duty imposed by China remains unchanged for all dissolving pulp producers in Brazil, Canada and the U.S., the company stated.

Fortress Paper noted in its report that it is evaluating the impact of China’s decision on the project proposed for Fortress Global Cellulose (FGC) in Lebel-sur-Quevillon.

In light of China’s decision, Fortress Paper also said it would implement a swing strategy whereby its Fortress Specialty Cellulose (FSC) mill in Thurso, Quebec, could produce either dissolving or northern bleached hardwood kraft (NBHK) pulps.

In its third-quarter report, the company said it was looking to modify the FSC mill to allow this swing production between dissolving and NBHK pulps, in order to “maximize margins in response to changing market conditions.”

However, it appears that this strategy has already been implemented, as the company had planned ahead and ran trials on NBHK production at the FSC mill in October, according to Industry Intelligence reports last month.

On the FGC project, Fortress Paper had expected to reach a decision on the strategy early in the third quarter, according to a May 14 Pulp and Paper Canada article in Industry Intelligence’s archives.

However, the company stated in its third-quarter report that it is still in discussions with prospective equity investors for the project. To mitigate the risk, it is exploring alternative financing structures, joint ventures and partnership opportunities.

In addition, the company has started looking at revising the terms for the FGC project financing “to provide greater flexibility,” Fortress Paper indicated.

The company also noted in that report that it will consider how the FGC mill project’s investment opportunity compares with other strategic options in terms of shareholder value.

It is possible that the FGC mill project might not be completed as previously planned, the company said in the third-quarter report, noting that so far it has spent about C$25 million on the project.

Fortress Paper also noted that its dissolving pulp segment had a difficult third quarter due to depressed market prices, delays in completing a cogeneration plant, and operational and maintenance issues.

The ramp-up of its FSC mill has not gone as planned. Originally, the mill was expected to reach full capacity of 200,000 tonnes/year by the end of second-quarter 2012, RBC Capital Markets indicated in a Nov. 13 research note.

However, in 2013 the mill has operated at just 76% of production capacity in the second quarter and 84% in the third quarter, RBC Capital Markets reported.

However, with the cogeneration plant in Thurso finally coming online Oct. 2, the overall cost structure of the FSC mill is expected to improve starting in the fourth quarter, Fortress Paper stated in its third-quarter report.

The cogeneration plant’s startup had been delayed by an unexpected mechanical failure of the high-pressure water pump and the backup pump, but that was subsequently resolved.

The change in timelines for the FGC mill project caused the electricity supply agreement the company has with Hydro Quebec to lapse, but a tender will be submitted for a new power supply agreement.

The new tender will request that the power supplied by the cogeneration plant to the grid be increased to 42 megawatts from the previously approved 34 MW. There is no guarantee the offer will be accepted, Fortress Paper noted.

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