FGE.to - Fortress Paper (formerly FTP.to)

[rjstc]

I sold out some time back. The rule cut your losses no matter how painful I thought applied to this. Reminds me of LVLT 10 or so years ago. Seems like people waited forever with no good results because the story looked so good & yet never materialized.  Once I got out of that I could concentrate on better ideas.

 

 

 

 

 

 

 

 

 

[txitxo]

 

...In the current market, it also means that the mill may well end up being temporarily mothballed for an extended period... 

 

 

Bull's eye.

[alertmeipp]

I sold out some time back. The rule cut your losses no matter how painful I thought applied to this. Reminds me of LVLT 10 or so years ago. Seems like people waited forever with no good results because the story looked so good & yet never materialized.  Once I got out of that I could concentrate on better ideas.

 

Agree. But it depends why you buy in the first place. Nice call, SD on the shutdown.

[obtuse_investor]

Raymond James downgraded Fortress Paper to underpeform from market perform after news the company will take about 10 weeks of downtime at its specialty mill in Thurso, Quebec due to current market conditions.

 

Source: http://online.wsj.com/article/BT-CO-20131218-708310.html

[alertmeipp]

If you believe that more than half of the producers are losing more money than ftp now and the wood cost alone in china could potentially be higher than the total cost here and the demand is growing to absorb the over capacity AND the market will not be that way for the next 2 3 years, then this is a good bet I think. And yes, I thought the same few dollars more as well.

 

 

[A_Hamilton]

If you believe that more than half of the producers are losing more money than ftp now and the wood cost alone in china could potentially be higher than the total cost here and the demand is growing to absorb the over capacity AND the market will not be that way for the next 2 3 years, then this is a good bet I think. And yes, I thought the same few dollars more as well.

 

Any chance RFP buys this thing out?

[jeffmori7]

If you believe that more than half of the producers are losing more money than ftp now and the wood cost alone in china could potentially be higher than the total cost here and the demand is growing to absorb the over capacity AND the market will not be that way for the next 2 3 years, then this is a good bet I think. And yes, I thought the same few dollars more as well.

 

What I don't get is why Thurso plant is the only one we have heard of that will be shutting down for a long period of time..aren't they supposed to be quite low-cost producer? What about all those high cost producers? Are they shutting down now?

[alertmeipp]

I think that will be extremely hard for them to agree on the price. RFP would like to be in a sector that is growing but will RFP willing to pay a 6x for a long term dp price range of 1100 to 1300 for example? and will FTP willing to sell at 900 to 1100 dp pricing assumptions?  I doubt it. And the dumping is not finalized yet. If it stays it basically says no new entry from NA forthe foreseeable future.  That would make Thurso an unique asset. I personally didnt want a sale now the price wont be good.

[alertmeipp]

If you believe that more than half of the producers are losing more money than ftp now and the wood cost alone in china could potentially be higher than the total cost here and the demand is growing to absorb the over capacity AND the market will not be that way for the next 2 3 years, then this is a good bet I think. And yes, I thought the same few dollars more as well.

 

What I don't get is why Thurso plant is the only one we have heard of that will be shutting down for a long period of time..aren't they supposed to be quite low-cost producer? What about all those high cost producers? Are they shutting down now?

 

It is one of lower cost one. I think they shut down coz their inventory is not moving fast enough so they didnt want to keep producing and they want to take the time to tune the plant. It is still failing from time to time it seems. As to why not the others, I really dont know. I bet some are and some switching to other products but just not on our radar

[finetrader]

Why don't they find new customers in India for DP..

 

It must not cost that much more to ship this thing from Montreal to Delhi than Montreal to Shanghai.

[OptsyEagle]

Why don't they find new customers in India for DP..

 

It must not cost that much more to ship this thing from Montreal to Delhi than Montreal to Shanghai.

 

I imagine they are trying, along with every other global producer.  The problem is, I would think that India's VSF producers are going to want some of that duty savings for themselves.  Greed has no bounds.

 

This was my premise previously, as to why the Chinese would not implement a duty.  They are basically giving a significant advantage to their global VSF producers, allowing them to buy DP cheaper then the Chinese VSF producers.  The Chinese VSF market would be 100 fold more important to China then the dissolving pulp market, so a duty here probably hurts China more then any other country.

 

It makes me think that the duty is geared towards providing a higher DP price, which may make more textile manufacturers use more cotton as opposed to VSF.  Remember that, for some reason, China stockpiled about 3 times the normal inventory of cotton in 2010/2011 and now is trying to unload it without loosing a fortune.  They are obviously going to lose a lot of money on this bet but perhaps the Chinese politicians are doing a few other things to stem the bleeding ...like imposing a duty on dissolving pulp.  The problem with this logic is that you could double the price of DP and it would be lucky to increase the demand for cotton by 1% or 2%, at best.

 

Anyways, very little of this duty makes any sense, therefore it becomes impossible to predict an outcome.

 

 

[obtuse_investor]

Any chance RFP buys this thing out?

 

I think FTP is quite hard to price right now because of the security paper business attached to the Dissolving Pulp business. Both are very different from each other even though they deal with "paper".

 

Chad has probably thought about this already, but as Landqart becomes profitable (it is already positive EBITDA) he should strongly consider spinning it (and the tiny Canadian security strip business) off or, better yet, find a private buyer. This would unlock a large amount of value for him and the rest of the shareholders. And then the remaining business will be a pure Dissolving pulp play-- something the market will likely do a better job valuing. 

[lessthaniv]

1. At the end of Q3 they held $43.3M in inventory compared to $31.6M in inventory at the end of June. An increase of $11.7M. The viscose guys held off on buying in advance of the MOFCOM decision. It's likely that the inventory continued to build up into Q4 as the MOFCOM preliminary decision didn't come out until Nov 8th.

 

http://english.mofcom.gov.cn/article/policyrelease/buwei/201311/20131100387846.shtml

 

2. 10 weeks from tomorrow takes them to Feb 28th,2014. The final Chinese MOFCOM decision is due out in February sometime. Its likely they set this date to get through the MOFCOM deadline.

 

3. The Chinese MOFCOM auditors have recently visited the mill. The current duty of 13% that has been imposed was calculated based on operating costs. By definition, dumping occurs when manufacturers export a product to another country at a price either below the price charged in its home market or below its cost of production. In Fortress's case the relevant metric is operating costs. Fortress's operating costs have been high over the past year relative to where they expect them to be long term. This is due to the ongoing transition of the mill and the delayed tie in of the cogeneration facility. The final grid test on the cogeneration facility wasn't announced as being completed until October 2. The cogeneration facility materially lowers the operating costs and I don't believe that MOFCOM properly took this into consideration prior to their Nov 8th preliminary decision as the data wasn't likely available to them.

 

4. If you look at the link above, Fortress was assigned one of the lowest duties in the group. This confirms to me their lower position on the cost curve within these named companies. Lower duties implies lower production costs.

 

5. Now that the auditors have visited the mill while the cogeneration facility has been operating under the contracted rates, it's quite possible  the 13% duty will be reduced as the overall operating costs can be shown to be lower.

 

6. At the moment, buyers of DP want the price net of the duty.  If Fortress abides then they'll be breaking the WTO anti-dumping rules as these trough DP prices are already sitting just above their current cost of production without factoring in the new 13% duty. 

 

7. Over the next couple of months Fortress needs to find a 13% pick up through any combination of:  improved operating efficiencies; a possible reduction in duties; or an increase in DP pricing.

 

Has anyone done the math to estimate what portion of the world supply (mtonnes) is now subject to these Chinese duties? If Fortress finds itself in this predicament with a 13% hurdle, how about the rest of the companies with north of 20%+ ?

 

I'm trying to understand what % of the current market supply is likely to be pulled on the short term (like Fortress) in order to judge how that may impact DP pricing going forward. Obviously,  if enough supply is curtailed on the short term then DP prices will eventually rise and Fortress's mill should become economically viable in advance of the majority of other penalized producers.

 

Shutting the doors ahead of Christmas was a tough decision and I feel for the families who have been impacted. 

[thecynic]

4. If you look at the link above, Fortress was assigned one of the lowest duties in the group. This confirms to me their lower position on the cost curve within these named companies. Lower duties implies lower production costs.

 

5. Now that the auditors have visited the mill while the cogeneration facility has been operating under the contracted rates, it's quite possible  the 13% duty will be reduced as the overall operating costs can be shown to be lower.

 

Isn't the goal of anti-dumping duty to equalize market prices such that low cost producers are penalized more, while high cost producers are penalized less?

 

If so, the 13% duty means FTP's operating costs are at the higher end. I think this is a +ve, because as you say, the chinese audit was before the generator was  turned on. Hence, the 13% duty can be taken care off by the generator and further operation efficiency. Additionally, wouldn't a falling C$ help FTP?

[Liberty]

4. If you look at the link above, Fortress was assigned one of the lowest duties in the group. This confirms to me their lower position on the cost curve within these named companies. Lower duties implies lower production costs.

 

5. Now that the auditors have visited the mill while the cogeneration facility has been operating under the contracted rates, it's quite possible  the 13% duty will be reduced as the overall operating costs can be shown to be lower.

 

Isn't the goal of anti-dumping duty to equalize market prices such that low cost producers are penalized more, while high cost producers are penalized less?

 

If so, the 13% duty means FTP's operating costs are at the higher end. I think this is a +ve, because as you say, the chinese audit was before the generator was  turned on. Hence, the 13% duty can be taken care off by the generator and further operation efficiency. Additionally, wouldn't a falling C$ help FTP?

 

I'm no expert on dumping and tariffs, but based on my understanding of the situation, I think lessthaniv is right.

 

Wikipedia on dumping: "It occurs when manufacturers export a product to another country at a price either below the price charged in its home market or below its cost of production."

 

So if you have a plant that produces a ton of DP for 1200 and the market price they sell it as is 900, they're selling below their cost of production and the difference could be called dumping (especially if they get a subsidy to make up for the difference and keep them operating). There are probably complex arcane WTO rules for how long you can do this and so on, so that you can't be accused of dumping every time the spot price dips below your costs...

 

If your production cost is 800 and you sell for 900, you can't be said to be dumping, unless you sell it for 900 in your home market and 800 elsewhere.

 

But if the Chinese checked Thurso when it was still ramping up and without a cogen, they could easily have concluded that its production costs were above the market price. If things work like this, a low tariff compared to others is indeed a sign that Thurso's production costs are lower than others.

 

So dumping is based on production costs for each producer, not on the cost difference between the high-cost producers and low-cost producers. Otherwise china could say that Australia was dumping iron ore in China because Australian producers have lower costs than Chinese ones.

 

Additionally, wouldn't a falling C$ help FTP?

 

DP is priced in USD, so it would.

[lessthaniv]

4. If you look at the link above, Fortress was assigned one of the lowest duties in the group. This confirms to me their lower position on the cost curve within these named companies. Lower duties implies lower production costs.

 

5. Now that the auditors have visited the mill while the cogeneration facility has been operating under the contracted rates, it's quite possible  the 13% duty will be reduced as the overall operating costs can be shown to be lower.

 

Isn't the goal of anti-dumping duty to equalize market prices such that low cost producers are penalized more, while high cost producers are penalized less?

 

If so, the 13% duty means FTP's operating costs are at the higher end. I think this is a +ve, because as you say, the chinese audit was before the generator was  turned on. Hence, the 13% duty can be taken care off by the generator and further operation efficiency. Additionally, wouldn't a falling C$ help FTP?

 

No, that is not the goal of anti-dumping.

 

Companies with competitively advantaged operating structures are not penalized. The goal of anti-dumping is to stop the practice whereby Company A in one country "dumps" inventory into another country at a price that is below their home countries price or their own production costs. Companies will do this to convert inventory to cash even though it's at a loss. They avoid cannibalizing sales in their own market.  The domestic producers in the importing country are the ones that are penalized as the excess supply coming in at lower price points hammers their margins.

 

That is why I posted this. I think this is a very common misunderstanding. 

 

Fortress needs to take this time out to increase their efficiencies once and for all. They need their costs to be lower so they can sell off their inflated inventory into China at today's market prices without breaching the WTO anti-dumping rules.  If they show up in February with a more efficient operating cost structure, for example production costs of $775/ton, they could absorb the final duty, currently 13% (which increases costs), yet still sell at a price point above their total production costs and thereby avoid breaching the WTO rules.

 

Those companies who were assigned higher duties, have higher production costs or domestic selling prices that are higher.

 

In 2012, companies not subject to MOFCOM's investigation had shipments of 1,655,000 tonnes of dissolving pulp to China, whereas companies subject to the investigation only had exports of 908,000 tonnes. In response to a price increase in the market for dissolving pulp, non-affected companies will respond by increasing their exports to China which will put downward pressure on the domestic price. Absent collusion by the non-affected companies, China's and other countries' prices will

quickly converge. - Source: Michael Stone

 

So, it not too likely we can hang our hats on higher DP in the near future.

 

What is silly about this whole thing is where Canada in aggregate sits in terms of Chinese Import pricing. Except for Norway & Spain, Canada has among the highest import prices into China.  I think one of the analysts called it cronyism which is a great choice of words.

 

http://i728.photobucket.com/albums/ww289/MikeNCathy/CanadaImport_zpsab4a8780.jpg

 

 

 

 

 

 

 

[thecynic]

Liberty & lessthaniv, thank you for the clear explanation! It was counter-intuitive but I understand now.

 

Also, great point that the duties will (probably) cause the DP prices to rise and should be good for FTP if they can become more efficient.

[triedtestedand]

Now, beyond the (ir)rationale for how Brazil, US, Canada were selected, and not others ... if someone can also explain how even higher dumping duties apply to companies that haven't yet built plants, that would be perfect.  ;-)

 

BTW -> Paper Excellence appears to be proceeding with alternative plan to convert Prince Albert to fluff pulp, instead of DP ... putting them quite squarely against Domtar, and the non-compete they have with them (ostensibly to avoid Paper Excellence from re-entering NBSK market at Prince Albert ... but presumably now arguing that language includes fluff as well?).

 

http://www.paherald.sk.ca/News/Local/2013-12-16/article-3545911/Pulp-mill-faces-another-roadblock/1

 

[lessthaniv]

Now, beyond the (ir)rationale for how Brazil, US, Canada were selected, and not others ... if someone can also explain how even higher dumping duties apply to companies that haven't yet built plants, that would be perfect.  ;-)

 

http://www.wto.org/english/tratop_e/adp_e/adp_e.htm

 

;D

[alertmeipp]

Now, beyond the (ir)rationale for how Brazil, US, Canada were selected, and not others ... if someone can also explain how even higher dumping duties apply to companies that haven't yet built plants, that would be perfect.  ;-)

 

There is probably no basis on the 50%, but why they want it is clear, they want no new entrance. Maybe that's the reason why they target the three places as well?

 

 

[alertmeipp]

http://translate.google.com/translate?hl=en&sl=zh-CN&tl=en&u=http%3A%2F%2Ffinance.qq.com%2Fa%2F20131216%2F010167.htm

 

Not sure how accurate the price is, but it is saying offering price is $930-960 though demand still weak. I don't think FTP is getting $930 but still not a bad piece of data.

[Liberty]

Over 1 million FTP.DB.A traded today. I've never seen such high volume, and it barely moved the price.

[alertmeipp]

Over 1 million FTP.DB.A traded today. I've never seen such high volume, and it barely moved the price.

 

Maybe FTP gets a deal.

[obtuse_investor]

Was there any news today?

 

Perhaps the value is becoming slowly evident to the market and FTP is rising up big on tiny volume.

[alertmeipp]

Was there any news today?

 

Perhaps the value is becoming slowly evident to the market and FTP is rising up big on tiny volume.

 

Nice to see, but I am afraid $4.5 is still very very far from many's cost basis here.