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Wild ride for dissolving pulp

As commodity dissolving pulp (DP) dropped from 2011’s heady highs of $2,650 on the spot market and contract prices in the $1,500 range, two Canadian mills that planned to get into DP production slid their timelines to the right.
Fortress Paper eased off on its original plan to convert its Lebel-sur-Quevillon mill, which it purchased from Domtar in 2012, to a DP mill. “Due to changing economics and market conditions, there is no assurance that the [Lebel-sur-Quevillon] mill project will proceed to completion as previously planned,” stated Chad Wasilenkoff, CEO, in a May 2013 press release.
By July, however, Wasilenkoff was more upbeat. “We continue to make progress on finalizing a new financial structure [for Lebel-sur-Quevillon] which will include new equity partners. We hope to be in a position to provide more details on this in September. At this point we remain confident that an acceptable structure will be found and that the project will continue as planned.”
The plan is to equip the Lebel-sur-Quevillon mill with the capacity to produce 250,000 tonnes a year of DP.
Paper Excellence had intended to launch an 18-month conversion of its Prince Albert pulp mill, and begin producing upward of 1,000 tonnes a day of DP by the end of 2012. The company purchased the shuttered pulp mill in April 2011. But then, because of the slide in DP market prices, Paper Excellence attempted to renegotiate its non-compete agreement with Domtar (a former owner of the mill) for making paper pulp. In the end, however, Paper Excellence decided to cancel the revised plan to produce market-grade pulp.
“We had several conversations about the non-compete agreement. We established the fact a couple of months ago that we would go ahead with the conversion and DP production.
“We are now essentially embarking on that process to do what we were going to do a year and a half ago. We have people working on the mill and we are negotiating to bring in major pieces of equipment for the mill,” says Dale Paterson, vice-president operations, Paper Excellence and general manager for the Prince Albert mill.
The mill will be ready to make DP by about the end of 2014. “Now the plan is 650 tonnes a day of production. The reason for this is that at 650 tonnes a day, there are no changes required for the steam plant. For 1,000 tonnes a day, the steam plant would require substantial changes,” Paterson explains, although he foresees being able to nudge up the output to 700 tonnes a day.
Paterson notes that the Prince Albert mill will be able to produce DP in a continuous process using a Kamyr digester. “This is a first in North America for DP and only the second mill globally that will be able to do this.”
The DP market is growing at an annual rate of between 9% and 12% but high production relative to demand is keeping prices down. “Pricing remains near trough lows at around $875 per tonne delivered to China. Since peak pricing in 2011 prices have declined as new capacity has announced and come online,” Wasilenkoff says.
This is keeping a lot of mills in the red. “We believe that approximately 50% of the global production is losing money at these current prices and thus it is not sustainable for the long term,” Wasilenkoff adds.
“I would bet that all the Chinese mills are losing money at this time. I’m told that their cash costs are $1,000 to $1,200 a tonne,” says Brian McClay, principal consultant at Brian McClay & Associés Inc., a Montreal-based pulp and paper competitive intelligence consultancy.
On the positive side, notes Wasilenkoff, “Most of the planned new capacity is already on-line. Some of the Chinese mills have swung back to paper pulps for now. We believe their cost structure is between $1,000 and $1,200 per tonne and thus they need a material recovery in prices prior to swinging back to DP.”
For example, says McClay, “The Tiger Group’s Huaihua mill was a 400,000 tonne-per-year paper pulp mill, but it switched to 300,000 tonne-per-year DP production in Q2 2012. It then switched back to paper pulp in Q2 2013.”

Producers will regain the upper hand
As some mills close down or switch back to making paper pulp, the imbalance between production and demand should redress itself over the next three years, McClay predicts. According to research conducted by Brian McClay & Associés, the demand/supply rate for all DP grades dropped from 90 in 2012 to 86.1 in 2013 as a million-tonne world capacity increase in 2012 outstripped an increase in demand of just 400,000 tonnes.
The near-term outlook is a lot of slim wallets. “People are not doing well now, and it will be worse next year,” McClay comments. His company’s research forecasts that new capacity in all grades of DP will exceed new demand by roughly 130,000 tonnes in 2014, but increased demand will outpace capacity by about 50,000 tonnes in each of 2015 and 2016. As a result, the demand/supply rate will improve from 85.4 to 88.3 between 2014 and 2016.
In 2017, however, when the increase in demand will outstrip any increase in supply by about 450,000 tonnes, producers will be in a position to call the shots. “There is not a lot of capacity coming in after 2016-2017. This should mean that by the back half of that year, the demand/supply rate would be in the low 90s. Anything that is in the low 90s would give producers pricing power,” McClay says.
Wasilenkoff weighs in with his outlook: “We expect stable or very slight increases for the remainder of the year as some new capacity comes online in Q3 and Q4. This new capacity in intended to go into higher specialty DP markets as soon as they can transition there, so it is a short-term impact. China is the biggest market for DP and for Fortress. China continues to invest and add more viscose capacity, which will require more DP going forward.
“Several previously announced DP projects have been cancelled. We expect that there will be excess DP capacity in 2014 and 2015. After that time we believe that the growth in DP demand will then cross over and the market will be in tight supply again by 2016, which is approximately when our Lebel-sur-Quevillon mill will come online with the DP capacity.”

Canadian capacity ramping up
During this market realignment, Fortress will slowly be ramping up production at its Thurso, Quebec, mill, which it purchased from Fraser Papers Inc. in 2010 and converted to DP production. Fortress began producing DP in December 2011, with a targeted capacity of 200,000 tonnes per year in the short term, but digester and evaporator capacity issues punched a hole in that target. However, says Wasilenkoff, “These issues were addressed in our May [2013] maintenance shutdown. We have been ramping up production since then. We are considering adding a fifth digester, which would get us to our long-term goal of 215,000 tonnes per year in 18 to 24 months.”
The Aditya Birla Group purchased the idled Terrace Bay, Ont., pulp mill last year and plans to invest about $250 million to convert it for DP production. The target completion date is 2016, with an estimated production capacity of 280,000 tonnes per year.
Aditya Birla has two other Canadian mills that are already producing DP. Although Aditya declined to provide production figures for the mills, Brian McClay & Associés pegs the total DP production at AV Nackawic, in New Brunswick, at 180,000 tonnes a year, and 120,000 tonnes a year at AV Cell, also in New Brunswick.
The two other Canadian players in dissolving pulp are Tembec and Fulida Group Holdings Ltd., the latter of which purchased the Neucel specialty cellulose mill in Port Alice, B.C. in 2011. Tembec produces mostly higher-value specialty cellulose grades at its Temiscaming, Que., facility.
Both companies, according to Paul Quinn, pap
er and forest products analyst, RBC Dominion Securities, would like to switch more of their production to the higher-value specialty grades. “Specialty DP commands $1,500 – $1,600 per tonne,” says Quinn. “Tembec is trying to get out of producing commodity DP. Neucell is also trying to move some production out of commodity into specialty.”
Paper Excellence also has its sights set on producing some specialty DP at its Prince Albert mill. “Our first goal is to compete on the commodity viscose [market] and then move into the specialty market as well – as high as 50% of production, eventually,” Paterson says.
In the meantime, as Quinn points out, which way the winds will end up blowing for producers will depend a lot on the global economy.
McClay sums up how things are likely to shake out: “The big producers are big believers in [commodity DP] taking more market share from cotton and eventually from polyester as well. They think that $2,700 per tonne or close to that might happen again and that they will do really well for a few years.
“In the meantime, I’m sure some will get out of the business, either close down or go back to paper pulp. This is the nature of the whole pulp business.”