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Fortress Paper down as 13% Chinese duty remains final

Fortress Paper (TSE:FTP) shares were falling early Friday after China's Ministry of Commerce stuck with its initial decision to impose a 13% duty on dissolving pulp imports, which the company said it disagreed with and was disappointed with the outcome.

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Fortress Paper (TSE:FTP) shares were falling early Friday after China's Ministry of Commerce stuck with its initial decision to impose a 13% duty on dissolving pulp imports, which the company said it disagreed with and was disappointed with the outcome.

The duty is the result of China's claims that dumping was harming the country's pulp sector following an investigation China launched in February last year on the importing to China of cellulose pulp originating from Canada, the U.S. and Brazil. 

The preliminary duty was first announced last November, when Fortress shares were battered following analyst downgrades on the long-term deterrent effect the duty would have on supply dynamics. At the time, a report by CIBC World Markets said the 13% levy translates into a $150 per tonne cost to produce dissolving pulp. A target output of 200,000 tonnes at Fortress' Thurso mill would imply a lost EBITDA margin of $30 million per annum and $189 million or $13 per share in lost net asset value. 

Meanwhile, the final duty imposed by China's Ministry of Commerce on dissolving pulp imports from all other unnamed current or future Canadian dissolving pulp producers, which would include the company's Fortress Global Cellulose Mill, was reduced to 23.7%. 

Still, Fortress said that this duty "materially impacts the economic viability" of converting the said mill to a dissolving pulp mill, and is thus looking into strategic alternatives. 

"We are very disappointed by this outcome and wholly disagree with MOFCOM's determination," said CEO of Fortress Paper, Chadwick Wasilenkoff, in a release. 

"During this challenging time, we will focus on and further enhance our strategy to improve production efficiency and reduce costs. We also remain confident that current market conditions for dissolving pulp will improve as the market adjusts to a reduction in supply caused by the MOFCOM duties."

The company said Friday that it is evaluating options in response to the duty, including petitioning the Canadian government to make an application to the World Trade Organization to review the Chinese ministry's decision on the grounds that China's domestic dissolving pulp industry, which petitioned the investigation,  "suffered no injury as a result of imported dissolving pulp from the investigated countries." 

Fortress also noted that the manner in which China's Ministry of Commerce determined the company's dumping margin was "entirely inappropriate" and contrary to WTO regulations.

However, given that the Canadian government is unlikely to intervene, according to CIBC's report in November, Fortress will probably be left to its own devices, with China unlikely to budge given its punitive history.

Fortress itself even cautioned against the success of reversing China's decision or in securing the Canadian government's support in its statement.

The company operates its dissolving pulp business from a specialty cellulose mill in Canada, and was initially looking into expanding its dissolving pulp capacity by converting the Fortress Global Cellulose Mill in Quebec into a dissolving pulp mill. 

Shares of the company were down 2.5% in early deals Friday, at C$3.85 in Toronto, extending year-to-date losses to nearly 9%. 

Quick facts: Fortress Paper Ltd.

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TSX:FTP
Market: TSX
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