RE: What about cotton pricee?What happens of the price of cotton goes down to its historic range? I mean it's a lot lower than it was just a few months ago. Would it slow -- even halt -- the transition to dissolving pulp?
--------------------------------------------------
.
Obviously, since rayon is a substitute for cotton and vise versa, cotton pricing is going to effect dissolving pulp pricing. This has been seen by the price of dissolving pulp pulling back from its earlier highs in conjuction with the falling cotton prices you mentioned. The question is, will cotton prices fall further and what would it mean to DP prices and inevitably what would it mean to Fortress Paper?
.
I believe cotton prices, at where they are now, is most likely priced close or below it's cost of production, at least for the high cost producers. With that in mind, I would not expect cotton prices to fall significantly lower and stay there, since it is a crop that seems to have a fairly high cost of entry and production.
.
If I am wrong on that, then my opinion is that of course it would effect the prices of DP, but it would at the same time convince some of the higher cost producers of DP to stop producing. This has a stabilizing effect on the price of DP, to a degree. Now, until DP prices got to about $700 per tonne, Fortress Paper would still be profitable (although not overly) and you need to understand that over 4 million tonnes of DP capacity would have already shut down at that time, because of their loss of profitability at those prices. That is over 70% of the capacity of the current DP market.
.
Basically then, cotton prices, new DP capacity and any other reasons for changes in demand, will all effect the price that Fortress Paper gets for their product. However, as long as they stay in the lowest cost quartile of producers, those factor will always have a much more leveraged effect on their competitors. This is the best kind and pretty much the only kind of protection a commodity producer can really ever have and Fortress Paper has it.
.
Now if the forecasters are right and the world does need more textiles and cotton becomes a more expensive alternative then rayon (DP) to buy, then all this starts to change. Keep in mind that rayon is only about 10% of the size of the cotton market and cotton is about 40% of the textiles market. If textile growth is 3% annually and you can't get much growth out of cotton so in replacement you look at rayon. That would be a 30% growth rate for the dissolving pulp market if it all had to all come from rayon.
.
So from the above calculation, one can see how just a small increase in textile or cotton demand can put tremendous leverage in the demand for a commodity like dissolving pulp, in a growing market, with the downside leverage being placed on the high cost producers in any period of lower demand. I don't think you could find a better place to position a company, then this.