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Opinion & commentary

Rentech announces results for first quarter 2017

Warm weather with low demand for fibre fuel and residential pellets in the US, lower wood chipping volumes along with contractual issues for an idled pellet facility in Canada all combine to continue dog US-headed wood fibre processing and pellet producer Rentech Inc.

Rentech currently operates a number of wood pellet plants in the US and Canada along with wood fibre operations in the US, Chile and Uruguay.

Having divested its nitrogen fertilizer operations in 2016 and its energy technology business a few years prior, US-headed Rentech Inc., operates three business subsidiaries; Fulghum Fibres, New England Wood Pellets (NEWP) and Wood Pellets Industrial making it a sizeable international wood fibre processing and pellet player.

The former offers a full range of integrated wood fibre services for commercial and industrial customers around the world, including wood chipping services, operations, marketing, trading and vessel loading at four locations in Chile, one in Uruguay and 23 locations in the US.

The other two businesses produce wood pellets. US-based NEWP operates four pellet plants for the bagged residential market in the US whereas and the Industrial Pellets division produces for Ontario Power Generation (OPG) in Canada and Drax in the UK with its Canadian pellet facilities Atikokan and Wawa.

One paper, Rentech with the geographical spread of the operations of its three companies covering multiple fibre baskets in the Americas, would seem to be well located to serve domestic and international energy and pulp and paper markets. However, judging from the 2017 first quarter results released May 11, the company is seemingly wedged between a rock and a hard place financially with all three recording net losses and with little real respite to be seen on the immediate horizon.

It is the result of a combination of mild winters, low oil and gas prices in the US weakening demand and prices for residential pellets in the US, “significantly” fewer woodchip sales to Asia and lower in-country biomass product sales from its South American wood fibre operations compounded by “increased repairs and maintenance expenses” at these operations along with asset and goodwill impairments and, its biggest monetary headache, its Canadian pellet operations.

Previous ramp-up issues with Atikokan and start-up issues with Wawa led to a board decision announced February 16 to curtail production at the former and idle the latter in a bid to conserve liquidity. Idling Wawa is though not unproblematic as the company has supply contract obligations to Drax in the UK and could incur default penalties of up to CA$20 million. This is in addition to potential rail car lease and rail transport contract default penalties with TrinityRail and Canadian National Railway (CNR).

The statement also revealed that Rentech shipped around 57 000 tonnes of pellets including most of the remaining inventory to Drax from Wawa. Prior the decision to idle Wawa, Rentech had agreed to supply around 336 000 tonnes to Drax in 2017. In March 2017, Drax agreed to cancel the next two shipments for 2017 without any penalties, thereby reducing the 2017 supply obligation to approximately 193 000 tonnes. Further amendments to the delivery schedule under the Drax contract will most likely occur as a result and it remains to be seen how gracious Drax and others can afford to be before applying penalties.

A long cold winter in the US northeast with a bump up in domestic oil and gas prices, a surge in woodchip demand from Asia and a swift amicable divestment of Wawa to a suitable party would perhaps help bring Rentech back on a more even keel.

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