Repap Sees Hedging Program Reaching Full Speed By Oct-Nov
By DAVID E. PARKINSON
Dow Jones Newswires
VANCOUVER -- Repap Enterprises Inc. (RPAPF) expects its new pulp and
paper hedging program to reach its full targeted volumes by October or
November, Repap vice-president of finance Michelle Cormier said.
Cormier told Dow Jones the company intends to hedge 100% of its market
pulp production and 5% of its paper production under the program, which
it set up with Enron Capital & Trade Resources Corp. earlier this year.
She said this amounts to about 70,000-80,000 metric tons of pulp, and
about 22,000-23,000 short tons of paper.
Cormier said the paper segment of the program could reach its target
within the next few weeks, but the pulp portion might take a bit longer.
She said the company so far has hedged only 15% to 17% of its pulp
production.
As reported, Repap agreed in April to enter a price-hedging program with
Enron, one of the North American market leaders in over-the-counter
hedging products for pulp and paper. The arrangement was part of a
package of initiatives that included Enron's purchase of $45 million of
Repap convertible subordinated debentures. Enron will also handle
marketing, sales and customer service for Repap's pulp operations, and
will advise Repap on energy activities over the next five years.
Cormier said it's too early to say whether the hedging program has been
a success, but so far Repap is satisfied with the prices it's received
through the program. However, she acknowledged that the company could
have done better by moving more quickly on pulp hedging earlier this
year, when forward selling prices were as much as $100 a ton above
current list prices.
"In retrospect, we should have (hedged) it all," Cormier said. She noted
that this had been Enron's recommendation.
Repap Enterprises Inc.'s (RPAPF) Michelle Cormier said the company
determined its targeted exposure levels for the hedging program by
looking at 12-month average prices over each of the past five years,
then adapting them to current costs and rates of return. She said the
hedging levels - 5% of paper and 100% of pulp - represent the
percentages needed to cover shortfalls the company would expect to incur
during low periods in the pricing cycle.
Cormier said Repap's hedging program was Enron's idea. She said Enron
had talked to Repap about risk management in the past, and brought it up
again earlier this year when the two companies got together to discuss a
possible financing arrangement. As talks on the financing progressed,
the hedging program became part and parcel with the deal, Cormier said.
"When we did the analysis, we realized that this (hedging) does make
sense," Cormier said. "It bullet-proofs you against any downturns in the
cycle."
Cormier predicted that more pulp and paper companies will enter hedging
arrangements with the likes of Enron as the market for over-the-counter
pulp and paper derivatives matures.
"I think you'll see more of this in the next few years, as people start
to understand it," she said.
Enron, Houston, has been marketing OTC pulp and paper derivatives for
about three years. In a recent interview with Dow Jones, officials at
Enron noted that the market still lacks sufficient liquidity, especially
in pulp, as large producers have been slow to fully embrace the benefits
of risk management. They said deals such as the one with Repap, tying
financing to hedging, could be a key source of new liquidity in the
market.
"I think you've just seen the tip of the iceberg," said David Cox,
Enron's vice-president of commodity and trade services. |
