Paper and packaging group Sappi said on Wednesday that its chemical cellulose business, which accounts for most of its operating profit in Southern Africa, continued to perform strongly, helped by a weaker rand/dollar exchange rate.

The business is based on dollar chemical cellulose prices, which makes the rand price of its sales sensitive to exchange movements.

“The exchange rate movement has largely offset the drop in prices, resulting in relatively stable rand-denominated chemical cellulose prices and good margins for our business,” said CEO Ralph Boëttger.

He added that demand for chemical cellulose – used in textile and consumer goods – was “relatively strong”.

Sappi currently supplies 15% of market demand from its KwaZulu-Natal Saiccor plant, but is expanding its Ngodwana mill, in Mpumalanga, as well as converting the kraft pulp mill in Minnesota, in the US, to increase its chemical cellulose capacity to over 1.3-million tons a year.

The expansions, due for completion next year, remained on track, Boëttger reported.

Further, the restructuring of the paper group’s Southern African assets was progressing well and the benefits, including improved profitability, were expected to be realised from the second half of the financial year. The restructuring and impairment charges were already accounted for in the September 2011 quarter.

The restructuring formed part of a strategy to deal with tough market conditions and included streamlining sales and marketing, as well as other central functions and services. It could also result in the loss of many jobs at the mills.

“We have progressed the consultation with our employees about the intended closures of the pulp mill at Enstra mill, the kraft pulp mill at the Tugela mill, a 10 000-ton kraft paper machine at Tugela mill and further improving operating efficiency at each Southern African mill,” said Boëttger in a conference call.

He also reported that the restructuring and cost reduction initiatives undertaken at Sappi’s European operations exceeded the cost reduction target of $25-million a quarter, or $100-million a year.

“As a result of our capacity reduction, operating rates remained reasonable despite the uncertain market conditions,” he added.

Further, overall performance at its North American operations was expected to improve owing to increased pulp production, as well as an improvement in Chinese demand for casting release paper. Sappi’s coated paper business in North America was expected to continue performing well.

Meanwhile, the group, which benefited from the various actions and strategies initiated during 2011, reported a profit of $45-million in the first quarter, compared with $37-million in the first quarter of 2011.

Capital expenditure (capex) in the quarter increased to $76-million compared with $45-million a year ago, owing to the investments into the company’s chemical cellulose expansion projects in South African and North America.

Boëttger also pledged to cut Sappi’s debt to below $2-billion after completing the current capex programmes. The group would reduce gearing to a “substantially” lower level.

“We expect net cash generation to turn positive for the full year after the increased capex and for debt levels, given constant exchange rates, to reduce by year-end,” he said.

Sappi said its second-quarter operating profit would be higher than the $100-million reported in the first quarter.
 

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