Pulp and paper group Mondi on Thursday confirmed it had put aside €170-million in capital expenditure for energy and debottlenecking projects, with the aim of achieving 97.5% energy self-sufficiency across its operations.
“These are all low-risk, high-value-generating projects, with expected returns of more than 40% likely to be delivered over the next two to three years. This includes a new steam turbine at the Richards Bay operation,” Mondi CEO David Hathorn said during the group’s full-year 2011 financial results presentation.
Mondi said particular pressure was being felt on electricity prices in South Africa, which continued to increase at levels well above inflation. Various initiatives to reduce its dependence on buying energy and using energy more efficiently were being undertaken in South Africa and at the group’s European operations.
“The business continues to focus on operational efficiencies and improvement opportunities, with a strong emphasis being placed on energy efficiency and self-generating capacity,” Hathorn said.
The group approved energy-related investments across a number of its operations, including a bark boiler in Syktyvkar, Russia, a steam turbine and recovery boiler economiser in Stambolijski, Bulgaria, a new recovery boiler in Frantschach, Austria and a new steam turbine in Richards Bay.
“The focus of these projects is to improve energy efficiency and self-sufficiency, while providing opportunities to capture additional benefits in the form of electricity sales.”
Mondi also approved a debottlenecking project, which entails investing in a 100 000 t/y pulp dryer in Syktyvkar to further exploit the benefits of the recently completed mill modernisation programme.
The approved projects were expected to generate significant benefits with returns of more than 40% from 2013 onwards. A number of other similar projects were under consideration at several of the group’s operations. If approved, these projects were expected to be completed over the next three to four years, with a total estimated capital expenditure of about €250-million.
Input costs, particularly wood, pulp and recycled fibre, increased by about 7% compared to the prior year. This was mainly attributed to market price increases, offset in part by currency gains and lower volumes, although some softening in key fibre input costs was seen in the second half of the year, the group said.
Despite the significant increases in energy and chemicals costs, Mondi reported a record financial performance, posting a 57% rise in earnings a share, to 66.1 euro cents.
The group’s underlying operating profit of €622-million was up by 36%, compared with 2010.
“The group benefited from a generally positive trading environment, although a noticeable slowdown in demand in the second half led to some volume and pricing pressures when compared to the strong first half of the year,” Hathorn said.
The return on capital employed was 15%, above the target of 13%.
Further, strong cash generation and the proceeds from the demerger of its former packaging division, now Mpact, led to a 39% reduction in debt, from €1.36-billion to €831-million.
“The group achieved a significant contribution from the modernisation project at its Syktyvkar plant. The successful demerger of Mpact further focused the group’s strategic priorities, all contributing to credit ratings firms Standard & Poor’s and Moody’s Investors Service upgrading our credit rating to ‘investor grade’,” Hathorn highlighted.
The group said it benefitted from exposure to faster-growing emerging markets, such as eastern Europe, Russia and South Africa, with 71% of the group’s operating assets and half of its revenue by destination, in these geographical areas.
Meanwhile, the Mondi Shanduka Newsprint joint venture in South Africa was negatively impacted on by currency translation effects and rising electricity costs. The business, has, however concluded renewed contracts with its significant domestic customers, at prices which would offset input cost increases over the coming year and restore a reasonable level of profitability.
“While macroeconomic risks remain, it is encouraging to note that in recent weeks order books have improved and prices have stabilised, with price increases announced in certain product categories. This should allow some recovery of price declines experienced over the course of the second half of 2011, although recent strengthening of emerging market currencies is impacting margins.
“Supply side fundamentals in our core grades remain good following further announcements of capacity closures in the industry,” Hathorn said.