JSE-listed paper and plastics packaging manufacturer Mpact announced on Wednesday that it would invest R765-million in the upgrade of its Felixton paper mill, in KwaZulu-Natal, enhancing the facility’s total product offering and increasing capacity by 60 000 t/y to 215 000 t/y.

Speaking at the company’s year-end results presentation, CEO Bruce Strong explained that the capital-hungry project was motivated by a need to improve the properties of the group’s paper products, while simultaneously manufacturing advanced lightweight packaging material.

The trend towards “lightweighting” – which reduced the weight of products to enable easier transportation – had recently become a notable feature of the packaging industry.

The upgrade announcement came as the company posted a 10.5% increase to R5.6-billion in revenue for Mpact’s paper business, with external sales volume growth of 3.2%.

Underlying operating profit in the paper business rose by 13% to R635.3-million, while the operating profit margin increased to 11.4%, primarily as a result of stringent cost control and a favourable product mix.

Leveraging off this solid performance, Strong said the project would also lead to “substantial” improvements in energy and operational efficiency, while significantly improving the mill’s environmental footprint.

“Against this background, we are pleased to be building the manufacturing capability to ensure that South Africa remains globally competitive in recycled paper production,” he commented.

Upon completion of the two-phase project in 2017, the upgraded mill would exclusively use recycled fibre in the manufacturing process and was expected to exceed Mpact’s return on capital employed target of 15%.

The R155-million first phase of development, which would start next year and add 20 000 t of capacity, would involve the installation of additional process equipment to increase the use of recycled fibre and enable the production of enhanced-quality lightweight paper.

Phase two, which involved a capital investment of R610-million, would comprise a major rebuild of the paper machine to enable the mill to produce paper using 100%-recycled fibre rather than sugarcane bagasse as part of the process.

A further 40 000 t of capacity would come online in the second half of 2017, with around 600 construction jobs created over the entire period.

“The sugar industry is well advanced in the planning of projects that may see energy generated using bagasse as fuel, which will render bagasse less economical as a raw material for the paper manufacturing industry,” Strong noted.

He added that the cash requirement for the project would be funded from debt facilities and cash flow from operations.

“Given the phasing of the capital spend and that incremental capacity will be brought on line during the project period, we are comfortable with the funding arrangements,” Strong noted.

Moreover, the Department of Trade and Industry had approved a tax allowance for the project, subject to it meeting certain criteria, which would be audited.

The company further expected the upgraded mill to increase demand for recycled fibre and thus boost job creation in the recycling industry.

“In South Africa, we already collect 59% of paper and board that can be recycled, but there is no doubt this can be improved upon. To this end, we have started projects to [establish material collection depots] in ‘deep’ rural areas and formal townships,” Strong said. 

Looking to the year ahead, he expected subdued demand growth in South Africa to be a challenge that could be compounded by further raw material cost inflation, driven by the current exchange rate.

“In spite of this, we are confident in our strategy and will look to implement projects in the paper and plastic packaging sectors across the [country] that will ensure sustainable growth and profitability for Mpact,” Strong noted.