Global diversified woodfibre company Sappi will continue to invest in its growth and has submitted an environmental approval application to expand its Saiccor mill, in KwaZulu-Natal by another 110 000 m2.

Production is expected to start early in 2020, with the environmental approval expected within the next few months.

Meanwhile, Sappi CEO Steve Binnie on Monday highlighted that Sappi’s operating performance in the second quarter ended March 31, had been ahead of expectations.

The company generated earnings before interest, taxes, depreciation and amortisation (Ebitda), excluding special items, of $211-million, which is an improvement over the same quarter in 2017.

“While the results were good, we were a little bit worried because we had the stronger rand in the first quarter of this year. We’re an export business from South Africa and were able to offset the stronger rand’s impact on our operations thanks to stable demand and volumes across the board,” he explained.

Binnie noted that the stable demand for dissolving wood pulp (DWP) enabled the company to increase its selling price for its graphics paper, which offset the impact of the higher raw materials cost of hard craft pulp.

However, average dollar prices for the quarter were still below those of the equivalent quarter a year ago.

Viscose staple fibre (VSF) prices remained under pressure owing to the start of significant additional VSF capacity in China, despite higher prices for competing textiles such as cotton and polyester.

Demand and pricing for kraft pulp continued to be strong and helped underpin DWP pricing, while the demand for specialities and packaging papers continued to be healthy across all major product segments and Ebitda margins improved to 15%.

Sappi is also continuing to ramp up productions on its packaging front, which Binnie says is “going from strength to strength.”

OPERATING REVIEW

Sappi on Monday reported that its European business continues to be stable and delivered a strong performance in the second quarter, with the successful implementation of coated paper price increases and growing specialities and packaging sales volumes leading to an improved result compared with both the prior quarter, as well as the second quarter of last year.

The specialities and packaging paper business experienced sales growth of 12% over the prior year, excluding the sales from the inclusion of the specialities business of the Cham Paper group for one month.

Variable costs rose 5% year-on-year, led by sharp increases in both purchased softwood and hardwood paper pulp pricing. Lower latex, wood and energy prices provided some relief.

Sappi’s North American business, meanwhile, benefited from increased sales volumes in all product categories and higher graphic paper prices when compared to the equivalent quarter last year.

The improved performance was achieved despite the $5-million impact of lost production owing to the start of the PM1 conversion at Somerset mill during March, the company said.

The US coated paper market continued to experience tight supply conditions, and coated paper prices have risen 5% over the prior year as the July and November price increases were further realised during the quarter.

Sales volumes have also been positively impacted, increasing by 2% compared with the equivalent quarter last year.

The packaging paper business experienced good year-on-year volume growth of 46% but had lower pricing owing to product mix, Sappi said.

The release paper business had a slight decline in volume while pricing was largely in line with last year, the company added.

Variable costs were negatively impacted by higher purchased paper pulp, chemicals and energy prices, all of which have risen year-on-year and quarter-on-quarter.

In South Africa, improved sales volumes could not offset the impact of the stronger rand/dollar exchange rate and the dollar DWP prices, which, despite rising during the quarter, were below those of a year ago, Sappi said.

Lower average dollar prices coupled with a stronger rand/dollar exchange rate led to average sales prices that were 10% below those of a year ago.

Packaging sales volumes improved in South Africa, with citrus industry growth more than offsetting the impact of the drought on agricultural packaging demand in the Western Cape.

Printing and packaging paper prices rose year-on-year and this, along with tight cost control, resulted in improved profitability for the paper business.

“We’re very aligned, as all our regions are integrated. However, we do have plans to expand in each of the regions in all the product categories,” Binnie added.

While demand for DWP remains stable for the third quarter, Binnie remains confident that the third quarter average realised DWP prices should be in line with those of the second quarter, while volumes will be lower owing to the scheduled maintenance shuts at the Cloquet, Ngodwana and Saiccor mills.

Graphic paper operating rates remain healthy in Europe, and further price increases have been implemented since quarter-end to mitigate the impact of the continuing rise in paper pulp prices, the company added.

Net cash utilised for the quarter was $225-million, while cash taxes for the quarter were $50-million, an increase of $18-million compared to the equivalent quarter last year.

Sappi has net debt of $1.63-billion, up $303-million year-on-year.

The group's third quarter operating performance is expected to be in line with that of the prior year as the impact of the stronger rand and the various capital projects under way offset the improved graphic paper market.

“Generally, we’re very happy with the quarter and we’re looking forward to, as we move towards 2019, improving profitability,” Binnie concluded.