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Jul 04, 2008

Weaker rand, strong demand offers sound start-up platform for chemicals-cellulose expansion

© Reuse this The $460-million expansion of the Sappi Saiccor chemical-cellulose facility, in KwaZulu-Natal, was over 90% complete, and once ramped-up to its full nameplate production of 800 000 t/y would entrench the group's position as the world's pre-eminent manufacturer of dissolving pulp. It would also further enhance Sappi's ranking as one of the world's lowest-cost producers, Southern Africa CEO Jan Labuschagne tells Engineering News in an interview.

The plant, which is situated 50-km south of Durban, currently has the capacity to produce 600 000 t/y of elemental chlorine-free chemical cellulose, the bulk of which is exported to countries in Europe, the Americas and Asia.

The biggest single consuming industry remains the garment trade, where chemical-cellulose is being employed increasingly to give fabrics a silky shimmer and feel, not only for use in high fashion items, but also in day-to-day garments.

However, the product is also used as an input in the food, pharmaceuticals, chemicals and plastics industries in applications as diverse as headache tablets, through to the handle on a screwdriver.

Labuschagne says that the expansion, dubbed ‘Amakhulu', also represents a ‘step change' for the industry, given that most of Saiccor's competitors, such as Rayonier, are still producing at rate of between 300 000 t/y and 500 000 t/y.

But the facility's cost advantage does not come exclusively from these economies of scale. Its access to the low-cost, renewable fibre resources of KwaZulu-Natal, which is a fast-growing timber region, is also a material benefit.

Sappi is also convinced that the demand trajectory, underpinned by robust garment-sector growth in Asia, will be more than adequate to absorb the additional output it plans to place into the market.

"The market is still very tight," Labuschagne reveals, adding that Sappi is inundated with requests from customers for additional tonnages.

This said, rising interest rates and slowing consumer demand worldwide could have a short-term impact. There has already been a softening in the viscose market, which has precipitated a fall in spot prices from around $1 500/t to around $1 000/t. But current price levels are still well above historical trends.

"We think that the markets were running too hot, and actually see the recent decline as positive for the long-term health of the market," Labuschagne asserts, noting that the investment decision was based on far more modest trend prices.

Sappi is still forecasting average yearly growth of four per cent, and Labuschagne discloses that the group has already secured offtake orders for more than 80% of the expanded production.

The timing of the ramp-up also offers something of a ‘sweet spot', particularly given the rand's recent weakening against the dollar.

"This will substantially shorten the pay-back period," Labuschagne confirms, revealing that, at current exchange rates and pulp prices, there could be a 25% to 30% reduction when compared to the payback period initially budgeted.

Commissioning is due to begin late in the current quarter and the facility is expected to be running at full capacity from the middle of the Sappi's next financial year. And, while the actual expansion is for 300 000 t/y, Sappi has decided to close 75 000 t/y of existing high-cost capacity.

The project should also improve Saiccor's environmental impact through the reduction of air emissions, improved waste-water quality and increased energy efficiency.

In fact, the project will result in the production of an additional 40 MW of electric power, which in South Africa's current power-constrained environment is a significant advantage.

A key challenge, though, is the rise in some of Saiccor's own inputs, particularly some of its chemicals inputs.

Sulphur prices, for instance, have surged tenfold over the last 18 months, while caustic-soda prices have gone up by about 50% over the last six months. But these prices have been offset by strong increases in pulp price, which underpins the chemical-cellulose price.

"Therefore, the financial model for the project is more robust today than it was when we completed the feasibility study," Labuschagne enthuses.

Edited by: Martin Zhuwakinyu
Creamer Media Senior Deputy Editor
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