A good performance from JSE-listed Sappi’s European and North American packaging and specialities segments, as well as the graphic paper business, was not enough to offset the impact from markedly lower dissolving wood pulp (DWP) prices in the company’s first quarter ended December 31.
CEO Steve Binnie says DWP market prices fell $272/t in the last year as the combined impact of soft global textile markets, excess viscose staple fibre capacity and a weaker dollar to the renminbi drove the DWP price downwards.
Weak Chinese paper pulp markets heavily influence DWP pricing.
DWP prices declined to $638/t in the quarter ended September 30, which was already $306/t below that of the corresponding period in 2018. Although slightly higher in the quarter under review, DWP pricing remains under pressure and Binnie believes it is unlikely that prices will pick up in the short term.
However, the company’s current plant expansion activities in KwaZulu-Natal should help to lower costs and improve margins.
Also on the plus side, the company’s ongoing strategy of diversifying the product portfolio into higher-margin segments and positioning the company for future growth reaped rewards as the packaging and specialities segment continued to grow profitably during the December quarter.
Sappi reports that the focus on efficiencies and costs, combined with strong customer relationships and service levels, ensured that profitability for graphic paper was stable, despite weak global demand.
The company’s sales volumes for packaging and specialities in Europe increased across all major product categories.
In North America, sales volumes for packaging and specialities grew 43% year-on-year, driven mainly by the ramp-up of the paperboard grades on PM1 at the Somerset Mill.
Binnie points out that, in South Africa, the containerboard segment struggled with low demand, which was driven by high levels of converter inventory, a weak South African economy and the ongoing drought in some citrus producing regions.
“The substantial market share gains in coated woodfree paper in both North America and Europe countered the ongoing deterioration in graphic paper demand, enabling us to take fewer production curtailments than in recent quarters. Declining input costs helped maintain healthy margins,” he notes.
Sappi expects its capital expenditure in the 2020 financial year to amount to about $460-million, which will comprise the completion of the Saiccor Mill expansion project and smaller European pulp mill debottlenecking projects.
Sappi started expanding capacity and undertaking improvement initiatives at the Saiccor Mill last year, collectively known as Project Vulindlela. The expansions will increase the mill’s production from 780 000 t/y to 890 000 t/y of DWP. The company anticipates completion of the project by the end of the calendar year.
Sappi’s earnings before interest, taxes, depreciation and amortisation (Ebitda) for the quarter ended December 31, were $139-million, compared with $197-million in the quarter ended December 31, 2018. Profit for the quarter under review was $24-million, compared with an $81-million profit in the prior corresponding quarter.
The company’s net debt rose to $1.9-billion in the quarter under review, compared with $1.5-billion in the prior corresponding quarter, partly owing to the Matane Mill acquisition in North America.
Binnie expects Ebitda in the second quarter – ending March 31 – to follow the trend experienced in the first quarter.
Meanwhile, Sappi confirmed to Engineering News that it had heeded Eskom’s call for help in alleviating and/or supplying more power to the national grid.
The company said it would assist where possible, offering additional power from its Saiccor, Ngodwana and Tugela operations.
The company said the timing of the additional help is immediate to one year. The additional help involves internal efficiency improvement, additional generating capacity and curtailing marginal tons.
Sappi generates steam from its boilers, which drive turbines to generate electricity.