Paper and pulp manufacturer Mondi plans to increase its South African business' primary exports of pulp and to ultimately shift the unit's focus away from paper exports, it said on Thursday.
Mondi CEO David Hathorn said in a conference call that the company would eliminate exports of uncoated fine paper (UFP) to Europe, which had been experiencing deteriorating margins, and boost its higher-margin pulp exports.
Currently, the South African business exports 200 000 t/y of pulp mainly to Asia and planned to increase pulp exports by 25% to 250 000 t/y.
Hathorn noted that on industry average, paper was about a 10% margin business and pulp a 30% margin business. "Our paper export margins to Europe are even lower than that.
"Export returns from the UFP operations continued to disappoint in the first quarter of 2010, owing to substantial cost increases, coupled with the continuing strength of the rand, making the business increasingly uncompetitive as an UFP exporter to Europe despite the recent increases in European prices."
To this end, Mondi would mothball a 120 000-t/y paper-making machine and related converting capacity within the Merebank plant in Durban.
However, the company pointed out that domestic UFP demand remained stable and that the South African business would focus its paper business on the local and African market.
After the restructuring, the business would be a net seller of around 280 000 t/y of market pulp and have UFP production capacity of around 250 000 t/y.
Following the restructuring in South Africa and based on the company's current production rates, the group would be a net buyer of around 135 000 t/y of pulp, making it 93% self-sufficient in pulp, cushioning it against pulp price escalations.
Meanwhile, Hathorn said that the company could mitigate the impact of a possible strike at national transport company Transnet, planned for Monday.
"Around 30% of our timber volumes are transported by Transnet, but we could up our road network deliveries from the north or even forest closer to the mill if necessary."
Further, Hathorn noted that Mondi's European and international division continued to perform well with underlying operating profit for the first quarter moderately above the previous quarter performance and well above the comparable period in the prior year.
He said that the financial position of the group remained robust with its net assets seeing a slight increase on the back of higher working capital and exchange impacts on the translation into euro.
Following the successful launch of a €500-million, seven-year Eurobond, that was used to pay down existing bank debt, the company is left with about €1,4-billion of committed undrawn facilities.
"The current improvement in the trading environment is evident. Order inflows are strong across all key grades, while selling prices continue to improve from previous lows," concluded Hathorn.