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Pulp giant’s profits plummet, but R7.7bn KZN mill expansion continues

Home Business Management Pulp giant’s profits plummet, but R7.7bn KZN mill expansion continues

SAPPI is to press ahead with a R7.7-billion upgrade of its Saiccor mill at Umkomaas on the KwaZulu-Natal South Coast, this despite a slump in key product segments which has seen it pull back from other capital projects.

This was revealed by CEO Steve Binnie, commenting after the company released its results for the first quarter of 2020. Sappi attributed its decision to weak prices in the dissolving wood pulp (DWP) and graphic paper markets.

Sappi’s profit for the quarter fell from the previous $81 million to $24 million, while earnings per share were down from 16 US cents to 6 US cents. Sappi’s net debt was up $359 million to $1.91 billion. Ebitda was $139 million, down from $197 million in the same period in the previous year.

“A good performance from the European and North American packaging and specialities segment and satisfactory results from the graphic paper businesses were not enough to offset the significant impact from the unprecedented and markedly lower DWP prices.”

Sappi is the world’s largest manufacturer of DWP, with two mills in South Africa and one in North America.

Binnie said DWP market prices fell US$272/ton in the last year as the combined impact of soft global textile markets, excess viscose staple fibre (VSF) capacity and a weaker US$/Renminbi exchange rate drove the DWP price downwards. “On the supply side, low paper pulp prices provided no relief for swing producers. This significantly impacted both the segment and group profitability levels.”

The company’s DWP products are used to create viscose fibre for clothing and textiles, pharmaceutical products and a range of household products.

Turning to the outlook for the coming year, Binnie said DWP pricing remains under pressure, albeit that prices have risen slightly from their lows in the past quarter.

“Given the current low DWP pricing levels, we expect EBITDA in the second quarter of financial year 2020 to follow the trend experienced in the first quarter.”

He said the ramp up of packaging and speciality grades at both Somerset PM1 and Maastricht Mill were continuing, which would ensure improved mix, price realisation and machine efficiency.

“Consumers and brand owners are driving the shift from plastic to paper in many packaging categories and this is driving demand growth and leading to new innovative products being developed, including those incorporating our barrier technology.”

He said the South African containerboard market remained “challenging”, driven by high inventory levels and a weaker domestic economy and graphic paper markets remain “difficult”, with demand decline rates exceeding that of recent years by some margin.

“Capital expenditure in 2020 is expected to be approximately US$460 million as we complete the Saiccor Mill 110,000t expansion project and various smaller European pulp mill debottlenecking projects. We continue to manage capital expenditure, working capital and costs tightly. Apart from the Saiccor Mill expansion, no material capital projects have been committed.”

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