EDWARD WEST
GLOBAL speciality paper, pulp and packaging group Sappi anticipates earnings before interest, tax, depreciation and amortisation (Ebitda) for the three months to September 30 to be above that of the same period last year in spite of rising costs and only a modest global economic recovery.
This was after it reported a whopping 80% increase in earnings to 9 US cents (R1.69) for the third quarter to June 30, compared with 5 US cents at the same time a year before. Ebitda was up sharply by 40% to $151 million from $106m. Profit for the period, within guidance, was up over 25% to $51m.
Sappi CEO Steve Binnie said in a statement last week that the group had reported a “pleasing” third quarter performance, driven by strong market conditions in the pulp segment and in the operating performance, and despite the sluggish economy and a muted recovery in paper markets.
“Globally, consumer sentiment showed signs of improvement as inflation continued to subside, which provided a boost for packaging and textile markets. However, graphic paper demand remained subdued, with the post-destocking cycle recovery of 2023 slowing during the quarter,” he said.
Market conditions for dissolving pulp (DP) were favourable, supported by tight supply and strong demand, which was enhanced by high downstream viscose staple fibre (VSF) operating rates and low inventory levels.
The hardwood DP spot market price was stable, rising by $2/ton to end the quarter at US$942/ton. DP sales volumes and dollar pricing were roughly in line with the prior year and quarter.
Graphic papers sales volumes increased by 13%, a substantial year-on-year improvement in profitability for the segment compared to the weak performance seen last year.
However, the gradual market recovery following the destocking cycle of last year slowed as underlying demand continued to be suppressed by global macroeconomic challenges and a likely shift in consumer behaviour following the Covid-19 pandemic.
Paperboard demand in North America rebounded, but selling prices were under pressure, while the maintenance shut of the Somerset Mill also impacted negatively.
European demand improved. Market sentiment modestly recovered, particularly in the label and self-adhesive categories. Containerboard demand in South Africa was negatively impacted by a weaker than forecast citrus fruit season due to adverse weather events.
Despite these headwinds, sales volumes were 22% above last year and improved 10% quarter-on-quarter. The positive sales volumes momentum was, however, offset by rising costs and declining prices which negatively impacted the profitability of the segment.
The sale of the Stockstadt Mill site for $49m was concluded and ownership transferred to the Progroup. Shortly after the quarter-end, Sappi announced the sale of the Lanaken Mill to UTB Waalwijk., a privately owned Dutch company that does industrial property conversions.
“Dissolving pulp market conditions remain robust as low downstream viscose staple fibre inventories and a constrained DP supply landscape continue to offer support for DP prices,” said Binnie.
Both VSF and DP prices had risen in recent weeks driven by an earlier than usual upsurge in seasonal activity in the textile value chain, and concerns around logistical challenges.
Cotton pricing had dropped in recent weeks from previously relatively high levels. The VSF discount to cotton nevertheless remained healthy, which should support continued demand.
Graphic papers markets remained suppressed, particularly in Europe. The fourth quarter was seasonally stronger, and the group anticipated some recovery in demand for graphic papers through the quarter.
Market conditions for packaging and speciality papers in North America and South Africa were steadily improving, but recovery in Europe continued to lag.
“Margin management remains our primary focus for the paper businesses to mitigate the impact of rising costs,” said Binnie.
Logistical challenges were driving up global shipping costs, which was expected to negatively impact delivery expenses. Additionally, variable costs, particularly chemical costs, were anticipated to increase as suppliers sought to pass on the higher logistics costs.
“Paper pulp prices appear to have peaked and are expected to begin reducing in the coming months,” he said.
The benefit of purchased pulp savings were only likely to be realised in the new financial year.
Capital expenditure was expected to be slightly below previous guidance due to phasing projects, and would likely be in the region of $480m.
“Global macroeconomic conditions and consumer sentiment are slowly improving but a high level of uncertainty still exists, which is exacerbated by ongoing logistical challenges,” said Binnie.
BUSINESS REPORT