Paper and pulp producer Sappi on Monday announced that it would expand its Ngodwana mill operations in Mpumalanga to produce chemical cellulose, which is primarily used for viscose fibre in the textile industry, by 2013.

The expanded mill would produce kraft linerboard, newsprint, as well as 210 000 t of chemical cellulose.

Sappi currently produces about 750 000 t/y of chemical cellulose from its sole producing Saiccor plant in KwaZulu-Natal, supplying about 15% of market demand and making it the largest supplier of the product in the world.

CEO Ralph Boëttger said that demand for chemical cellulose was currently growing at about 6% a year, driven by the Asian market.

He said that besides the expansion of its Ngodwana mill, the company would also consider further expanding its chemical cellulose capacity in other parts of the world to maintain its market position.

Sappi said its chemical cellulose business achieved improved sales volumes and prices in the March quarter, compared with a year ago, but sales volumes were below the first financial quarter ended December. The Sappi Southern Africa business reported sales of $435-million during the quarter, compared with sales of $368-million in same quarter last year.

The product’s financial contribution to bottom-line profitability has become important in recent times, with product prices increasing four times over the past year. Spot prices for chemical cellulose ranged between $1 500/t and $2 000/t during the past year.

Meanwhile, Sappi would also embark on achieving cost savings of more than $100-million a year through its European business.

Business margins suffered owing to increasing input costs in pulp, wood, latex and energy costs in the region.

Boëttger said that Sappi had already paid $118-million towards the envisaged closure of its Biberist mill in Switzerland, which would amount to savings of about $50-million a year once closed.

The group is also considering different fixed and variable cost savings that could amount to a further $50-million a year once fully implemented.

During its second quarter, Sappi was able to increase its overall operating profit to $127-million, compared with $54-million for the same quarter last year. But special items, including the planned closure of the Biberist mill amounted to $128-million, resulting in an operating loss of $1-million, compared with a profit of $28-million a year ago.

Nevertheless, the group trimmed its headline loss a share to $0,02 a share, from $0,07 a share for the second quarter of 2010.

Headline earnings are the key profit measure in South Africa, stripping out some once-off and non-trading items.

Sappi said results for the third quarter might be weaker, owing to seasonal factors and significant maintenance shutdowns planned across five of its mills. “The shutdowns will result in substantial increase in maintenance costs and lost contribution from reduced output. We expect our results, excluding special items for the third financial quarter, to be in line with the equivalent quarter last year,” said Boëttger.

He said Sappi would start realising the benefits of its European profit improvement measures by the fourth quarter, and therefore expected the improved trend in the group’s underlying operating performance to be maintained through the remainder of the year.

The paper industry has only recently started to see a return in demand, after it had suffered from overcapacity and soft demand for almost a decade.