Paper and packaging giant Sappi has reported a recovery in its earnings before interest, taxes, depreciation and amortisation (Ebitda) from a low of $26-million in the quarter ended September 30, 2020, to $98-million in the quarter ended December 31, 2020 – the first quarter of the company’s 2021 financial year.

CEO Steve Binnie says that, as a group, the company outperformed the guidance provided at the end of the September quarter, with profitability across all reporting segments exceeding expectations.

“During the quarter, the global surge of Covid-19 infections and the related employee absenteeism put all of our operations under pressure. In spite of the unprecedented obstacles that have arisen as a result of the pandemic and through the dedication and resilience of our workforce, our mills remained fully operational.”

Sappi expects profitability in the second quarter of its financial year to improve relative to the first quarter.

The company reported a loss for the quarter of $17-million, compared with a net profit of $24-million posted for the first quarter of the 2020 financial year, and a loss of $88-million in the third quarter.  

Meanwhile, Binnie attributes the improved quarter-on-quarter Ebitda performance to dissolving pulp (DP) markets and graphic paper demand in North America recovering at a faster rate than anticipated.

These benefits were, however, offset by the maintenance shuts of the company’s Ngodwana and Somerset mills.

This while the economic effects of the Covid-19 pandemic continued to impact on performance, with graphic paper sales still well below levels recorded in 2019.

Sappi says the pandemic also affected its global shipping and container availability, which led to 16% lower DP sales volumes year-on-year in the quarter under review.

Binnie adds that DP markets tightened considerably in the December quarter, with market prices rallying by $106/t through the quarter. Key drivers behind the price increase included DP capacity curtailment, resurgent viscose staple fibre (VSF) demand and prices, higher paper pulp prices and a weaker dollar/renminbi exchange rate.

Sappi reports that packaging and speciality paper sales volumes in all regions experienced encouraging growth compared with the prior year. 

While demand for most categories was positive, some non-essential products in Europe were affected by the Covid-19-related lockdowns and other governmental measures.  Profitability was partially reduced by lower selling prices linked to depressed pulp prices.

Graphic paper demand continued to slowly recover from the impact of Covid-19 and volumes were down 19% compared to the same quarter last year, an improvement on the 32% reduction experienced in the prior quarter. 

While North America recorded a strong recovery, soft coated mechanical demand in Europe, weak export markets in South America and Australasia and low selling prices were a drag on profitability in this segment. 

The group took production downtime of 125 000 t in the quarter under review, entirely in Europe, which was less than the 321 000 t required by the group in the prior quarter. 

South African newsprint and uncoated woodfree demand continued to be adversely impacted by the weaker domestic economy.

LOOKING AHEAD

Binnie explains in a results statement that there has been a pronounced recovery of pricing and demand in DP markets.  As of January 29, the Chinese market price had improved to $895/t, driven by a number of positive factors including low inventory levels, rebounding textile demand, higher VSF prices and favourable dollar/renminbi currency movements. 

The full benefit of the rising DP prices will be phased through future quarters owing to the quarterly lag in contract pricing. 

Meanwhile, a strengthening rand/dollar exchange rate is expected to negate some of the pricing benefits for the South African DP segment.  Despite the improved market conditions, Sappi is encountering logistical and production challenges at its South African DP facilities as a result of Covid-19. 

Notably, a severe second wave of Covid-19 infections in South Africa has necessitated a prioritisation of oxygen supplies into the healthcare sector. 

Consequent restrictions on the procurement and transport of oxygen to the South African mills resulted in a temporary curtailment of DP production at the Ngodwana Mill in the second quarter that started on January 1.

Underlying demand for packaging and speciality paper products remains resilient as consumer preferences default to more sustainable alternatives. 

“We continue to ramp up sales and production in North America and Europe following the completion of the Somerset Mill and Maastricht Mill conversions. However, Covid-19 may adversely impact demand for certain non-essential consumer products.

“The global resurgence of Covid-19 and associated extended lockdowns and restrictions on economic activity are expected to stall the graphic market recovery, particularly in Europe,” Binnie notes.

A rapid and significant rise in paper pulp costs is expected to reduce margins in this segment.  While Sappi has announced selling price increases in most of its markets to mitigate this risk, there will be a lag before the benefits of the increases are realised. 

The recent series of paper machine and mill closures or conversions in the industry are expected to improve the supply/demand balance resulting in a recovery of operating rates in the coming quarter and year.

“The strong demand of our packaging and speciality paper grades combined with the sharp recovery in DP markets support our strategic focus as we transition the business towards higher growth segments,” Binnie points out.

Sappi expects its capital expenditure (capex) for the 2021 financial year to be $400-million, including $100-million related to the Saiccor Mill expansion project.  The increase in estimated capex – from the previous guidance of $370-million – is as a result of the strengthening rand and euro relative to the dollar.

The Saiccor Mill expansion project is scheduled to start production during the fourth quarter.

Second-quarter earnings will be tempered by the production curtailments related to oxygen availability at Sappi’s Ngodwana Mill, global logistical challenges and the negative impact of Covid-19 on its European graphics segment. 

“However, there are no material annual maintenance shuts planned for the quarter and we anticipate good performance from our packaging and speciality papers segment.  Therefore, we expect the second quarter earnings to improve relative to the first quarter,” Binnie notes.