Pulp and paper producer Sappi says its operations are steadily recovering from the ongoing challenges of the Covid-19 pandemic.

For the quarter ended March 31, its earnings before interest, taxes, depreciation and amortisation (Ebitda) continued to improve to $112-million, compared with $98-million in the quarter ended December 31, 2020.

Ebitda was, however, lower than the $131-million reported for the quarter ended March 31, 2020.

Net debt, meanwhile, increased $2.07-billion.

Sappi posted a loss for the period of $23-million, compared with a $2-million profit in the March 2020 quarter.

It achieved a loss a share of $0.01 for the three months under review, compared with earnings a share of $0.04 for the March 2020 quarter.

Liquidity comprised cash on hand of $350-million and $660-million available from the undrawn committed revolving credit facilities (RCF) in South Africa and Europe.

Favourable market conditions provided the group with the opportunity to refinance the €350-million 2023 bonds during the quarter at par. Strong investor demand provided the opportunity to upsize the replacement 2028 bond to €400-million at a coupon 3.625%, with the additional proceeds used to repay the partly drawn RCF in Europe, the company says.

“The North American and South African regions recorded strong improvements in profitability. This was in contrast to Europe where extended lockdowns and restrictions on economic activity hindered the performance.

“Given the favourable market conditions for dissolving pulp (DP) and packaging and speciality papers, offset partially by the weak graphic paper demand and global logistical challenges, we expect the third-quarter Ebitda to improve relative to the second quarter.

"However, earnings in the European business will be lower owing to rising pulp costs,” says Sappi CEO Steve Binnie.

For the quarter, a strong packaging and specialities performance, combined with solid results from DP, more than offset the weak demand and margin squeeze in graphic paper.

A positive highlight for the quarter was the continued rapid recovery of DP markets, with Chinese market prices at the highest levels since May 2012.

The key factors supporting the positive sentiment in the sector include continued tight DP supply, low viscose staple fibre (VSF) inventory levels throughout the textile value chain, improved apparel retail demand in the US and Asia that favourably impacted all textile fibre prices, higher paper pulp prices and a continued weaker dollar:renminbi exchange rate.

Covid-19 also severely affected global shipping and container availability, which impacted on sales volumes in a number of product categories.

Across all regions, logistics issues, including congested networks, shipping line schedule disruptions, a lack of containers and vessel space constraints, impacted regular customer deliveries, contributing to higher delivery costs and higher freight rates and prevented Sappi from achieving the benefits of improved export market demand, in particular from Europe and South Africa, the company notes.

Sales volumes in the packaging and specialities segment increased by 25% year-on-year, owing to a further ramp-up of board products in North America and strong containerboard demand in South Africa. While demand for most categories in Europe was positive, some non-essential products were affected by Covid-19-related lockdowns.

The steady rate of recovery in graphic paper demand over the last two quarters slowed and sales volumes in the segment were 17% lower than the same quarter last year. Capacity closures enabled Sappi to gain market share but pressure on input costs, particularly pulp, and rising delivery charges negatively impacted on profitability.

“DP market indicators remain positive and demand from our customers currently exceeds our capacity. As at April 30, 2021, the Chinese DP market price was $1 100/t. However, pricing for VSF and other textile fibres has reduced in recent weeks.

“Much of the benefit from the material recovery of DP prices in the second quarter will be realised in subsequent quarters owing to the lag in contractual pricing.  A prolonged stronger rand:dollar exchange rate will temper some of the pricing benefits for the South African DP segment,” says Binnie.

The underlying demand in the packaging and specialities segment in North America and South Africa remains robust and Sappi's focus is shifting to improving margins through machine efficiencies, mix optimisation and price realisation. 

However, Sappi warns that, as long as there is uncertainty in Europe regarding the continuing lockdowns owing to Covid-19, the sluggish economic activity in the region is expected to impact demand for non-essential consumer products.

Graphic paper markets remain challenging and demand is still well below the long-term pre-Covid-19 trend levels. The persistent weak demand in Europe is likely to keep the market in oversupply and diminish pricing power. The lag in sales price increase realisation in combination with rising raw material and logistics costs could exacerbate the margin squeeze even further in that region.

“Ongoing worldwide logistical challenges of container shortages, port congestion and availability of vessel capacity pose a risk to export volumes from all regions in the third quarter,” Binnie highlights.

Capital expenditure in 2021 financial year is estimated to be $400-million and the Saiccor Mill expansion project is expected to commence production in the fourth quarter.