Storage towers at Sappi?s Ngodwana wood mill in Mpumalanga. Picture: BLOOMBERG
Storage towers at Sappi?s Ngodwana wood mill in Mpumalanga. Picture: BLOOMBERG

Sappi’s European profits were under pressure in the second quarter ended-March 2017 from rising raw material costs, especially pulp and latex, and a soft graphic paper market.

Europe is the international pulp, paper and packaging group’s biggest market by sales.

But its speciality packaging business in Europe — including for soup sachets, carry bags and cosmetics — experienced strong sales growth and profit margins, helped by a weaker euro.

Meanwhile, buoyant dissolving wood pulp markets, mainly for clothing and textiles, generated 50% of profit.

"SA surprised positively with a robust dissolving wood pulp and packaging performance," Wade Napier, a diversified resources analyst at Avior Capital Markets, said on Monday.

The upward trajectory of dissolving wood pulp — also known as chemical or specialised cellulose — followed trends for viscose staple fibre, cotton and polyester.

The average dollar prices in the quarter were above those of the prior quarter and the equivalent quarter in 2016, driven mainly by higher average prices in the Chinese market.

Sappi said higher specialised cellulose pricing and increased packaging-and-release paper volumes, along with cost and efficiency gains, more than offset a drop in coated paper volumes and prices for the group’s US business, leading to an improved year-on-year result.

This pushed earnings of $208m before interest, tax, depreciation and amortisation — excluding special items — 7% up on the same quarter in 2016. However, profit for the period fell from $100m to $88m due to an $18m positive aftertax plantation fair-value adjustment that occurred in the previous year.

CEO Steve Binnie said graphic paper would be reduced from about 37% of profit in the future as the group substantially boosted output of speciality packaging from about 13% of profit to 25% by 2020.

The group had halved its debt in the last three and a half years, from $2.4bn to $1.3bn. By 2020 this would fund conversions from graphic paper output to speciality packaging.

The paper business in SA also had a positive quarter, with higher sales volumes in the containerboard and newsprint categories. However, the stronger rand-to-dollar exchange rate hurt export prices in particular.

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