Sappi adapts to changing packaging market as shares slide on lower profit
Sales fell 5% amid ‘sluggish’ demand, as the group races to ramp up packaging production as the world switches from plastic to paper
Sappi’s R2.5bn acquisition of a pulp mill in Canada comes as the group races to ramp up packaging production to take advantage of a global switch from plastic to paper, CEO Steve Binnie says.
Sappi’s shares slumped as much as 15.4% on Thursday to R44.17 — their worst level in nearly four years — after the pulp, packaging and paper company said profit in the three months ended June plunged to $8m from $51m a year before.
This was partly the result of “sluggish” demand for graphic paper — the company’s traditional business.
The group has been reducing its relative exposure to graphic paper by moving deeper into the wood-based packaging and textiles markets.
Alongside its quarterly earnings report, Sappi said on Thursday that it has agreed to buy the Matane hardwood pulp mill in Quebec, Canada, for $175m (R2.5bn).
The deal means the group’s North American and European packaging businesses will be able to source most of their pulp internally, Binnie said, adding that it will lower the group’s pulp costs, reduce the volatility of earnings, and provide certainty of supply.
“We need to ramp up packaging volumes as quickly as possible,” Binnie said, citing growing demand for paper packaging for consumer goods such as chocolates, cosmetics and electronics. Sappi may look to add more packaging capacity in the future, he said.
The quarterly decline in profit came as sales fell 5% amid weak demand for graphic paper and lower dissolving wood-pulp prices. Several mills were temporarily shut for maintenance or in response to weak demand, Sappi said.
Profit was also dented by a $9m once-off finance charge linked to bond refinancing.
Binnie warned that profit in the final quarter to September would probably fall compared to a year before.
Prices for dissolving wood-pulp were expected to remain under pressure while textile makers contend with a supply glut stemming from an inventory build-up prior to the US hiking tariffs on Chinese goods. Sappi supplies dissolving wood-pulp to textile manufacturers in China, India and Indonesia.
However, according to Binnie, the dissolving wood-pulp market is expected to normalise over the coming 12 months as stocks are reduced, and some higher-cost producers are having to reduce capacity, as prices are at a 10-year low.