Exchange rates, upgrades and material costs affect Sappi Group profits

Global paper producer Sappi Group, based in Johannesburg, has released its third quarter financial results, for the quarter ending June 30, 2015. The company posted a profit for the period of US $4 million, compared with profits of US $17 million in the third quarter of 2014.

Other noted results included a net debt level that has fallen US $1,917 million (from US $2,286 million in the third quarter of 2014), and earnings per share, excluding special items, that was unchanged from the third quarter 2014, at $.02 per share.

Commenting on the results, Sappi Chief Executive Officer Steve Binnie says the third quarter is seasonally the weakest for Sappi. He refers to the pulp mill upgrade at Gratkorn, Austria, and planned annual maintenance shutdowns in all three regions (Europe, North America and Southern Africa) that reduced profit by approximately US $27 million compared with the equivalent quarter last year.

Sappi says its North American business experienced significant pressure as a result of the stronger U.S. dollar, which led to increased imports of coated paper, lower coated paper sales volumes and lower margins for the release paper business. The domestic graphic paper market was also weaker than expected, the company indicates in a press release announcing the results.

The company also says the performance of the European business was adversely impacted by the higher cost of raw materials due to the stronger U.S. dollar and additional pulp purchases during the upgrade of the recovery boiler at Gratkorn. The market for graphic paper continues to decline in Western Europe. However, the weaker euro made exports more competitive and profitable.

In the South African paper business the virgin fibre packaging grades continue to show good demand growth, Sappi says. However, newsprint and recycled packaging paper demand were flat.

The Southern African business achieved higher average prices and volumes compared to both the equivalent quarter last year and the prior quarter, Sappi reports. Operating profit for the quarter was impacted by ZAR 204 million (US $16 million) as a result of the planned annual maintenance shuts at Ngodwana and Saiccor. Postquarter-end, the company announced the sales of its Enstra Mill’s recycled packaging paper business and Cape Kraft paper mill, in-line with a strategic focus on the virgin fibre packaging business in South Africa.

The company reports that graphic paper markets remain challenging and currency movements are having a significant impact on trade flows. These are cited as having affected its U.S. business while improving export margins for the European coated paper business. The European business continues to face pressure from higher pulp prices, Sappi says.

Dissolving wood pulp prices in China have risen steadily over the past four months and this should translate into higher short-term fixed prices with major customers, the company says. The weaker Rand/US dollar exchange rate will support the profitability of this business in South Africa, Sappi adds.

Overall Sappi says the regional operating performance for the year will be broadly similar to 2014 despite a number of significant once-off impacts from various capital projects.