South African paper and pulp company Sappi continues its recovery in results for the second financial quarter of 2021.

Sappi’s Tugela Mill. Photo by Sappi

Sappi’s Tugela Mill. Photo by Sappi

According to Sappi’s CEO Steve Binnie the company’s EBITDA continued to improve quarter-on-quarter from a low of USD26-million in the third quarter of 2020 through USD98-million in the previous quarter to USD112 for the current quarter, with further improvement expected for the third quarter.

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

Our comprehensive Covid-19 action plan is fully entrenched in all of our operations and employee safety remains a top priority. The rate of employee and contractor infections reduced significantly during the quarter across all regions and as a consequence there was minimal impact on mill operations,” says Binnie.

Looking forward, Binnie said that the favourable market conditions for DP and packaging and speciality papers, offset partially by the weak graphic paper demand and global logistical challenges, could result in EBITDA improving relative to the second quarter. However, he added that earnings in the European business will be lower due to rising pulp costs.

For the quarter, a strong packaging and specialities performance combined with solid results from dissolving pulp (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 which favourably impacted all textile fibre prices, higher paper pulp prices and a continued weaker USD/Renminbi exchange rate.

Sales volumes in the packaging and specialities segment increased by 25% compared to last year due 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 impacted profitability negatively.

Across all regions, logistics issues, including congested networks, shipping line schedule disruptions, lack of containers and vessel space constraints impacted regular customer deliveries, saw a rise in 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.

In a positive development, new leverage covenants have been agreed with the banking group as Sappi exits the financial covenant suspension period in September 2021. The new covenants will start at 5.50 for December 2021 and reduce quarterly to 4.25 by March 2023.