24 November 2019 Paper

Sappi tightens belt as demand for coated papers continue to dive

The coated paper specialist has suffered as demand for its key paper product continues to freefall, with the conversion to packaging grades continuing.

Sappi has reported a 7% fall in European demand for coated wood free papers, but says that it has outperformed the market where demand for coated papers has fallen 13% in a year.

The company’s relative performance it says, is due to market share gains as competitors have looked to exit the market. Nevertheless, the company’s strategy of shifting production from these over supplied sectors to areas where there are higher margins to be had “continues to show positive results”, says chief executive office Steve Binnie.

“An initially strong start to the year was unfortunately offset by weak graphic paper markets and lower dissolving wood pulp prices driven by the ongoing trade wars and slower economic growth in various geographies,” he says. The net impact was a 10% decline in Ebitda for the year and a decision to withhold the end of year dividend in anticipation that the same forces will continue into 2020.

In the year Ebitda fell 10% to $687 million ($762 million) with operating profit down to $402 million ($480 million). Production of graphics papers fell to 3.85 million tonnes from 4.15 million.

It has gained as packaging shifts towards paper based substrates and the company has converted capacity at its Somerset mill in the US and at Maastricht to produce packaging grades, thus tempering the impact of the weaker demand for graphic papers.

And the acquisition of the Matane pulp mill in Quebec will provide a source of raw material for packaging papers. This deal has been completed this month, after the end of the year covered by the report.

Pulp prices for coated wood free papers have been drifting downwards, which in Europe has helped create a healthy gap between input and sales prices and so mitigating for the drop off in demand. Though this has not been enough to fully offset the decline in demand, the company says.

Sappi is now “evaluating various options regarding our paper machines in Europe, in order to lower fixed costs and match capacity to demand”, it says. In 2019 this has meant taking downtime across the group equivalent to 268,000 tonnes of production.

The outlook for the first quarter of the current financial year is very much a continuation of current trends with Ebitda for the first three months expected to be below that of the 2019 financial year. As well as looking at how best to manage capacity, the company says it has tightened up on working capital management and either cancelled or postponed capital expenditure.

By Gareth Ward

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Sappi is considering how to optimise its asset base of paper machines in Europe as demand for coated paper continues to fall. Some production has already been converted to packaging grades.

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