Sappi says cogeneration a strong feature of cost reduction plan

South African paper manufacturer Sappi is “aggressively” pursuing restructuring and cost reduction plans, with cogeneration featuring strongly, CEO Ralph Boëttger said on Thursday.

The JSE-listed company, which posted a third-quarter loss, said high input costs remained a challenge.

“Sappi continues to see cogeneration as a significant opportunity. The paths are well suited and we see a lot of synergies in electricity generation, which helps our core business and makes us competitive,” Boëttger told Engineering News Online.

He was unable to divulge details of projects in the pipeline, but indicated that Sappi was working on about four “exciting” projects of different sizes.

More detailed information might be announced in the 2012 financial year. “We will be in a position to be able to internally fund all projects,” said Boëttger.

Benefits from these projects would drive cost savings and revenue generation and lessen dependence on third-party supply.

Sappi was also looking into cogeneration opportunities for its European business.

A challenging business environment, exacerbated by economic uncertainty in Europe and planned shutdowns at major pulp mills, resulted in basic loss a share of $0.13. This was an improvement on the $0.14c a share loss reported in the second quarter, but a big decrease from basic earnings of $0.12 reported in the June quarter last year.

Sales for the quarter rose 12% year-on-year to $1.8-billion.

Net debt at $2.47-billion was higher than the corresponding period last year and the last quarter, at $2.34-billion and $2.37-billion respectively.

Boëttger acknowledged that Sappi has underperformed, but stressed that recent closures at two mills in South Africa and Switzerland, were not an indication that the company was in any trouble.

Business conditions in Europe were under strain as a result of weaker-than-expected demand for coated wood-free paper and the company reported an increase of 18% in variable costs a ton.

To reduce the impact of high raw material prices, Sappi continues to seek innovations with regard to the sourcing and the use of raw materials.

What was key, said Boëttger, was that there were areas of the company’s core business that was performing exceptionally well.

But, there continues to be “big intervention” in business to ensure a more profitable 2012 financial year, he added.

Sappi would be shutting down the 47-year-old Adamas mill, in Port Elizabeth, and has closed shop at the Biberist mill, in Switzerland.

The closure of Biberist would result in $50-million savings for the company from the fourth quarter, with all other cost reduction and profitability-geared initiatives in Europe to bring additional savings of $50-million.

While, Boëttger could not divulge the costs savings targets for Southern Africa, he said there would be substantial cost reductions.

In North America, order inflows remain firm. Sappi expects to see some improvement from the levels of the previous quarter in Europe.

The Southern African business has a strong order book for chemical cellulose and it is expected that there would be an improvement in demand for the packaging paper in the domestic market. Printing and writing paper remains highly competitive, particularly with regard to imports in the domestic market, owing to the strength of the Rand to the US dollar.

Fourth-quarter results are expected to improve, but well short of the corresponding period in 2010, with regard to operating profit and strong net cash generation. “These are challenging times, but we remain focused on increasing our competitiveness and improving our performance and profitability,” Boëttger concluded.