Sappi braces for shipping price increases
• Conflict in the Middle East likely to raise logistics costs
Diversified wood fibre manufacturer Sappi says disruptions to shipping routes as a result of conflict in the Middle East is likely to increase logistics costs for the business.
The outlook is set to pile further pressure on the R24.9bn JSE-listed paper and pulp group, which on Wednesday reported a loss for the three months to the end of December as sales volumes across its products came under pressure — a situation worsened by scheduled maintenance shutdowns at some of its mills.
CEO Steve Binnie said logistics was a challenge at present because of the effect of geopolitical issues, specifically the war in the Middle East and tensions in the Red Sea that have led to ships travelling around Africa rather than through the Suez Canal.
“We export a chunk of product out of Europe to Asia,” Binnie told Business Day. “What it means now is that we have to go around the Cape, which adds to the cost.”
In recent weeks international media has reported that dozens of container ships were rerouted via SA’s Cape of Good Hope in January in a bid to avoid attacks by Houthi rebels in Yemen on shipping in the Red Sea, which leads to the Suez Canal.
The diversion adds about 6,000 nautical miles to a typical journey from Asia to Europe, potentially adding three or four weeks to product delivery times.
Binnie said shipping costs are starting to rise as the extended travel times reduced the number of vessels available.
“There are more vessels on the water [and] because they are on the water for longer, it is getting a little bit harder to find space allocation, so it’s a combination of logistical challenges and higher costs,” he said.
“We expect the impact in the second quarter ... to add about $9/tonne to our costs,” he said, adding that while the escalations would be passed on to customers, there were opportunities amid the chaos.
“Ironically it’s not all bad because ... there are imports from Asia coming into Europe and now because we are in Europe already, it means that the Asian competitors equally can’t take the shortcut through the Suez Canal,” Binnie said.
SHUTDOWNS
The Johannesburg-based company reported a loss of $126m during the October-December period compared with a profit of $190m in the same period a year earlier.
Earnings before interest, taxes, depreciation and amortisation (ebitda), or core profit, nearly halved to $156m after group sales fell 23%.
The planned maintenance shutdowns at the Saiccor, Ngodwana and Cloquet mills resulted in lower production volumes, which hit the bottom line.
Sappi also encountered reduced demand for paper, a phenomenon that has been in place for several years as a result of a structural decline in the print industry. The paper markets were also under pressure during the review period from lower consumer confidence, higher interest rates and continuing geopolitical instability, Sappi said. To offset the structural decline in paper markets, Sappi has been pivoting to packaging and speciality papers to attract demand from e-commerce, which exploded during the height of the Covid-19 pandemic before cooling off.
PUMPING THE PACKAGING
Binnie said the company is banking on a combination of normalising macroeconomic markets and the conversion and growth projects in Europe and North America to shore up its packaging volumes.
“We’ve got some projects that are close to completion that are going to give us additional volumes on the packaging side because that’s where the growth is going to come from ... it’s a big opportunity for us,” he said.
“Similarly in Europe, we are also converting away from graphics towards labels and that’s a real growth segment for us; it will give us additional margins and growth opportunities.”
Graphic paper has been in long-term decline and the group has been progressively decreasing its exposure there. Sales volumes for graphic paper fell 14% year on year but improved 6% on a quarterly basis.
Binnie said the goal was to reduce graphic paper to less than a fifth of the business by 2027, from 80% a decade ago. Sappi is converting and expanding its Somerset Mill in North America to produce solid bleached sulphate board (SBS) rather than coated wood-free graphic paper, which it said was progressing as planned.
Additionally, the rationalisation of its European graphic paper capacity gained momentum during the quarter with the closure of the Stockstadt Mill. The consultation process for the closure of the Lanaken Mill was also concluded late in the quarter, it said.
“That will ensure we reduce our fixed costs ... and because we will move the volumes that were in those mills to our other European assets, those will be more fully utilised, which will provide significant cost savings and efficiency benefits,” Binnie said.
Sappi shares ended the day 2.42% lower at R44.27, taking the loss over the past year to about 17%.
BINNIE SAID SHIPPING COSTS ARE STARTING TO RISE AS THE EXTENDED TRAVEL TIMES REDUCED THE NUMBER OF VESSELS AVAILABLE