The weakening dollar has put pressure on South Africa’s 90-year-old paper and packaging giant, Sappi, making the group vulnerable to cheap imports and rising costs at home.
In recent weeks, fears of a steady decline in earnings led to investors exiting their stakes in the company, one of the oldest listings on the JSE, pushing its share price to the lowest level since March 2009.
Commenting on results for the quarter ended December, Sappi CEO Steve Binnie said the group was not looking to consolidate its South African operations, even as persistent pressure from cheap imports and market headwinds saw it post a plunge in earnings.
However, Binnie said the weaker dollar, coupled with a steady decline in the price of its products, was part of the reason behind rival Mpact’s decision to mothball a local mill, laying off nearly 400 employees.
“We’ve seen the announcement from Mpact — they’re both a customer of Sappi and a competitor. It’s obviously very sad, and it’s clearly reflective of the shift in exchange rates, which makes imports cheaper and domestic production less competitive,” he said.
“But costs in South Africa have been rising for many years. I know the exchange rate was around R16/$ a few years ago, but costs have risen since then because of Eskom and other infrastructure challenges. It does make things difficult.”
The group’s main concern heading into the second quarter, said Binnie, remained the exchange rate, which is expected to make second-quarter earnings even lower than those of the December quarter.
To make matters worse, a scheduled maintenance shut at its South African Saiccor plant is expected to cut another $15m off that quarter’s earnings.
Sappi reported adjusted earnings before interest, tax, depreciation and amortisation (ebitda) of $90m for the December quarter, down 56% from a year ago.
Revenue slipped 6% to $1.29bn, while net debt ballooned nearly 40% to $1.95bn.
While South African consolidation seems off the table for now, Sappi’s European operations in December announced a 50-50 joint venture to combine its graphic paper plants with Finnish group UPM-Kymmene Corporation’s paper business in Europe, the UK and the US.
In a statement, Sappi cited the “long-term structural decline of the European graphic paper industry, which continues to face pressure from falling demand, high energy costs, excess production capacity, and broader macroeconomic challenges” as its rationale.
In an effort to stem the losses, the company reduced its capital spending forecast further from $290m to about $260m, limited to spending on “essential maintenance and regulatory activities only”, it said.
It warned that significant weakening of the greenback against both the rand and the euro was likely to continue weighing on profitability in South Africa.
After initially falling as much as 5% on Wednesday morning, Sappi’s share price recovered and was 1.18% lower at R18.50 by 9.36am.
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