In the 1980s, Sappi bought its Saiccor Mill – a dissolving pulp mill south of Durban.
“It wasn’t the focus. It was isolated in the Sappi group,” says Steve Binnie, CEO of Sappi.
At the time, Sappi’s main focus was graphic paper, which is “high-end coated paper” used for printing and writing. The company was busy with major expansions into this market.
“Graphic paper was quite sexy then,” explains Binnie. “Our paper predominantly went into marketing literature, high-end magazines, catalogues and brochures for luxury products.”
Meanwhile, the Saiccor Mill “just quietly ticked along”.
The dissolving pulp mill had its own management team, and wasn’t integrated into Sappi. “It was doing nicely. And it slowly built the business.”
But then “graphic paper crashed”, says Binnie. “The world changed. We had the advent of digital and smartphones … then we had the global financial crisis in the late 2000s. And all of that put tremendous pressure on Sappi.”
Sappi’s expansion into graphic paper meant that its balance sheet was “heavily indebted”.
“Suddenly we were sitting with all this capacity in a market that was getting much smaller.”
The former orphan, Saiccor Mill, suddenly became more important, and it has since become increasingly more profitable and relevant in size to the rest of Sappi.
It’s at this mill that the company will be investing R2.7bn to expand production capacity, as announced at the end of July.
Becoming a global leader
It has been a long road since Sappi started a major process of restructuring in 2011 (see sidebar on pg 41), but it has since become the world’s biggest producer of dissolving pulp – producing 1.3m tonnes, or 18%, of the global demand of roughly 7m tonnes.
About 1m tonnes of Sappi’s capacity is produced in South Africa, and 750 000 tonnes at Saiccor.
Dissolving pulp is used in textiles, and Binnie describes it as a “high-end textile product that competes with cotton”. Viscose, according to Binnie, is seen as a sustainable product, and is “a very breathable product – it’s very soft on the skin. It’s very popular for ladies wear, because it is soft.”
The global textile market is growing at about 3% per annum, and is currently roughly 100m tonnes, says Binnie. Viscose has been growing at “double digits” over the last couple of years.
“With us being in a strong leadership position, that’s created growth opportunities for us. Our major customers are all looking to expand.”
Sappi’s main market is in China and Indonesia.
Sappi’s biggest challenge at the moment is capacity. “We’re full,” says Binnie. “We need to be able to keep up with the demand from our customers.”
Hence the expansion plans at Saiccor, which should add roughly 110 000 tonnes of capacity. And Sappi is also adding 50 000 tonnes at its Ngodwana Mill in Mbombela.
“We’ve got an ideal situation where we make a great product here in South Africa. We do it at a relatively low cost. We already have long- established relationships with key customers … the market is growing … So we want to invest in growth.”
However, building extra capacity costs approximately $2 000 per tonne, says Binnie, explaining that as demand started to outstrip supply, pulp prices (soft wood, hard wood and dissolving pulp) have “run very hard in the last couple of years”.
Building capacity through external opportunities has therefore become much more expensive, he says. “So we’ve had to rely on what we can do internally.
“It’s not cheap, and we have to be cognisant of the fact that we still have debt on our balance sheet. And we don’t want to make the same mistake as in the past and over-gear the company. So you have to play a very careful balancing exercise.”
Sappi believes that, towards 2025, it could grow production to “up to 2.5m tonnes”.
“We have to figure out how we’re going to do that – it’s a nice problem. But at the same time we don’t want to do anything careless – and risk over-gearing Sappi once again. We’ve been very disciplined and diligent over the last few years. And we’ll continue to be that. We’ve set ourselves a leveraged ceiling of two times ebitda [earnings before interest, tax, depreciation and amortisation] – we wouldn’t want our debt to get above that level. It may on a very short-term basis, but not on a sustainable basis.”
Binnie says Sappi is using conservative forecasting figures, but with the global market currently at about 7m tonnes, annual growth of 5% means the market is growing by ?350 000 tonnes every year. “And we want to keep our leadership position – just to keep our market share we would have to grow at least 50 000 tonnes a year.”
‘Making beautiful coated paper’
Apart from increasing its exposure to dissolving wood pulp, Sappi also moved a chunk of its capacity into high-end packaging.
“We’re talking about luxury goods. Perfumes, alcohol boxes, electronic goods, chocolates.
“Because Sappi was the global leader in making coated paper, we know how to make a very beautiful coated paper. So we took that knowledge and shifted it into packaging.”
They started with the conversion of the Alfeld Mill in Europe about five years ago. “That went extremely well.”
Binnie says a global push to replace plastics with paper has resulted in an accelerated demand for paper packaging, and the impact for Sappi is “huge”.
In South Africa, Sappi has a very strong paper packaging business, supplying paper predominantly for packaging in the fruit industry, mainly for the export market.
“Demand has been extremely strong,” says Binnie, adding that they’re also looking at expansions there.
“On the graphic paper side, with all the capacity that’s come out in the last few years from ourselves and our competitors, the market is actually doing okay at the moment – it’s actually doing pretty well. We’re not naïve – we know it’s not going to change the long-term trend – roughly it declines at around 3% per annum, and it continues to do that.
But more capacity has come out than the demand drop. And actually pricing has been picking up over the last year. Therefore the business is doing okay.”
The last leg of Sappi’s repositioning plan is on the bio-products side, where it is exploring opportunities to use raw by-products for commercial applications.
They’re currently running a pilot project to extract the sugar component from timber to make xylitol that goes into chewing gum and toothpaste.
Operating in a difficult climate
“What a lot of people don’t realise is that 90% of Sappi’s profit is hard currency,” says Binnie. “We manufacture in rands and sell in dollars.”
The company therefore benefits from a weak rand and is, essentially, “a strong rand hedge because of our export business”.
About 75% of the company’s production is in Europe and the US, and 25% in SA.
The majority of its SA product is exported, however. “So we’ve got very little direct exposure to the SA market,” says Binnie. “About 40% of our profit is made in SA – and most of that is in the export business.”
In terms of business friendliness, Binnie says Sappi has been encouraged by the fact that President Cyril Ramaphosa’s government is “making the right noises”.
But he warns that it is “early days ... Let’s see on implementation.”
Asked what changes Sappi would like to see implemented, Binnie says that, because of the poor rail infrastructure, “we have to redirect on roads, which are not being maintained either. But at least we can get it through, although at a much higher cost.”
They also experience “endless problems” at the ports. Sappi is currently the single largest exporter of containers from the Durban harbour.
Binnie says queues into the Durban port are “kilometres long, because of the layout”.
“It causes major delays. It upsets our customers in the Far East because we miss shipments. And it’s expensive.”
On the issue of land
Sappi owns just over 300 000ha of forestry land, and manages another 100 000ha.
Binnie says Sappi recognises the need for change in land ownership structures.
“We support the land claims initiatives generally. We’ve been frustrated around the implementation of the policies,” he says.
Historically, Sappi has settled on 40 000ha of land claims. “And there’s probably another 40 000ha in the pipeline.”
But now, says Binnie, everything has stopped.
On current debates around expropriation of land without compensation, Binnie says the company has been encouraged by comments that it won’t impact economic productivity.
“We’re encouraged that the government appears to want to take a pragmatic approach.
“To us it has always been a matter of … it doesn’t matter who owns the land, as long as the land is used to produce fibre,” says André Oberholzer, Sappi’s group head of corporate affairs.
Sappi’s frustrations have mostly been around “bureaucracy” with the land claims processes, says Binnie. “Really, nothing happens. There are claims submitted. We respond. We investigate. But nothing ever happens. It takes many years.”
On many of the land claims that Sappi has been involved in, and where there has been a change in ownership, Sappi continues to buy the timber and helps to manage those plantations.
Currently 4 000 active small growers (80% of which are female), mainly in KwaZulu-Natal, deliver a combined 15% of Sappi’s dissolving pulp timber requirements. Sappi spends about R400m a year on buying timber from these small growers.
But a frustration is that small growers often have to absorb long waiting periods to get permits approved by government to grow scale, or for new entrants. “You can wait years on water licences in this country,” says Binnie.
Sappi sees opportunities to partner with government to manage and beneficiate current government plantations.
This includes opportunity in the northern parts of the Eastern Cape, where government has identified about 100 000ha, says Oberholzer. “The forestry industry is a key driver of rural growth. If government unlocks some of the obstacles, or just some of the bureaucratic lagging there, then that benefit will flow directly to those communities. Because they will be able to own and grow the timber and supply it to us.”
A lot of companies move offices because they want “big shiny new offices”, says Steve Binnie, CEO of Sappi, as finweek sits down with him in the company’s new offices in Rosebank.
The company moved here after almost 40 years in Braamfontein.
“That was not our reason. It was purely a practical reason,” he says. For one, many of their employees travel quite frequently, so being close to a Gautrain station is an advantage.
But, also important, is that their headcount at their head office is down from 700 in its heyday in the early 2000s to 250 today.
It didn’t happen overnight.
And some of the jobs had been relocated elsewhere, specifically to KwaZulu-Natal.
Recognising that the demand for their main product, graphic paper, was in decline, “we were going to continue to reduce our exposure on that front”.
This meant “capacity conversions” and at the same time “expansion into dissolving pulp and speciality grades”.
A substantial restructuring was started in 2011 already, initially led by Binnie’s predecessor, Ralph Boëttger. Binnie joined as CFO in 2012, and took over as CEO in 2014.
“Firstly, we had to consolidate the balance sheet. We had to cut costs. We sold non-core assets. We streamlined the business. We focused on our core strengths.
“As the balance sheet started to improve, we started a process of transitioning the business away from graphic paper – although it is still important to us. But with less dependency on it.”
Where the “vast, vast majority of the business was in graphic paper, both [in terms of] assets and profitability”, graphic paper’s contribution is expected to have shrunk to 25% of the company’s profitability by 2020.
Dissolving pulp is expected to account for 50% and packaging for 25%.