Pulp and paper producer Sappi, which posted record profits in the third quarter of its 2022 financial year, aims to boost its self-generating power capacity to supply electricity to the struggling national grid.
This comes after President Cyril Ramaphosa’s announcement that, to address the shortage of megawatts, the ailing state-owned utility Eskom aims to purchase additional energy from mines and paper mill companies that have surplus power.
Speaking to Business Day on Thursday, Sappi CEO Steve Binnie said the company has been in dialogue with the government for many years, with the Ngodwana Mill selling small amounts onto the national grid for the last 10 years.
He said Sappi is investigating green opportunities to scale up this possible revenue stream.
“We supply on average 8,500-megawatt hours of power per month to the grid from Ngodwana,” Binnie said.
Sappi’s two biggest plants in SA are Saiccor, north of Durban, where it generates about 60% of its own power needs, and Ngodwana Mill in Mpumalanga.
“We want to produce more, so it’s something that we are investigating and hopefully in time we can boost our capacity further and if that creates opportunities for us to sell into the grid then certainly we will investigate it.”
Ageing fleet
Binnie said Sappi is also involved in a separate joint venture in Mpumalanga where the plant uses biomass as energy, of which about 30MW is sold onto the grid.
Hampered by an ageing coal fleet that is highly prone to faults and years of mismanagement, Eskom has been struggling to meet demand since 2007, choking economic growth.
To meet the country’s future energy needs, at least R1.2-trillion will be required in electricity investment before 2030.
The state power utility has been battling to supply efficient electricity for the country’s needs with Ramaphosa’s new plan emphasising that the electricity grid would continue to incorporate energy from renewable sources.
“In terms of our carbon-reduction strategy we are also investigating other potential green opportunities,” Binnie said.
Operating in Europe, North America and SA, Sappi is a global supplier of dissolving pulp, wood pulp, biomaterials and timber. Its end-use products include packaging and speciality papers, graphic papers, casting and release papers and forestry products manufactured from wood fibre sourced from sustainably managed forests and plantations.
Record earnings
Many of its international production facilities are powered with bioenergy from steam and existing waste streams.
Sappi delivered record earnings in its third quarter, bolstered by strong global demand and pricing momentum driven by an international paper shortage.
Tightening capacity, labour shortages, and supply chain disruptions have been attributed to causing the scant availability of packaging and paper company Mondi’s products. Industrialists globally have thus been grappling with logistical challenges, coupled with surging raw material and energy prices, which Sappi offset by price increases in the paper business.
In its financial results released on Thursday, Sappi recorded a profit of $199m (R3.3bn) for the period, up from $18m in the prior year. Earnings before interest, taxation, depreciation and amortisation (Ebitda), a measure of operating profit, rose to a record $371m from $145m previously.
“I am very proud of another quarter of record earnings against a backdrop of significant geopolitical turmoil, supply chain headwinds and extraordinary global inflationary pressures,” Binnie said.
He said while unabated inflation poses headwinds for Sappi’s export sales and raw material procurement in all regions, strong global paper demand and pricing momentum has offset sharply rising costs and the negative effect of scheduled maintenance shuts at four mills.
Temporary closure
Sappi said its SA business experienced a challenging quarter with renewed congestion at the Durban Port delaying deliveries of about 24,000 tonnes.
This was further compounded by floods in April that forced the temporary closure of three mills in KwaZulu-Natal, causing a loss of 24,000 tonnes of production and 32,000 tonnes of inventory, which was damaged in a warehouse at the Durban Port.
Binnie said the insurance claims are ongoing and the first of multiple payments should be finalised within the next two months.
Local operational activities were affected by the scheduled shuts at the Saiccor and Ngodwana Mills, where the subsequent ramp-up of production at the mill has been challenging.
Profitability was shored up by improvements in its European and North American operations where favourable market conditions prevailed, facilitating selling price increases in the paper segments.
The North American business reported a record quarterly Ebitda of $118m amid tight markets while progress was made on optimising the product mix for the assets.
The Johannesburg-based company reported a sizeable, $170m (R2.4bn) cash generation during the quarter. The company said it was able to use the funds to support its strategic objective to degear the balance sheet and accelerated its timeline to reduce debt.
Sappi managed to slash its net debt to $1.53bn from $2.055bn in the third quarter of 2021, due to strong cash generation and a positive translation impact of a weaker euro-to-dollar exchange rate.
Sappi’s share price was down 2.75% at R51.64 at close of trade on Friday, having risen 18.44% in the past six months and more than doubling over the past two years.
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