Pulp and paper manufacturer Sappi, which employs more than 4,500 people nationwide, says it is keeping a close eye on potential social unrest as the country enters an election year amid poor service delivery.
The group, valued at R22.6bn on the JSE, said deep-rooted problems in SA’s state-owned ports and rail companies coupled with a disaffected population due to the lack of service delivery and job opportunities, made social unrest in SA an ever-present threat.
Sappi suffered a more than R220m loss of production after civil unrest in July 2021 caused disruptions to raw material supplies and forced the temporary closure of the Saiccor, Tugela and Stanger mills in KwaZulu-Natal. It was also forced to temporarily close them in response to flood damage in 2022.
In the company’s annual report for the year ended September, the group cautioned that while the risk of community unrest and potential disruptive effects on its operations had stabilised, a resurgence was possible with the upcoming elections.
“As the country prepares for 2024 national elections, political activities can be expected to intensify,” said Sappi. “This could have potentially negative consequences for some of our operations.”
With 400,000ha of owned and leased sustainably managed forests, five production facilities and three sales offices in the country, SA is one of Sappi’s core operating regions alongside North America and Europe.
SA will hold general elections in 2024 for both the National Assembly and provincial legislatures. This is against the backdrop of “material irregularities” by municipalities that have led to financial losses of about R5.2bn since 2019, according to the auditor-general’s latest report.
Sappi Sub-Saharan Africa (SSA) supports local communities in 60 of the country’s 278 municipalities which comprise primary communities within a 30km radius of Sappi operations and secondary communities within 50km of its plants, “many of whom have expectations of Sappi to resolve social demands”, it said.
With the government’s well-documented failures becoming increasingly glaring to citizens, communities are looking to private companies to provide solutions to social ills such as unemployment, inequality and crime.
“In some instances, this negatively affects our reputation and relationships with communities, many of whom look to us to take on the government’s role,” the group said.
Maputo over Durban
Sappi lamented the logistics nightmare in SA characterised by poor railway infrastructure and port bottlenecks that have seen Durban lose business to neighbouring ports.
The group has traditionally moved a large proportion of both raw material and finished products by rail in the SSA region, however, SA’s dilapidated rail network has forced more freight onto the country’s already overwhelmed roads, increasing congestion and damaging infrastructure.
The troubles at Transnet are dealing a blow to the economy as vital exports are held up on blocked roads and ships, with SA ports now rated among the worst in Africa.
“There are deep-rooted problems in SA’s state-owned ports and rail companies related to a shortage of freight trains, rail infrastructure and inefficient ports,” Sappi said. “SSA exports the majority of the dissolving pulp produced in the region and relies heavily on the Durban port.”
In response, the group increased its road transport routes, opting to ship dissolving pulp from Ngodwana Mill to the port of Maputo in Mozambique, rather than Durban.
The manufacturer said several railway bridges between Durban and Umkomaas, where its Saiccor Mill is situated, became unusable after the April 2022 floods with authorities saying the end of 2025 is the earliest it can expect the 95-year-old Illovo bridge south of Durban to be operational.
In a letter to stakeholders, the chair and CEO said that “2023 was one of the most challenging downcycles experienced in the pulp and paper industry”, with demand for Sappi paper products falling below that of the Covid-19 pandemic years.
The Johannesburg-based group posted a near 62% decline in headline earnings per share in the year ended September, but maintained its dividend at 15c.
Graphic paper demand fell sharply with sales volumes down 38% year on year. The packaging and speciality papers segment faced weak trading conditions which resulted in a 22% drop in sales volumes.
The company said the weakness was due to weak consumer confidence related to the slowing global economy and an inventory destocking cycle which took longer than expected.
Lower debt
Conversely, concentrating on preserving selling prices, efficiently managing capacity and inventories to optimise working capital, and implementing cost-saving initiatives across operations had positively contributed to the earnings performance, it said.
Sappi managed to shave down its net debt to $1.085bn from $1.163bn in 2022 — its lowest level in 30 years.
CEO Steve Binnie said the stronger balance sheet with a significantly reduced debt profile and healthy cash reserves provided Sappi with the flexibility to navigate the headwinds of cyclical downturns.
He said it further positioned the business well to deliver on its strategy to reduce exposure to graphic paper markets while investing for growth in target markets like packaging.
Outgoing group chair Sir Nigel Rudd said though he was able to “spend some quality time with President Cyril Ramaphosa discussing the strategic importance to SA of Sappi and the forest products industry”, the challenges in SA’s operational environment remained.
However, he was upbeat that management, with the guidance and support of the board, has been able to change the strategic direction of the company in response to fundamental changes in market demands and consumer preferences.
“I retire from a diversified wood fibre company rather than the narrow graphic paper-focused company I joined in 2006,” said Rudd. “I am satisfied that I leave a company in very good health.”
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