March 6, 2009 / 1:46 PM / 10 years ago

Sappi sees capacity cuts if no demand pick-up

JOHANNESBURG (Reuters) - Sappi, the world’s biggest maker of fine paper, expects the industry to close more coated fine paper capacity permanently if demand does not pick up, its chief executive said on Friday.

A printing press produces ballot papers in Budapest, March 29, 2006. REUTERS/Karoly Arvai

CEO Ralph Boettger said he does not rule out that Sappi, which controls some 30 percent of the market for fine paper, would take the first step, but said that the company would first consider the interest of its shareholders, then the industry’s.

“If demand doesn’t pick up, one can expect further permanent closures in the industry ... but whether we would be the first ones to do that, one has to see,” Boettger told Reuters, adding that Sappi was reviewing the situation on a weekly basis.

Shares in the company fell nearly 7 percent before recovering to close down 2.8 percent at 13.82 rand, compared with the JSE basic materials index, which closed up 4 percent.

The paper industry has struggled for six years to climb out of a slump, burdened by overcapacity and soft prices, and the global economic crisis has dimmed prospects for 2009 as demand for basic materials, including paper, has dropped further.

Sappi temporarily cut fine paper output in Europe and the United States by up to 25 percent in the last three months and indefinitely suspended its Muskegon Mill, which has a capacity to produce 170,000 tonnes of coated fine paper.

While demand in Southern Africa has not dropped as much, Sappi cut paper production by around 10 percent and pulp production by 30 percent from its expanded capacity.

Boettger said Sappi preferred not to close capacity permanently, in spite of the costs incurred by the temporary cuts, as it could substantially harm its market position, and it instead prefers to focus on managing stock levels, costs and prices, for now.

“In a situation like this, the main priority is cash generation, above profit,” he said.

SUFFICIENT CASH

Sappi said it would reduce capital expenditure for the current financial year to below $200 million, from $505 million the previous year, and is targeting a $100 million reduction in working capital until its financial year-end.

Boettger said, however, the company had sufficient cash and committed facilities to cover its short-term obligations.

“We are not concerned about our covenants and don’t see us breaking them; we have a clear plan in terms of liquidity, generating cash and reducing working capital,” he said.

Sappi said it expects the quarter to end-March to fall into an operating loss before special items, with demand expected to remain under pressure for the remainder of 2009, and in Europe to fall substantially below last year’s levels.

Boettger said 2010 could be equally challenging.

“We don’t expect much from this year and we are preparing ourselves that 2010 might be challenging as well,” he said.

Boettger said that while the company managed to push through another price increase for European coated fine paper this year, he does not expect further hikes to be possible.

He said prices for pulp in South Africa have dropped to levels close to the cash cost, suggesting that they might have hit a floor, but he sees further pressure on prices in North America.

Boettger bets, however, on the long-term outlook for the company and says Sappi will emerge strongly once the market has turned, especially given its graphic paper aquisitions from Finland’s M-real, completed at the end of last year.

While there will be a slight delay in the ramp up to the annual synergies of 120 million euros Sappi expects to reach within three years, Boettger said they would be “substantial” in this financial year to end-September.

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