“We continue to invest in all three of our world-class production sites – further entrenching our leadership position as a trusted source for responsible and sustainable DP.”
Our pulp segment predominantly comprises two product categories, namely, DP and high-yield pulp (HYP). Occasionally, excess kraft pulp produced at Cloquet Mill, Somerset Mill and Ngodwana Mill is sold externally and included in the Pulp segment.
Our Verve brand, is a significant player in the DP market. With capacity of 1.4 million tons per annum and 17% share of the DP market, Verve is a truly sustainable brand. From textiles to pharmaceuticals and food applications, Sappi has the expertise, technology and the track record to meet almost any challenge from these DP market segments.
DP is a highly purified form of cellulose extracted from sustainably grown and responsibly managed trees using unique cellulose chemistry technology. The majority of DP is consumed to make textiles, such as viscose and lyocell, where DP is converted to viscose and lyocell staple fibres. From there, the fibre is spun into yarns and ultimately woven into textiles, providing naturally soft and breathable fabrics which are smooth to the touch, hold colour and drape well. The fibres produced from DP also act as good blend partners in fabric with cotton and polyester. Man-made cellulosic fibre, however, far exceeds cotton and polyester when it comes to sustainability. What consumers want are goods that are renewable, biodegradable and have superior resource efficiency. This is where man-made cellulosic fibres differentiate themselves versus the alternatives.
Viscose staple fibre (VSF) is the most prominent of the man-made cellulosic fibres, and accounts for approximately 73% of global DP demand. VSF is most commonly used in fashion, home and decorating textiles as well as non-woven applications such as the fibre component in face masks, health and hygiene clothing and sanitation. Verve DP provides both the quality and the sustainability assurance into this major market segment.
Lyocell represents the next generation of man-made cellulosic fibres. With its sustainable DP raw material, reduced chemical processing and closed loop systems, Lyocell continues to be the most sustainable woodbased cellulosic fibre. Our commitment to and investment in sustainability shows in that approximately 60% of the world’s Lyocell fibre is manufactured from DP produced at Sappi’s DP manufacturing sites.
DP can also be processed into products that are used in food and beverages, health and hygiene, wrapping and packaging, pharmaceuticals and many more applications that touch our daily lives.
Demand for DP used in textiles, particularly viscose and lyocell fibres, is expected to continue to grow post the Covid-19 pandemic. Based on the growth rate in the overall textile market, driven by factors such as population growth, rising urbanisation, wealth and the shift towards more comfortable, environmentally friendly natural fibres, we expect long-term growth in demand to be between 4% to 6% per annum for DP.
Market prices for DP are influenced by VSF and other textile market dynamics, paper pulp market pricing which influences swing mills, as well as general macro-economic uncertainties pertaining to the ongoing US/China trade dispute and US$/RMB exchange rates fluctuations.
Sappi’s Matane Mill, located in Quebec, Canada, has the capacity to produce 270,000 tons of HYP. Approximately 40% of Matane’s pulp production is consumed internally within our packaging business, thereby increasing the pulp integration. The higher levels of pulp integration lowers our cost of pulp, reduces its volatility on earnings through the pulp cycle and provides certainty of supply. External HYP sales to third parties are included in the Pulp segment.
The pulp produced at Matane Mill is a high-quality, high-yield pulp made from either Aspen or Maple hardwood. Sappi Matane Aspen pulp is a high-yield fibre with good bulk, excellent brightness and exceptional drainage. It is ideal for the manufacturing of tissue grades as well as graphic paper grades. Sappi Matane Maple is a high-yield pulp with superior bulk and drainage properties, as well as excellent opacity and formation. It is an excellent fibre for the manufacturing of paperboard and linerboard products as well as speciality papers, tissue and towelling.
In FY2021, the Pulp segment made up 18% of Sappi’s sales. This figure includes HYP from Matane Mill and kraft pulp produced at Ngodwana Mill. A severe second wave of Covid-19 infections in South Africa necessitated a prioritisation of oxygen supplies into the health care sector. Consequent restrictions on the procurement and transport of oxygen to the South African mills resulted in a temporary curtailment of DP production at the Ngodwana Mill, resulting in the mill producing a few thousand tons of kraft pulp in the second quarter.
Our markets in 2021 and outlook for 2022
DP market conditions rallied strongly from the first quarter on the back of improved apparel retail demand in the US and Asia, which favourably impacted demand for all textile fibres. Low DP and VSF inventory levels, high paper pulp prices and a weaker US$/Renminbi exchange rate were all factors that further contributed to the positive sentiment in the sector. The market price(1) for hardwood DP surged from a base of US$624 per ton in October 2020 to a peak of US$1,106 per ton in April 2021 and closed the year at the end of September 2021 at US$1,000 per ton.
Buoyant demand and significantly better market prices resulted in EBITDA ex SI for the year being substantially higher than the prior year. EBITDA ex SI margins for this segment improved from approximately 8% to 21% as a result of the higher US$ prices, slightly off set by a stronger ZAR/US Dollar exchange rate, which impacts our South African operations.
Segment volumes decreased 6%, or 79,000 tons compared to last year. The ongoing global supply chain challenges, exacerbated by the impact from the South African civil unrest and a cyber security breach at the Durban port, constrained sales resulting in a backlog of 100,000 tons at year end which reduced EBITDA ex SI by approximately US$30 million. In addition, once off events at the South African mills including a labour strike, shortage of oxygen due to Covid-19, an extended annual shut at Saiccor Mill and civil unrest, which forced Saiccor Mill to close temporarily, significantly reduced production volumes. Construction work at our 110,000 ton expansion project at Saiccor Mill was impacted negatively by Covid-19 lockdowns and associated travel restrictions, which delayed the project schedule. Commissioning of the plant began during the fourth quarter and additional production will commence in the first quarter of the 2022 financial year. The project is additionally expected to yield long-term safety, efficiency and reliability improvements. This investment is a key part of our strategic vision as we expand into fast-growing, higher-margin segments.
Overall market conditions for DP continue to be strong. However, short-term demand in China is impacted by the recent implementation of energy savings regulations which impose curtailments for energy intensive manufacturing operations across the country. The textile value chain in China has been negatively impacted thereby reducing VSF production and DP demand. Consequently, DP market prices dropped to US$940 per ton in October 2021. The lower VSF supply and a widening price differential to cotton fuelled a significant rise in VSF pricing, which should be positive for DP pricing. Sappi’s sales volumes are not expected to be impacted by the weaker Chinese DP demand as we see, in contrast to China, DP demand in South-East Asia, Europe, North America and the near East remains strong.
Global logistical challenges and vessel shortages are expected to continue through FY2022, which may have an ongoing negative impact on our export sales. It is unlikely that any significant improvement in supply chain reliability will be realised in the first quarter and hence the backlog of 100,000 tons of DP sales volumes will take time to resolve. We aim to remain focused on meeting and exceeding the needs of our customers. We will continue to capitalise on our competitive advantages: our world-class and sustainably managed plantations, our geographic positioning and our sterling reputation as a reliable partner, to bring our customers sustainable products that create shared value for everyone.
Matane Mill volumes have been fully sold out with strong Asian demand off setting any weakness we have experienced in other markets. Our focus remains on meeting our own growing need for high-quality highyield pulp for our packaging and speciality papers businesses in Europe and North America, as well as external sales to third parties.
Packaging and speciality papers
“Innovative packaging and speciality paper products and services with a commitment to sustainability and a circular economy. Working closely with brand owners, converters, printers, designers and communications agencies, we pride ourselves in being a reliable and global business partner.”
Legislative changes and growing consumer pressure are forcing brands to re-think their packaging choices. Governments, retailers, brand owners and their consumers are demanding paper-based packaging solutions that are biodegradable, recyclable, compostable and provide the functionality of plastic-based materials. We estimate that the increasing demand for more sustainable and environmentally friendly packaging solutions will lead to demand growth of 3-6% per year globally, across the spectrum of our products.
Sappi’s evolution within this segment is supported by the suitability of our technically advanced and efficient paper machines for conversion to packaging grades that require a variety of surface treatments or coatings for functionality. Ahead of commissioning conversion projects, we carefully analysed our assets, specifically their production capabilities and cost of production, the cost to serve customers, demand growth and competitive threats. We chose only those projects where we believed we held a significant advantage.
We have made progress in growing our business with a compelling value proposition, a propensity for innovation, and a superlative service record. We aim to create solutions that solve our customers' most critical challenges, helping them grow their sales, lower costs, improve their sustainability metrics and minimise their risk.
We work in partnerships based on trust and respect. For that reason, we place great value on reliability. Our well-maintained assets, financial stability, global availability and consistent premium quality are vital to our customers.
In FY2021, 30% of Sappi’s sales were packaging and speciality papers, up from 27% last year. Sappi offers products and solutions in many different product categories including:
Flexible packaging: innovative paper-based solutions with integrated functionalities such as barrier technology from water, oxygen and grease as well as sealing properties are suitable for various applications, notably in packaging for food as well as non-food markets.
Label papers and self-adhesives: label papers are used for both wet glue and wet strength labels processes in the beverage, food and packaging applications. Our clay coated kraft and glassine release liners provide solutions not only for labels but applications such as self-adhesive tapes, medical and industrial applications.
Containerboard: includes liners and fluting, for corrugated boxes. Sappi’s products are found in applications like consumer packaging, shelf-ready packaging and transport packaging for agricultural and industrial uses.
Paperboard: high-quality coated boards for use in luxury packaging applications that require functionality and superior graphics across a range of market segments, including health and beauty, confectionery, premium beverages and food packaging.
Casting and release papers: used by suppliers to the fashion, textile, automobile and laminate industries. Our papers serve as moulds to impart textures on other surfaces, ranging from decorative laminates and synthetic leather to engineered films and rubber.
Dye sublimation papers: for digital transfer printing with water-based dye sublimation inks. Designed for the transfer of an image onto various materials, such as apparel, outdoor advertising and home textiles.
Digital imaging papers: for large format inkjet printing. Posters, for indoor/outdoor applications and technical printing in the construction industry (CAD/Engineering).
Tissue paper: used for bathroom tissue, kitchen towels, serviettes and medical and industrial wipes.
We manufacture at sites throughout Europe, North America and South Africa, ensuring scale-based efficiencies and security of supply. Globally, we are well positioned to support and benefit from the paper for plastic packaging movement. For example, in 2019, the European Union introduced new rules to reduce marine litter by banning certain single-use plastic items, alongside a measure which holds those plastic producers responsible for the cost of cleaning these items from European beaches. The industry will also be given incentives to develop less-polluting alternatives for these products. With this comprehensive product range on three continents, R&D centres in each region, sharing best practices and collaborating with customers to develop new solutions, our customers can expect reliability of supply from a broad geographic footprint, and a leader in innovation within the sector.
Our markets in 2021 and outlook for 2022
The highlight of the year for this business segment was the achievement of record profitability as Covid-19 lockdowns eased and global economic activity resumed. Volumes were 21% higher than last year which was primarily driven by the successful ramp-up of sales volumes from Somerset Mill PM1 in North America. The line ran paperboard at the investment target levels from the second quarter and the focus shifted to product mix and margin optimisation. Containerboard demand in South Africa was robust on the back of strong fruit exports which contributed to sales for the segment increasing 26% year on year. Growth in the European packaging and speciality paper sales volumes was hampered by weaker demand for certain non-essential luxury product categories and prolonged speciality paper qualifications, however, certain packaging grades within this segment did grow. Profitability in the European region was also impacted by higher purchased pulp, energy, chemicals and delivery costs resulting in EBITDA ex SI margins for the segment decreasing from 14.1% last year to 13.6% in fiscal 2021.
This business segment has proven to be resilient in difficult economic circumstances and supports our strategy to diversify the product portfolio into higher margin and growing segments. We believe we will achieve additional volume growth in 2022, aided by the shift from plastics to paper in various packaging and speciality paper categories. We expect continued success from our conversion projects which were completed in 2018. Customer qualifications and trial-runs of our new products prove we are capable of developing innovative and quality products on which our customers can depend.
“When companies build brands, picking the right paper can mean the difference between creating something average and something memorable.”
At Sappi, we understand this difference and use our expertise to develop a variety of graphic papers designed to meet specific needs, whether a high-end product with the extra wow factor, a comprehensive solution that caters to numerous requirements or a paper that is more budget friendly. We at Sappi deliver, so that brands can have a more memorable impact.
Our markets in 2021 and outlook for 2022
Global demand for graphic papers has generally been in secular decline. The outbreak of Covid-19 in the prior year led to a significant decline in graphic paper usage across the globe, however, as Covid-19 lockdowns eased and economic activity resumed, global demand for graphic paper grades progressively improved through the course of the year. Market recovery in Europe lagged North America due to stricter lockdowns in the European Union. Capacity closures in North America, in combination with constrained imports into the region due to supply chain challenges, contributed to a favourable shift in the supply and demand balance and enabled domestic producers to operate at full capacity. Our strategy remains to reduce our exposure to graphic markets and align this business over time with market demand. To this end, in 2017 and 2018, we converted various paper machines within our portfolio from graphic paper to packaging and speciality paper grades, where demand is growing worldwide and in 2020 closed two paper machines. Our focus is on maximising the segment’s significant cash flow generation, continuously improving our cost position, and optimising the utilisation of our best-in-class production assets.
In our fiscal 2021, industry statistics show volume declines of approximately 14% relative to the prior year for European coated woodfree and coated mechanical papers largely as a result of the severe impact of the Covid-19 pandemic related lockdowns and the economic after-effect on the industry. Our graphic papers segment volumes increased 3% relative to the prior year but was 83% of fiscal 2019. The lagging European demand recovery necessitated 367,000 tons of graphic papers production curtailment in our European operations. Average prices realised were 3% up relative to 2020, however, EBITDA ex SI deteriorated from US$131 million to US$120 million, driven primarily by substantial cost inflation in purchased pulp, chemicals, energy and delivery costs. Our EBITDA ex SI margin declined relative to last year, from 5.1% to 4.4%, due to rising input costs in combination with a lag in selling price increases.
In 2022, we expect to sell higher volumes of graphic paper as the recovery of demand combined with industry capacity closures has tightened the market balance. In North America, ongoing restrictions on imports due to global supply chain disruptions have contributed to a positive environment in this region. Recent spikes in global energy prices for gas, power and coal are anticipated to have an adverse impact on our first quarter results, principally in Europe. To offset rising costs, we have announced selling price increases across all paper grades. In addition, energy specific surcharges have been implemented for all European shipments from 25 October 2021.
In FY2021, 52% of Sappi’s sales were from the graphic papers segment. The four major grades of graphic paper are discussed below:
Coated woodfree paper
Printers and publishers use coated woodfree paper for a variety of marketing promotions including brochures, catalogues, calendars, corporate reports, direct mail, books and magazines. Coated woodfree paper provides a smooth and uniform surface for optimal print fidelity. We manufacture coated woodfree paper in our North American and European businesses but sell to customers all over the world. Coated woodfree paper products are sold through large paper merchants, as well as directly to commercial printers.
Demand trends: Global advertising expenditure is forecast to grow, but the share of that spend relative to print is expected to decline. However, we believe there will always be a place for paper within the marketing mix. Globally, demand for coated woodfree paper is forecast to decline from approximately 21 million tons in 2019 to approximately 16 million tons by 2024.
Sales: Sappi’s sales volumes for coated woodfree paper increased 6% from last year and sales were 8% higher, largely due to a recovery in demand, as Covid-19 lockdowns eased, and global economic activity resumed. Globally, demand for coated woodfree paper increased by approximately 1% with Sappi gaining market share.
Coated mechanical paper
Coated mechanical paper is primarily used in magazines, catalogues, newspaper inserts and other advertising materials. Sappi’s coated mechanical paper sales all come from our European business. Customers for this paper are typically large web printers, publishing houses, retailers and cataloguers.
Demand trends: Demand for coated mechanical paper is more closely linked to that of demand for magazines. Readership, subscriptions, circulation, pagination and advertising revenue per page continue to decrease in larger markets as consumers opt for digital formats.
Sales: Sappi’s sales from coated mechanical paper were 3% lower than last year, as we took market-related downtime in response to poor demand. Volumes were approximately 1% lower than the prior period. This year, the global market contracted by approximately 1% relative to the prior year.
Uncoated woodfree paper
Uncoated woodfree paper is used for letterheads, business stationery, photocopy paper, books, brochures, envelopes, pamphlets and magazines. Sappi manufactures and sells uncoated woodfree paper in our European and South African businesses. Our main customers in this sector are paper merchants, commercial printers and retailers.
Demand trends: Demand for uncoated woodfree paper is not expected to decline over the next several years, with limited growth coming from emerging markets.
Sales: Our sales from uncoated woodfree paper were 1% higher than last year, largely as a result of the resumption of global economic activity as Covid-19 lockdowns eased. Globally, demand increased by approximately 1% in the current financial year.
Newsprint is manufactured from mechanical and bleached chemical pulp, with uses including the printing of newspapers and advertising inserts. We manufacture and sell newsprint from our South African business.
Demand trends: Demand for newsprint is principally derived from newspaper circulation and overall retail advertising. Newspaper readership is declining around the world. This industry segment was hard hit by the Covid-19 pandemic with an estimated drop in demand of approximately 6% during the current year and an estimated decline of 3% to 6% annually through to 2025. Publishers are consolidating, while some titles have closed. Pockets of growth exist in advertising-financed daily newspapers typically found in large metropolitan cities.
Sales: Newsprint volumes continue to be impacted by the negative impacts of Covid-19 on the economy, however, no production curtailment was necessary in the current financial year. Our volumes and sales were above the prior year by approximately 21% and 24%, respectively. Globally, newsprint demand declined 6% versus 2020.