Dissolving pulp 

Our DP brand Verve is a significant player within this market. With 17% share of the DP market and 1.4 million tons per annum, 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.

In November 2019, Sappi acquired the 270,000 ton Matane high-yield hardwood pulp mill in Quebec, Canada. The acquisition increases our pulp integration for our packaging businesses and lowers our costs of pulp, reduces its volatility of earnings through the pulp cycle and provides certainty of supply. External high-yield pulp sales are included in the DP segment.

In FY2020, the DP segment made up 17% of Sappi’s sales. This figure includes high-yield bleached chemi-thermo mechanical pulp (BCTMP) from Matane Mill and paper pulp produced at both Cloquet and Ngodwana mills to mitigate the impacts of the downturn in DP demand during the initial period of the Covid-19 pandemic.

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 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. 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 cellulosic fibres differentiate themselves versus the alternatives.

Viscose staple fibre (VSF) is the most prominent of the manmade cellulosic fibres, and accounts for approximately 70% 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 fibres. With its sustainable raw material, reduced chemical processing and closed loop systems, Lyocell continues to be the most sustainable wood-based cellulosic fibre. Our commitment to and investment in sustainability shows in that almost two-thirds of the world’s Lyocell DP is produced at a Sappi mill.

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 4-6% 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.

The pulp produced at Matane Mill is a high-quality, high-yield BCTMP 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 printing and writing 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.

Our markets in 2020 and outlook for 2021

During 2019 a substantial increase in integrated VSF and DP capacity disrupted market dynamics; installed VSF capacity now exceeds global demand by approximately 25%. This surplus of new low-cost VSF capacity as well as the Covid-19 pandemic has disrupted the market, lowering operating rates, and resulting in DP prices reaching historical lows during August 2020 of US$607/ton. Market conditions and pricing for DP improved during the latter part of the fourth fiscal quarter of 2020. Underlying demand for DP is still growing at a rate of approximately 5%. At the end of November 2020, the Chinese market price had risen to US$710/ton, driven by an acceleration in DP demand, tighter market balance and higher VSF prices.

The economic impact of Covid-19 during FY2020 has been dramatic, resulting in EBITDA for the year being substantially lower than the prior year. EBITDA margins for this segment declined from approximately 28% to 8% as a result of the lower US$ prices and DP sales volumes, slightly offset by a weaker ZAR/US Dollar exchange rate, which benefits our South African operations.

Segment volumes increased 2%, or 31,000 tons compared to last year as a result of the inclusion of approximately 255,000 tons of BCTMP and market paper pulp in the segmental volumes. Construction work at our 110,000 ton expansion project at Saiccor was temporarily halted from end March to early June due to Covid-19 lockdown restrictions. Construction resumed in June and the project is now expected to be completed in Q3 FY2021. 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.

Since November 2019, Matane Mill volumes have been fully sold out with strong Asian demand offsetting any weakness we have experienced in other markets. Our focus remains on meeting our own growing need for high-quality, high-yield pulp for our packaging and speciality businesses in Europe and North America, as well as external sales to third parties.

In a year characterised by macro-economic uncertainty, disruptive market dynamics and the economic impact of Covid-19, 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.

Packaging and speciality papers 

We offer a broad range of paper-based sustainable solutions as an alternative to fossil fuel-based, non-renewable packaging in many of our product segments.

Both legislative changes and consumer pressure are forcing companies to re-think their packaging choices. Governments, retailers and brand owners all over the world are demanding paper-based packaging solutions for their products, and eco-conscious consumers and shoppers are pressuring brand owners for more biodegradable, recyclable and compostable packaging, all reflective of a more circular economy. The increasing need for more sustainable and environmentally friendly packaging solutions, we estimate will lead to demand growth of 3-6% per year globally, across the spectrum of our products.

The evolution of our focus from graphics toward packaging and specialities is derived from the suitability of many of our graphic paper machines for conversion to packaging grades that require a variety of surface treatments or coatings for functionality. Ahead of commissioning the various conversion projects, we carefully analysed our assets, specifically their production capabilities for specialities and packaging grades, and how those capabilities matched their expected cost of production, the cost to serve customers, historical demand growth, forecasts for the future, as well as competitive threats – choosing only those mills/products/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 excellent logistics network, financial stability, global availability and consistent premium quality are vital to our customers.

In FY2020, 27% of Sappi’s sales were packaging and specialities, up from 22% last year.

Sappi offers products and solutions in many different segments including:

Casting and release papers: used by suppliers to the fashion, textiles, automobile and household industries. It is used in the manufacture of synthetic leather and decorative laminate products, creating textures that make designs come to life.

Containerboard: including liner 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.

Digital imaging papers: for large format inkjet printing. Posters, for indoor/outdoor applications, and technical printing in the construction industry (CAD/Engineering).

Dye sublimation papers: a coated sublimation paper for digital transfer printing with water-based dye sublimation inks. Designed for the transfer of an image onto various polyester materials, such as banners, flags, snowboards, gadgets, (mugs, mouse pads, etc.) apparel and home textiles.
Flexible packaging: can be coated or uncoated, for food and non-food applications, such as sachets, pouches and wrappers.

Functional papers: that offer highly efficient paper-based solutions with integrated functionality, like paper with barriers against mineral oil residuals, oxygen, water vapour and grease as well as sealing properties.

Label papers: for pressure sensitive applications as well as for wet glue and wet strength labels.

Paperboard: solid bleached board and folding boxboard for luxury packaging applications that require functionality and superior graphics across a range of market segments including cosmetic, perfume, confectionery and premium beverages.

Release liner: with silicone base papers and glassine papers for self-adhesive applications, such as graphic art applications with outdoor advertisements, adhesive tapes and office materials.

Technical papers: for interleaving and thermal coating. Examples include tickets for boarding passes and concert/stadium tickets.

Tissue paper: used for toilet tissue, kitchen towels, serviettes and medical and industrial wipes.

We manufacture from a suite of machines within Europe, North America and South Africa, ensuring scale-based efficiencies and security of supply. Our South African operations mainly focus on the local containerboard market, supplying the agricultural sector with cartonboard to protect fresh produce as it is shipped from farms to tables locally and around the world. Our North American operations currently make functional packaging papers, label papers, and paperboard for folding cartons. Examples include perfume boxes, packaging for items like toys, small electronics, health and beauty products and other fast-moving consumer goods. The focus of our European operations in this segment is much more diverse, and niche. Our portfolio has higher levels of specialisation and customisation than most other speciality paper producers. We are capable of engineering specific products for specific customers, particularly those who want more than just a package. We are capable of coating paper to give the paper functionality that was previously unavailable; such as moisture controls, oxygen barriers, grease resistant barriers, vapour barriers, etc.

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, like cutlery, straws, and drink stirrers, 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. So, with this comprehensive product range on three continents, R&D centres in each region sharing best practices and new findings from new customers, our customers can expect reliability of supply from a broad geographic footprint, and a leader in innovation within the sector.

Our markets in 2020 and outlook for 2021

The highlight of the year for this business segment was good growth in sales and profitability despite the many challenges posed by lockdowns in various industries across the globe. Volumes were 7% higher than last year as continued customer trials and qualifications turned into customer wins and subsequent volume commitments. Net sales were flat year on year. Good cost control resulted in EBITDA margins improving from 10.1% last year to 14.1% in fiscal 2020. While our realised price per ton decreased by approximately 7% through the year, our average cost per ton decreased over 11% from last year. The acquisition and integration of the Matane Mill, the delayed maintenance shut at Ngodwana as well as generally lower input costs all contributed to the improved performance.

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 2021, aided by the shift from plastics to paper in various packaging and specialities 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 that our customers can depend on.

Graphic papers 

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 2020 and outlook for 2021

Global demand for graphic papers has generally been in secular decline. The outbreak of Covid-19 during the year led to a significant decline in graphic paper usage across the globe in line with the slowdown in economic activity. Our graphics business volumes have consequently declined, and part of our strategy is to rationalise this business over time in line with the market. In 2017 and 2018, we converted various paper machines within our portfolio from graphic paper to packaging and specialities grades, where demand is growing world-wide. For Sappi, this means maximising its significant cash flow generation, continuously improving our cost position, and optimising the utilisation of our best-in-class production assets.

In our fiscal 2020, global industry statistics show significant volume declines when compared to the prior year of between 20-22% for both coated woodfree and coated mechanical papers largely as a result of the severe impact of the Covid-19 pandemic, related lockdowns and the economic aftereffect on the industry. Our volumes from the segment were approximately 20% lower this year relative to last. Average prices realised were 6% down relative to 2019 as selling prices moved in line with lower input costs. Significant curtailment was taken during the year to match supply to demand and prevent the build-up of inventory. Our EBITDA margin declined relative to last year, from 7.4% to 5.1%, due to the significant decline in volumes and lower selling prices, partially offset by lower variable costs. The poor demand, which we believe is unlikely to return to pre-Covid-19 levels, accelerated our decision to close a paper machine at each of Stockstadt and Westbrook Mills during the year. This action, along with closures by other industry participants should result in industry operating rates returning to more profitable levels in the coming year. From a low point in June, we have experienced a gradual improvement in sales each month.

In 2021, we expect to sell marginally higher volumes of graphic paper as demand continues to improve, and a series of paper machine and mill closures or conversions in the industry recently completed or imminent should improve operating rates in the coming year. We expect pricing to move in line with variable cost movements and margins to be marginally higher than the prior year. Due to the improved supply/demand balance in coated graphics paper in North America, a price increase on our North American-produced web brands has been announced effective in January 2021, matching similar announcements by competitors.

In FY2020, 56% of Sappi’s sales were from the graphics segment. The four major grades of graphic paper are discussed below:

Coated woodfree paper

Share of sales: 41%

Printers and publishers use coated woodfree paper for a variety of marketing promotions including brochures, catalogues, calendars, annual reports, direct mail, textbooks and magazines. Coated paper provides 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. In FY2020, 41% of Sappi’s sales were in this segment, 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 declined 16% from last year and net sales was 21% lower, largely due to a decline in demand, amplified by the Covid-19 pandemic and the economic aftereffect of related lockdowns. Globally, demand for coated woodfree paper declined by approximately 20% with Sappi gaining market share.

Coated mechanical paper

Share of sales: 8%

Coated mechanical paper is primarily used in magazines, catalogues, newspaper inserts and other advertising materials. In FY2020, 8% of Sappi’s sales constituted coated mechanical paper, all coming from our European business. Customers for this paper are typically large web printers, publishing houses.

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 net sales from coated mechanical paper was 35% lower than last year, as we took market related downtime in response to poor demand. Volumes were approximately 33% lower than the prior period. This year, the global market contracted by approximately 22%.

Uncoated woodfree paper

Share of sales: 6%

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. In FY2020, 6% of Sappi’s sales were uncoated woodfree paper. Our main customers in this sector are paper merchants and commercial printers.

Demand trends: Demand for uncoated woodfree paper is expected to post modest declines in demand of about 1% over the next several years. Like most graphic papers, demand continues to decline in most markets, with limited growth coming from emerging markets.

Sales: Our net sales from uncoated woodfree paper was 12% lower than last year, largely as a result of the impact of the Covid-19 crisis. Globally, demand declined by approximately 12% in the current financial year.

Newsprint

Share of sales: 1%

Newsprint, 1% of Sappi’s sales, is manufactured from mechanical and bleached chemical pulp, with uses including the manufacture of newspapers and advertising inserts. We manufacture and sell newsprint from our South African business.

Demand trends: Demand for newsprint principally is 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 20% during the year and an estimated decline of 5% 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: Due to the weaker domestic economy, production curtailment was taken on the newsprint machine resulting in our volumes being approximately 37% behind last year. Net sales declined by 42% relative to last year. Globally, newsprint demand declined 20% versus 2019.