SAPPI stock fell as much as 7.3% to an intraday low of R28.50 on Wednesday after it reported a 57.5% plunge in headline earnings to $17m for the December quarter, compared with $40m in the corresponding period in 2011.
Lower paper and pulp selling prices were blamed and CEO Ralph Boettger said market conditions would remain difficult in the first half of the year. "I am confident that our results will pick up during the rest of this financial year, but we expect difficult pricing, especially with regard to dissolving wood pulp products."
The 2013 financial year would be a transitional year in which various cellulose production projects came on line. The costs of managing new investments meant profits would not be as strong as in the previous year.
Avior research analyst Sean Ungerer said Sappi’s chemical cellulose business was promising because of high margins going forward, but its reliance on Europe had not eased. "I see revenues going down and profits going up because of the higher margins on chemical cellulose and the company’s product mix."
Europe was still a challenge.
Mr Boettger said Sappi’s Southern African and European paper businesses did not improve much in the first quarter even if they did not embarrass themselves when compared with the world market. The Southern African cellulose business remained formidable.
"The Southern African paper and cellulose business posted similar results to the fourth quarter of last year even though we had the three-week road transport strike," Mr Boettger said. "Europe did relatively worse, but better than most competitors."
The North American coated paper business performed well. There were increased coated paper sales volumes, but these were partially offset by lower average sales prices, which were 3% when compared with the equivalent quarter last year.
Lower pulp prices, down 5% and 3% versus the same quarter last year and the prior one respectively, negatively affected the North American business.
Fine paper products used in glossy magazines dominate Sappi’s Europe and North America sales. The company has tried to branch into cellulose packaging, which starts with dissolving wood pulp in Southern Africa.
Sappi sells dissolving wood pulp to converters for a wide range of consumer products, such as clothing, cell phone screens, cellophane wrap for sweets and flowers, pharmaceutical and household products, and lipstick.
It is the world’s largest manufacturer of dissolving wood pulp and exports almost all the production of the Sappi Saiccor mill in KwaZulu-Natal. It has the capacity to produce about 800,000 tons of the pulp a year. It has spent millions to increase this to 1.3-million tons by June.