THE world’s biggest manufacturer of glossy paper, the Johannesburg-listed Sappi, once had a market capitalisation that rivalled Sasol’s.

That was in the very early days of the new millennium, an era when the shift to digital was just a distant threat. But alas, the threat turned into something much more tangible for paper manufacturers.

It would not be incorrect to say that the rise of digital has been most sharply felt by the paper-making sector. Sappi is a pale shadow of the giant it once was.

Valued at about R15.1bn, the company is now a fraction the size of Sasol, which has a market capitalisation of more than a quarter of a trillion rand.

Digital’s growth has seen paper volumes across the globe decline sharply, threatening the profitability of paper and forest product companies the world over.

Apart from the structural changes in the paper market, sluggish economic growth in Europe and the US has only aggravated the situation. Earlier this week, we had a peek into just how desperate the situation has become, although Sappi’s CEO promises that the worst is over. The company reported a 57.5% drop in its six-month headline earnings because of low selling prices.

It is hard to say what the global paper market will look like in the next 10 years.

In the US and Europe, the print magazine industry remains troubled, with publishers placing a much greater focus on digital.

Last year, the most prominent example of the shift towards digital was US magazine Newsweek’s decision to drop its print edition after almost 80 years.

Emerging markets have been highlighted as an area of possible growth, but the relative cost effectiveness of digital will soon enough erode whatever profitability there may still exist.

A Moody’s report last month called for greater diversification among paper producers to restore their long-term profitability and credit profiles.

The continuing shift to digital, is "creating a widening supply-demand gap at a time when producers are facing elevated input costs and have limited pricing power," the agency says.

The report listed Sappi as one of those manufacturers that were trying to diversify.

Apart from being the glossy paper producer, the company is also the largest producer of dissolving wood pulp, which it is betting on to raise profit and allow it to resume paying dividends. (It last paid a dividend in 2008.)

Sappi is in the process of converting mills locally and in the US to produce speciality pulp that will be used to make sports clothing and cellphone screens. At a UBS presentation last September, it listed as among the key demand drivers for textiles between now and 2030 the growing global population, which is increasing the need for clothing and food.

For shareholders in Sappi who have held through the 62% fall in the company’s shares over the past 10 years, the move to diversify its offerings may be the company’s last shot at reclaiming former glory.


AS LONG as people keep smoking or buying luxury goods in China, keep drinking beer in Latin America and across Africa, and keep watching the English Premier League or the local version, the JSE all-share index should stay on its upward trajectory. The all share’s run to record highs has been propelled in large part by companies listed on the bourse that are exposed to the vices mentioned above.

British American Tobacco, with the biggest market capitalisation on the bourse, has gained 22% over the past 12 months. SABMiller, the second-biggest, has seen its stock rise 49%, while Richemont, the fourth-largest, has climbed 63%. Naspers, operator of pay-TV and the eighth-biggest, has risen 54%.

Of the 10 largest stocks by market cap on the local bourse, I can only pick out MTN, Naspers and Standard Bank with a sizeable exposure to the performance of the South African economy.

For the remaining shares, it is the strength of China, emerging Asia, Europe, Latin America and most importantly, the US, that is going to dictate their earnings horizons.

With the outlook on these economies much more bullish than it has been for years, there will be support for the market at current levels, as long as earnings do not disappoint.

For South African Inc stocks such as the retailers, 2013 does not promise to be a good year, as earnings start to reflect the state of the economy. They are expected to moderate any rise in the all share we may see this year.