Sappi reports intensified cost inflation

Listed paper and pulp company, Sappi, has reported record profitability for the period ended March 2022, despite facing significant headwinds in global markets. The company's Chief Executive Officer, Steve Binnie, highlighted the drivers behind the impressive financial results in an interview with CNBC Africa. Steve Binnie expressed his enthusiasm for the company's performance, citing the impact of higher costs on raw material prices and supply chain challenges. However, Sappi's ability to navigate these challenges and capitalize on the tightness in the paper markets has led to increased demand and higher selling prices, ultimately offsetting the impact of the rising costs. Sappi's success is not limited to a specific region, as Steve Binnie noted that the tightness in paper markets is broad-based, spanning across Europe, North America, Asia, South America, and South Africa. The company's proactive approach in passing on higher costs to customers has enabled them to maintain margins at elevated levels, despite inflationary pressures on raw materials. With a sharp focus on sustainability, Sappi remains confident in its ability to sustain pricing increases in the short term, supported by a clear visibility into order books and pricing structures. A key driver of Sappi's financial performance has been the strategic pricing adjustments made in response to the 29% increase in year-on-year raw material costs. By implementing selling price increases and enhancing operational efficiency, the company has achieved a substantial 45% growth in top-line earnings. Looking ahead, Sappi plans to invest $395 million in maintenance and improvement projects for the full year 2022, with a significant portion allocated to operations in South Africa. Despite volatile geopolitical dynamics in Europe, notably the situation in Russia and Ukraine, Sappi has managed to mitigate risks associated with the region by halting sales to Russia and redirecting volumes to other markets. The indirect impact of energy and natural gas supply disruptions in Europe has led to cost escalations for Sappi, but the company remains resilient due to robust market demand that allows for cost recovery through pricing adjustments. Steve Binnie emphasized the strength of the graphic paper market in the near term, driven by capacity reductions in the industry. While acknowledging a potential decline in long-term demand for graphic paper, he expressed confidence in the market's resilience for the remainder of the financial year. Furthermore, Binnie highlighted the growth opportunities in South Africa, particularly in the fruit industry, where Sappi anticipates continued expansion in the coming years. Sappi's focus on innovation is evident in its production of dissolving pulp, a key product that has experienced robust demand and significant market growth. Despite challenges such as the recent floods in Durban affecting production, Sappi remains optimistic about the outlook for dissolving pulp and is actively working to address supply chain disruptions. The company's commitment to sustainability and product diversification positions it strongly for future success in the paper and pulp industry.