Sappi, the South Africa-based global pulp and paper group, is caught in the crosshairs of a confluence of economic headwinds and sector-specific pressures.
Manufacturing a range of products, including dissolving wood pulp (DWP), printing and writing papers, and packaging and speciality papers, it serves markets in North America, Europe and South Africa. The company’s latest quarterly results paint a picture of a business under strain, yet positioning itself for a rebound should global trade tensions ease.
Profitability across all operating segments weakened due to a mix of external shocks and internal operational issues. Central to the financial miss were extensive planned shutdowns, including costly and longer than expected maintenance outages at Saiccor and Ngodwana mills in South Africa, and a significant $20m shutdown linked to the Somerset PM2 conversion project in the US. These disruptions slashed output, increased fixed cost absorption and led to reduced inventories.
While sales volumes in segments such as packaging remained stable or improved marginally, declining selling prices across the board compounded the hit to margins.
Sappi’s dissolving pulp segment, a key earnings driver, was particularly affected. DWP prices fell during the quarter, starting at $970/t and dropping to $900/t — and continuing downward after quarter-end to $830/t. This price pressure is largely attributed to weaker global demand for clothing, an indirect consequence of US-China trade tensions and tariffs under US President Donald Trump’s administration.
The US tariffs on Chinese textile and apparel goods have throttled demand from China, a critical downstream market for DWP, as clothing manufacturers adopt a wait-and-see posture. Sappi doesn’t export much DWP directly to the US, but its prices are benchmarked against Chinese markets. That exposure has hurt.
However, there may be some relief ahead. Signs of a thaw in US-China trade relations could reinvigorate clothing demand and, in turn, DWP pricing. Sappi will need that tailwind.
Signs of a thaw in US-China trade relations could reinvigorate clothing demand and, in turn, DWP pricing
The company is now trading at close to four times its earnings before interest, tax, depreciation and amortisation (ebitda) in net debt — an elevated gearing ratio by most standards. While this level of leverage would typically raise red flags, it’s tempered somewhat by Sappi’s debt maturity profile. Refinancing of its 2026 bonds with 2032 paper has pushed out near-term repayment risks, giving the company breathing room to improve cash flow and reduce leverage over the next two years.
The current year is expected to remain tough. Management’s outlook for the next quarter is cautious, anticipating ebitda similar to the subdued levels of the recent quarter. With peak capital expenditure related to the Somerset PM2 conversion now behind it, the focus shifts to ramping up this strategically critical asset. The PM2 project — transforming a graphic paper machine into a state-of-the-art solid bleached sulphate (SBS) board machine — aims to double the machine’s capacity and pivot production into higher-growth, higher-margin packaging.
With packaging demand in the US on an upward trajectory, Sappi is betting that PM2 will be a cornerstone of its shift away from structurally declining graphic paper markets. The expectation is that PM2 will be breaking even by Q4, with continued volume and margin improvements in FY26 as production climbs towards its full 470,000t capacity.
Despite the nearly $500m capex overrun on the Somerset project, the investment could prove a well-timed strategic pivot. Sappi has already signed up roughly two-thirds of the ramp-up volume, and domestic US demand for SBS board is strong, potentially bolstered further by any reduction in imports if trade policies tilt more protectionist. Domestic production capacity in this segment is in demand, and Sappi is well placed to take advantage of this with its newly upgraded asset.
Looking beyond the next 12 months, a mix of normalised production post-shutdowns, stabilising input costs and growing contributions from PM2 could shift Sappi’s earnings trajectory back to growth. Management is targeting a significant reduction in net debt, aided by a sharp drop in capex starting next year — projected to be less than $350m annually for at least the next two years, compared to this year’s elevated $550m.
Cost discipline, tight capital allocation and a clear focus on returning above its cost of capital all point to a reset in strategy aimed at long-term sustainability.
But there’s little room for missteps. Europe remains a drag, with structural overcapacity and a sluggish post-Covid recovery. Any further weakness in global trade or sustained DWP price depression could delay recovery efforts. While management has ruled out further mill closures for now, European assets may remain under strategic review if conditions don’t improve. Investors should also keep a close eye on shifts in US trade policy and their downstream effects on both DWP and packaging demand.
The next few quarters may not offer much excitement, but for patient investors with a long-term view and a tolerance for risk, Sappi could offer asymmetric upside once the dust settles.
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