Sappi Calls for State Protection from Cheap Imports

South African paper and packaging giant Sappi's CEO, Steve Binnie, has expressed cautious optimism about recent tariff measures introduced by the government to protect domestic manufacturers from a surge in cheap imports. The International Trade Administration Commission (Itac) has implemented a provisional 21% safeguard duty on imported A3 and A4 office paper, following an application by Mondi South Africa supported by Sappi. Binnie believes that these measures are an encouraging sign that the government is taking the plight of South African manufacturers more seriously.

However, Binnie warns that trade protection alone will not be enough to restore competitiveness. He emphasizes that deeper structural problems, including inefficient ports, failing rail infrastructure, rising electricity costs, and regulatory delays, need to be addressed. Sappi has also sought protection for newsprint imports, arguing that foreign producers are increasingly targeting the South African market. Binnie notes that some overseas manufacturers sell paper in South Africa at lower prices than in their home markets, making it difficult for local producers to compete.

The tariffs will not materially change Sappi's group earnings, but the company believes they send an important signal that the government recognises the challenges facing domestic manufacturers. Binnie stresses that the company is not calling for permanent protection, but rather needs time to respond to shocks and changes to the system. He points to logistics as a key area that needs improvement, citing congestion at the Port of Durban, which delayed about 38,000 tonnes of dissolving wood pulp shipments during the fourth quarter.

Binnie also highlights the issue of rail infrastructure, describing it as "a mess" and stating that the company has to transport everything by road, adding to costs. He calls on the government to speed up approvals in the forestry sector and create a more predictable operating environment for long-term investment. Energy is another key challenge for Sappi, with the company relying on Eskom for about a third of its electricity. Binnie notes that Eskom costs have continued to rise, and the company aims to reduce its reliance on Eskom.

Sappi's South African operations face mixed conditions, with demand for containerboard used in packaging remaining robust during the quarter, supported largely by agricultural exports, particularly citrus. However, volumes were affected by low inventories and production disruptions at the company's Ngodwana mill. Binnie is optimistic about the longer-term outlook for packaging, citing growing demand in export markets, particularly in Asia, China, and Europe.

The company's export products, including dissolving wood pulp, continue to perform well, with pulp prices improving by $22 a tonne during the quarter to about $920. However, profitability in South Africa is under pressure from factors largely outside the company's control, including a stronger rand, which has reduced export competitiveness, and elevated oil prices and geopolitical tensions, which continue to increase fuel, chemical, and logistics costs.

Despite these challenges, Binnie remains cautious about the impact of uncertainty around the US's African Growth and Opportunity Act (Agoa) on Sappi's operations. He estimates that only about 5% of the company's exports are exposed to the US market, and therefore expects any impact to be limited. Sappi's management is focused on addressing the structural challenges facing the company and the broader industry, with the aim of restoring competitiveness and driving growth in the sector.

Key points

• The tariffs will not materially change Sappi's group earnings but send an important signal that the government recognises the challenges facing domestic manufacturers.
• Deeper structural problems, including inefficient ports, failing rail infrastructure, rising electricity costs, and regulatory delays, need to be addressed to restore competitiveness.
• Sappi's South African operations face mixed conditions, with demand for containerboard used in packaging remaining robust, but profitability under pressure from factors outside the company's control.