Sappi Calls for State Protection from Cheap Imports

South African paper and packaging giant Sappi has welcomed recent tariff measures introduced by the government to protect domestic producers from a surge in cheap imports. CEO Steve Binnie said that while the measures are an encouraging sign that the government is taking the plight of local manufacturers seriously, trade protection alone will not be enough to restore competitiveness. Sappi is seeking protection for newsprint imports, arguing that foreign producers are increasingly targeting the South African market.

The International Trade Administration Commission (Itac) has introduced a provisional 21% safeguard duty on imported A3 and A4 office paper, following an application by Mondi South Africa supported by Sappi. Binnie said 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 pointed to deeper structural problems that need to be addressed, including inefficient ports, failing rail infrastructure, rising electricity costs, and regulatory delays. He cited congestion at the Port of Durban, which delayed about 38,000 tonnes of dissolving wood pulp shipments during the fourth quarter, pushing sales into the new financial year and weighing on earnings. The company wants 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, which generates about 65% of its own power but relies on Eskom for about a third of its electricity. Binnie said that Eskom costs have continued to rise, and the company wants to reduce its reliance on the state-owned power utility. The company'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 Sappi's Ngodwana mill. Binnie said that the longer-term outlook for packaging is positive despite pressure on local consumers. The big opportunity for Sappi is in export markets, particularly in Asia, China, and Europe. South African citrus exports, one of the key drivers of packaging demand, have been growing 6%-8% annually and are expected to continue expanding in the next few years.

Uncertainty around the US's African Growth and Opportunity Act (Agoa) is unlikely to have a significant impact on Sappi, with only about 5% of its exports going to the US market. Demand for dissolving wood pulp, one of Sappi's most important export products, remains strong, supported by global textile markets. Pulp prices improved 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. Binnie said that it's difficult for South African manufacturers who export their products, as a stronger rand effectively increases their cost base relative to global competitors.

Key points

• Sappi wants policymakers to tackle deeper structural problems, including inefficient ports, failing rail infrastructure, rising electricity costs, and regulatory delays.
• The company has sought protection for newsprint imports, arguing that foreign producers are increasingly targeting the South African market.
• The tariffs will not materially change Sappi's group earnings but send an important signal that the government recognises the challenges facing domestic manufacturers.