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- Paper and packaging group Sappi's shares slumped on Wednesday, when it said a buildup in customer inventory helped prompt a fall in first-quarter volumes of almost a third.
- Slower activity in China also weighed on volumes, it has benefited from successfully passing on price increases.
- Sappi said it still had its best first quarter ever, with core profits rising more than a fifth and its shares are still up by double-digits over the past year.
- For more financial news, go to the News24 Business front page.
Shares in Sappi, the world's largest producer of dissolving wood pulp, slumped almost 8% on Wednesday, after it reported that high customer inventory and weak demand in China helped prompt a fall in first-quarter volume.
Higher selling prices meant sales only fell 2% to $1.66 billion (R29 billion) in the three months to end-December, but the group said its still had its best first quarter ever, with core profit rising 21.1% year on year to $290 million. Core profit, a measure of operational profitability, fell however from a record $391 million in the prior quarter.
In morning trade, Sappi's shares were down 7.48% to R50.50, though they remain marginally positive for the year so far, and have risen 11.6% over the past 12 months.
A rapid inventory accumulation among customers in all major product categories suppressed underlying demand, it said. This inventory build began with the lifting of Covid-19 restrictions in late 2021 and the subsequent chronic global logistical bottlenecks which hindered product flows. Recent improvements in global supply chains resulted in a reduction in delivery lead times and a surge in customer inventory levels.
Despite this, Sappi said it had benefitted from recent price increases, and has said previously it was in a favourable position as demand picked up, given general supply constraints in the industry.
Specialty paper and packaging, used for example in food delivery, makes up about a quarter of the group's sales, and while volumes fell 14% to end-December, selling prices more than offset this.
Dissolving pulp, about a fifth of group sales, also grew revenue despite an 8% fall in volumes, in part due to slower activity in China, although the company said that activity levels recently had improved. China has moved to end its zero-Covid-19 policy, improving its economic prospects in 2023. Graphic paper volumes slumped 31%, with the group saying margins fell, but remained "healthy" as it cut back production in line with demand.
Sappi, valued at R32.2 billion on the JSE, generates only 8% of its sales by destination in SA, but over half of its operating assets by value are local, and it has previously flagged issues with the Port of Durban, including inefficiencies and a lack of containers.
The group said on Wednesday supply chain disruptions had eased amid efforts such as shipping its product in separate pieces rather than using containers, while it had also made good progress in shipping from the Port of Maputo, with 20% of its dissolving pulp from its Ngodwana mill using this route.
READ | Record quarter for upbeat Sappi despite port, rail woes and substation explosion.
Sappi warned on Wednesday that it expects another profit fall in the coming quarter, though it does expect an improvement in the rest of the financial year.
"The lower profits relative to the record levels in the prior quarter were reflective of the slowing global economy, which led to a softening in demand for our products, driven by the volatile and uncertain macroeconomic context including ongoing geopolitical turmoil, rampant inflation, rising interest rates and an underperforming Chinese economy as well as rapid downstream inventory accumulation in all our major product categories," CEO Steve Binnie said in the results.
"Factoring in the protracted macroeconomic uncertainty, and coming off three quarters of outperformance, we anticipate a return to a normalised level of earnings in 2023," he said.
Sappi said downstream inventory levels for its paper products have declined in recent months but remain at historically elevated levels. It may take a further few months before order activity normalises.
