Mondi to shut plants, cut costs

Its cost cutting exercises continue, with Mondi announcing the closure of its woodchip export operations based at the SilvaCel plant at Richards Bay, as well as a decision to shut down one of the two remaining newsprint machines at the Merebank plant outside Durban.

"The woodchip export operation is a very small business within the group. Its contribution has not been sufficient to keep it going," says Mondi's chief executive David Hathorn.

At its peak the SilvaCel plant was producing more than a million tons of eucalyptus and wattle woodchips a year. These were exported to Japan, the Pacific Rim and more recently China.

Hathorn says the SilvaCel plant is one of two mills Mondi has at Richards Bay, the second being much larger and more important to the group.

"We'll shut SilvaCel down and sell the land. Its contribution has been very modest, though of course we realise that closing the mill is hard for the staff working there." Consultations with employees and representatives are under way.

Newsprint sales crumple

The decision to close the newsprint machine at Merebank is a reflection more of the state of the publishing industry than of Mondi's operations.

"Newspapers have contracted. [Printing them] is a substantially less profitable business than it used to be. There were three newsprint machines at Merebank but we closed one down a while ago. Closing this machine will improve profitability at Merebank. It has become a loss-making machine so we will save on that," Hathorn says.

In the 2011 financial and calendar year, Mondi was producing 124,914t of newsprint in SA. Last year this had declined to 114,854t, a drop of 8%.

The pattern is repeated in the company's overseas interests. Last year Mondi sold its 50% holding in Aylesford Newsprint Holdings in Kent in the UK. It's a large operation with the capacity to produce around 400,000t of newsprint a year. It supplies this to the major national newspaper groups in the UK and exports paper to Europe.

Mondi took a big hit exiting the unprofitable Aylesford business. Mondi and its joint partner, Svenska Cellulosa Aktiebolaget, had recapitalised the operation and proceeds of the sale were used to repay its debt. Mondi's loss on the disposal was €71m.

Packaging focus

But scaling down newsprint operations shows what's essentially a shift of focus at Mondi, from paper to packaging. "We're growing into packaging more and more. I think the decline in demand for newsprint shows the shift in the industry from print to Internet publications and advertising," Hathorn says.

Packaging is the more profitable business even in the tough central European market. Hathorn says price increases in the packaging paper grades provide support and that good progress is being made in integrating recent acquisitions.

Success by the large groups in the paper, pulp and packaging industries is like playing a game of chess. It's largely about making the right acquisitions and disposals. Sometimes the closure of a mill is a necessary sacrifice to advance the game.

Mondi and Sappi aren't really comparable, because their operations are so different. Sappi played itself into check four years ago with the expensive acquisition of four mills in Europe. It's still paying the price, trying to reduce its high debt levels and quarterly results from Sappi last week weren't encouraging - profit was US$7m for the quarter to March compared with the year-ago profit of US$58m. Basic earnings per share dropped to just US1c from US11c over the same period.

The trends are reflected in the respective share price performance of Mondi and Sappi, the former up by 84,6% over the past year and the latter down by 4,7%.

Source: Financial Mail via I-Net Bridge