By: Henry Lazenby
31st October 2011

JSE- and LSE-listed pulp and paper manufacturer Mondi on Monday said it had managed to post a profit amidst a soft global market and significant downtime of its plants, owing to maintenance.

It was also closing its Aberdeen, Scotland industrial bags facility, while the group disposed of its Unterland flexible packaging business to Sun European Partners LLP at a loss of €4-million.

The company achieved an operating profit of €136-million in the third quarter. While this was in line with the year-to-date earnings of €490-million, it was below that achieved in the previous quarter.

"The performance reflects the planned third-quarter maintenance shuts, estimated to have negatively affected the underlying operating profit by about €20-million, and an impact of a generally softer trading environment," CE David Hathorn said.

Mondi's South Africa division showed a significant increase in production, following the planned shutdown of the Richards Bay mill during the three-month period.

The strong performance of the South African division was undermined by lower pulp prices, which was to some extent offset by the weaker rand value. "Export sales volumes of white-top containerboard were also lower than in the previous quarter, also partially offset by increased domestic sales, while sales prices remained flat to marginally lower," Hathorn said.

The newsprint business, however, continued to deliver poor results. The South African business, Mondi Shanduka Newsprint, continued to be impacted by a rising cost base, largely due to a series of significant electricity price increases.

"Management is actively assessing various options to address the resultant unacceptable financial performance. The very weak European newsprint market continued to impact on Mondi's Aylesford Newsprint's ability to return to profitability," it stated.

The uncoated fine paper business continued to perform strongly, although Mondi reported sales volumes lower than the previous quarter due to the expected seasonal summer slowdown and the impact of planned yearly maintenance closures. "Average selling prices were marginally down on the previous quarter on currency and mix effects," the company said.

Meanwhile, in the corrugated business, underlying operating profit was well above the comparable period a year ago, but below that of the second quarter, due to the planned maintenance shuts at Swiecie, in Poland and Syktyvkar, in Russia. Lower-than-average paper selling prices and reduced income from green energy credits of about €10-million against the second quarter also influenced the division's quarterly performance.

Selling prices for the virgin containerboard products were flat, to marginally down in the quarter. Recycled containerboard prices were down by around 5% on a combination of currency and mix effects and a decline in the input cost.

Sales volumes were marginally higher than those achieved in the first two quarters of the year. Recovered fibre input costs reduced during the period, most notably towards the end of the quarter, with benchmark recovered fibre prices down by around 4% between June 30 and September 30. Wood costs have remained largely unchanged when compared with the second quarter.

In Mondi's bags and coatings division, operating profit was well above the comparable prior year and at similar levels to that achieved in the second quarter of 2011. Some weakness in demand, due to a combination of mildly weaker end-user demand resulting from the European macroeconomic slowdown and destocking in the value chain, led to lower craft paper sales volumes.

In response, the business took downtime at certain of its operations in order to manage inventory levels. In anticipation of further destocking in the value chain, including at the group's own converting operations, plans were in place for further downtime to be taken in the fourth quarter. "Flexibility would be retained to bring this capacity back on stream as the destocking process comes to an end. Export demand for craft paper remains good and sales prices were generally stable through the quarter," Hathorn said.

The weaker end-user demand and customer destocking also impacted volumes in the industrial bags segment, when compared with the second quarter, although the business continued to benefit from the seasonally stronger European summer months. Volumes were expected to reduce further in the fourth quarter due to normal seasonal effects and continued customer destocking.

Weaker volumes in certain industrial product segments impacted the coatings and consumer packaging division negatively.

Edited by: Mariaan Webb

Source: Engineering News (http://www.engineeringnews.co.za/article/mondi-q3-profit-up-despite-weaker-market-2011-10-31)