Sappi scores on cellulose demand
The forestry giant has expanded aggressively to make itself the world market leader.
A vast project is under way to modernise and change the Sappi Ngodwana mill near Nelspruit to produce higher-value export cellulose products rather than the paper, packaging and pulp products of the past.
Project GoCell, which was begun in mid-2012 and is being fast-tracked, will be largely completed by the middle of this year. It will cost $330-million, or about a fifth of the replacement cost of the Ngodwana mill, which is currently valued at $1.5-billion.
The project is employing about 2 000 people for about two years of construction. It is one of the few large engineering and building projects in South Africa at present. Most others are by Eskom.
For motorists passing the well-known mill, the biggest result of the expansion and modernisation will be the absence of the characteristic smell — it will be almost odourless.
Ngodwana was built by Sappi in 1964 and expanded in 1981. It was one of the largest industrial projects at that time in South Africa, worth $1.1-billion (or R880-million at the exchange rate at that time).
In 1988, Sappi made another big local investment when it bought the Saiccor mill in Umkomaas in KwaZulu-Natal from the (now defunct) British company Courtaulds.
Saiccor was then already producing chemical cellulose, an export product primarily used for producing viscose in various forms for fabric blends for the clothing industry.
Since then, Sappi has invested heavily in research and the development of chemical cellulose, and is expanding and modernising the Saiccor mill.
Saiccor was built in 1954 with a 40 000-tonnes-per-annum (tpa) capacity. By 1992 this had been expanded to 440 000tpa. In 1995 Sappi expanded it to 580 000tpa and, in 2008 to its current capacity of 800 000tpa.
Today Saiccor is the single largest producer of chemical cellulose in the world, accounting for about 15% of the world market.
Expanding beyond South Africa
Since the 1990s Sappi has expanded far beyond South Africa. It began as a domestic company supplying the local paper, packaging and pulp markets, but today only about 24% of its sales are local. About 53% of its sales are derived from operations in Europe and the remaining 23% from North America, making it one of a select group of South African companies that have become multinationals since the country's international isolation ended after 1994.
Today Sappi is listed in Johannesburg and New York, and most of its shares are held by institutions. In South Africa, partly in response to the Forest Sector Charter, about 30% of its operations are black-owned after empowerment deals were struck, but that translates to only about 5% of the international company's operations.
Internationally, the world has also changed in other ways, which Sappi is now adjusting to.
In Asia, the middle class is expected to grow from 1.9-billion people to 2.7-billion by 2030 and will account for 43% of global consumption expenditure.
Many Asians have been buying the cheapest clothing possible, made of polyester, a non-breathable fibre derived from oil. But, with greater affluence, they are graduating to natural fibres and blends, which include derivatives of chemical cellulose.
About 90% of chemical cellulose is used for fabrics, but it has many other applications — such as a bulking agent in low-fat yoghurts and diet colas, to bind the ingredients in pills and to filter out a certain amount of smoke and tar in cigarettes.
It can also be used in spectacle frames and tyres can be reinforced with it. Paints can be cellulose-based and cellphone screens are made from a cellulose polymer. DIY pastes, fillers and glues also have cellulose in them. Overall, the demand for chemical cellulose is projected to grow at 8% a year.
The upgrading and transformation of the Ngodwana mill represents a strategic move by Sappi to gain the best possible value from its timber-derived products.
The production process for chemical cellulose is basically similar to that of bleached paper, although more sophisticated. It results in a much higher value per tree felled.
In most of South Africa, except in the Eastern Cape, commercial forestry areas have reached a plateau and cannot be expanded much more. Forestry companies such as Sappi are gaining productivity by improving the cultivars of trees, which yield about 17% more per unit than a few decades ago, says Ralph Boettger, the chief executive of Sappi.
He says the industry has been managed excellently by the state and forestry is strictly managed. Of the areas used for commercial forestry, 30% is left in its natural state — mainly wetlands, riverine areas and natural bush. The forestry industry strenuously maintains that its environmental impact is no worse — and probably better — than other forms of well-organised agriculture.
But how has Sappi stayed competitive in an industry such as chemical cellulose when other South African industries have been trampled by Asian juggernauts?
In many countries, the trees taken to mills such as Ngodwana can be grown commercially — they are ideally eucalyptus hardwoods, which Sappi says are no more water-hungry than pine.
Sappi's competitive lead has been maintained not only by ideal forestry conditions in some places in South Africa but also by maintaining a close relationship with its customers — chemical cellulose derivatives have to be tailored to customers' needs. It has required continued research and large investment.
Nonetheless, chemical cellulose is still a commodity, so companies such as Sappi have to be competitive on price.
The international market is tough and, although Sappi in South Africa is competitive in chemical cellulose, it can no longer compete with larger international producers of some products, says Boettger. For example, last year Sappi closed its 47-year-old Adamas mill in Port Elizabeth, which produced speciality papers, at a cost of 213 jobs.
Leading international market
As part of its drive to maintain its lead in the international chemical-cellulose market, Sappi has a similar, parallel project to expand another major mill — the Cloquet mill near Minnesota in the United States.
The Ngodwana project involves producing 210 000tpa of dissolving wood pulp, although the Cloquet mill project will produce 330 000tpa at a project cost of $170-million, a lower unit cost partly because the mill is ideally suited to chemical cellulose production, Boettger says.
When both mills are complete, Sappi will have the capacity to produce about 1.3-million tpa of chemical cellulose and will be the world's biggest producer by far.
Asked for a comparison of the two projects, Boettger says that, in terms of construction, the productivity of US construction teams is about double that of South Africa's and only slightly higher in unit costs — the US costs have also come down recently because of the recession. He ascribes the difference partly to the shortage of skills in South Africa, which is exacerbated by a few big projects, such as the construction of Eskom's Medupi power station.
Boettger says part of the Ngodwana project involves replacing the current bleach plant with a new process, which will be chemically more efficient and will generate less effluent. The mill will also use less power and emit less carbon dioxide. Ngodwana generates all its power from wood biomass, from which the fibre, which is the essential component for both paper and chemical cellulose, has been extracted. Ngodwana's costs are, in order, wood, energy, chemicals and labour.
Boettger says that labour costs have been rising at a faster rate than other costs, but Sappi is concentrating on increasing labour productivity.
The basic production of both paper and chemical cellulose involves chipping the wood, dissolution, cooking and bleaching.
The chemical cellulose produced by the mill looks like big rolls of thick blotting paper. Almost all of Ngodwana's new production will go to the East. The chemical cellulose is dissolved and spun into various forms, which are then blended into cloth.
Chemical cellulose derivatives hold colour well and, in South Africa, are most commonly found in the colourful, upmarket "French" women's scarves and other items of women's clothing. In men's clothing, it is most obvious in the shiny linings of suits. Rayon, viscose and acetate are all derived from chemical cellulose.
Boettger says the Ngodwana project's viability has not been not calculated on a weak rand, although it would benefit greatly from a weakening currency.