SOUTH AFRICA – The international packaging and paper group Mondi Plc is planning to stop operations at its Merebank, Durban processing facility blamed on declining margins and high input costs for hardwood pulp, Business Day has reported.

The Durban facility, located in eastern South Africa’s KwaZulu-Natal province hosts one of its uncoated fine paper machines with a 70,000t per annum production capacity.

Mondi CEO Peter Oswald revealed this in the second half of its financial year results, saying that as a result of low margins and high costs, the company recorded a net special item charge of US$20.80 million comprising of restructuring costs and in impairment of assets.

Closure of the facility may lead to job losses but according to Oswald, the direction to be taken by workers was still under discussion.

Apart from possible retrenchments, the company was considering absorbing affected employees into other areas within the business when the matter is finally resolved.

Higher net debt

In the half year, net debt increased from US$1.77 billion to US$2.83 billion as a result of payment of 2017 special dividend of US$559.56m at the end of May and the completion of acquisitions at US$479.79m.

However, the group managed 17% increase to US$984.95m in underlying earnings before interest, tax, depreciation and amortisation while profit before tax increased by 6% to US$566.46m.

Strong performance was maintained attributable to strong demand and higher prices across its packaging businesses during the period.

“We benefited from good demand across our packaging businesses as well as higher average selling prices, while remaining focused on initiatives to drive performance and mitigate inflationary pressures on our cost base.

We saw a strong operational performance across the pulp and paper businesses, with the exception of the extended shut at our Richards Bay mill [in SA]” Oswald said.

Basic underlying earnings were up 26% to $1.03 per share and cash generated from operations was up 18%.

The company declared an interim dividend of $0.25 a share.

Reducing the costs

Though pressure on the cost base was expected to continue, the group said this will be offset by ongoing proactive and comprehensive cost reduction measures including centralised procurement and increased digitalisation.

Earnings for the next financial year are expected to be boosted by its capital expenditure programme of US$867.32m but second half may be affected by seasonal downturn in uncoated fine paper.

Oswald said its major capital projects in the Czech Republic, Slovakia and Russia will boost its current saleable pulp and paper production by about 9% when in full operation.

Various strategies are being implemented to reduce rising input costs.

Mondi’s 300,000t-per-annum kraft top white machine and related pulp mill upgrade at the Ruzomberok, Slovakia was expected to start operations by the end of 2019.