Sappiâs Q3 loss reflects a cash squeeze, not the demise of SAâs paper industry

This story has significance for readers across Africa and beyond.

The writing was all over the newsprint before Mpact was forced to shut its BM6 coated cartonboard machine at the Springs mill in May. The story goes that global oversupply has allowed foreign competitors to undercut production costs by about 20%, forcing Mpactâs largest customer to switch to imported product.

That machine was the last of its kind in South Africa, and for decades it supplied the takeaway packaging and folding cartons for ubiquitous local products and iconic brands, including KFC takeaway boxes, Blitz firelighters and Freshpak rooibos tea.

The facility employed 377 people, with the Section 189A retrenchment process affecting hundreds of staff members. When you tally the financial toll of this closure on Mpact, it was severe: R299 million in once-off restructuring, impairment and retrenchment costs.

These costs comprised R104-million in cash retrenchment expenditures, R54-million in plant and equipment impairments, and R141-million written off for capital spares and inventory.

But the death of the BM6 machine and the broader pressures on the South African paper market cannot be attributed to a single macroeconomic factor. Instead, the domestic industry is caught in a triad of destruction: the weaponisation of global oversupply, the systemic collapse of local municipal infrastructure, and permanent, technology-driven shifts in end-user demand.

A tale of woe

Sappi is undergoing a painful, multi-year shift away from declining graphic papers toward packaging and textiles, aggressively slashing capital expenditure and consolidating its struggling European assets into a joint venture to preserve cash.

While management talked about âimproving momentumâ and âhealthy liquidityâ on the results presentation call, the raw numbers show a company running out of cash flow to pay its interest, surviving on a temporary bank reprieve, putting off critical factory upgrades, and permanently writing down the value of its main global assets.

âThereâs no doubt weâve had a number of headwinds and external challenges over the course of the last year or so,â said Sappi CEO Steve Binnie during a post-Q3 results interview.

âBut we are starting to see improvements coming through and not so much in the numbers that weâve reported. Weâve got to look forward ... and, from a number of angles, Iâm seeing improvement.â

Sappi recorded a devastating $181-million loss for the quarter and a $631-million loss for the nine months ending in June 2026. The companyâs debt has ballooned, and its earnings have shrunk. Right now, its bank-to-debt ratio is 6.9 times what it brings in â which is up from 2.9 times a year ago.

Because it was about to break the bankâs repayment rules, Sappi had to ask its lenders for an emergency lifeline, which was granted until March 2027.

Binnie, of course, frames the bank-negotiated suspension as a vote of confidence:

âWe continue to closely engage with our banks, and they were understanding of where the market situations were at and the challenges that we were facing... The fact that they gave us the covenant suspension demonstrates their support.â

To claw back into compliance by March 2027, Binnie is banking on rolling mathematical averages rather than a sudden market boom. âThe math behind those covenanting calculations [is] as you drop the weaker quarters and you move forward with better numbers, you progressively improve the calculations.â

Different strokes

Conversely, Mpact has maintained a more resilient financial profile, focusing on refining its local footprint by executing a massive R1.2-billion upgrade to expand its virgin-fibre capacity while consolidating and closing uncompetitive mills.

The Felixton and Mkhondo mills remain highly profitable. The differentiator was capital allocation: Mpact spent more than R2-billion to decouple these mills from municipal reliance. They are located near natural water sources and run on 17.7MWp of self-generated solar capacity.

The story from before is a powerful contrast that highlights how important location can be in the paper game. The Springs mill was captive to the Ekurhuleni Municipality, enduring above-inflation water and electricity tariff hikes, erratic municipal water outages, and national load shedding.

In 2025, despite generating R1.75-billion in revenue, the millâs operating profit collapsed to just R2-million, forcing Mpact to shut down the BM6 machine.

Thatâs only half of the problem. South Africa runs a dual forestry economy. The finished paper sector runs a heavy trade deficit, importing R7-billion of paper and board in 2024 to meet local demand.

The raw pulp and dissolving wood pulp (DWP) export sector, however, runs a massive R18-billion trade surplus, yielding a net positive contribution to South Africaâs balance of trade of R11-billion.

This explains why Sappi continues to focus heavily on DWP exports (via Saiccor and Ngodwana mills) to feed global textile markets, even as its domestic graphic and office paper operations are squeezed by cheap imports.

A zesty market

To be fair, the domestic packaging market is projected to grow from 1.42 million tonnes in 2025 to 1.92 million tonnes by 2031, driven by citrus agricultural exports and e-commerce. However, only local players that completely decouple themselves from municipal infrastructure can capture this growth. Small, owner-run sawmills and municipal-dependent paper mills will continue to close down.

Unfortunately, an increasingly digital world means that traditional office paper, newsprint, and domestically manufactured coated board are in terminal decline.

With Mpactâs BM6 closure, South Africa has completely surrendered its sovereign industrial capacity to produce coated cartonboard. Local consumer brands are now 100% reliant on imported packaging, leaving them highly exposed to global shipping disruptions and currency volatility.

South Africaâs paper industry is not experiencing an overall death spiral. Instead, it has shrunk its physical footprint to a highly integrated, hardened core of mega-conglomerates (Sappi, Mpact and Mondi). The long-term winners will be those with the balance-sheet capacity to act as independent power and water utilities, completely bypassing South Africaâs failing municipal systems to protect their production lines.

The pulp industry is most stable where the municipalities are not on life support systems. DM

Reporting originally appeared via Daily Maverick. Read the full source for additional context.