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Market The pulp and paper market in South Africa is estimated at R10 billion and expected to continue growing at an average rate of 3% per annum a. Demand i. Paper consumption per capita was approximately 46kg in 1997 ii. Along with the increasing standard of living, certain sectors of the paper market are projected to grow rapidly, at a rate of 8% iii. Development of the education system is giving rise to a demand for newsprint and office paper iv. Potential growth can also be seen within consumer packaging boards, for instance in the sector of fluid packaging v. Demand for tissue is expected to increase 9% annually. vi. Businesses in 2011 were affected by weak demand aggravated by increased imports, which were competitive as a result of the strength of the rand against the USD for most of the year vii. Market conditions started improving late in the year as the Rand weakened against major currencies viii. As consumer and housing markets recover in South Africa, demand for timber products is expected to recover ix. A turnaround of the paper business is expected influenced by 1. Slowly improving market conditions 2. Exchange rates low competition from imports b. Supply i. There are 17 pulp and paper mills in South Africa: some of them equipped with very modern technologies ii. However, the stage of development varies from plant to plant, and a number of machines are becoming outdated iii. The whole industry is estimated to invest some R300 million in paper machinery and maintenance annually iv. For the projected growth in paper consumption to be reached, 3-4 new paper and five tissue machines are needed by 2010. 2. Cost Headers a. Raw Materials i. Since the climate in South Africa, especially in KwaZulu-Natal and Mpumalanga, is exceptionally warm, the growth of pine forests is much quicker than in most pulp and paper producing countries situated north of the Equator ii. Other neighbouring countries, such as Angola and Zimbabwe, can be considered potential future sources of raw material b. Power i. The South African electricity distribution sector is highly fragmented Sources: 1. http://www.remburssi.org/projects/southafrica/sa_tgo/industries.htm 2. http://www.sappi.com/regions/is/service/mediadownloads/Pages/default.aspx 3. http://www.pulpmillwatch.org/countries/south-africa/ 4. http://www.mondigroup.com/microsite/HY2011/files/mondi-half-yearly-report-2011.pdf 5. http://apps.thedti.gov.za/econdb/raportt/Rap44821.html

ii. Coal dominates the South African energy system 1. The country has abundant deposits of coal and coal provides 75% of total primary energy needs 2. The 200 million tones annual coal production is projected to grow at a rate of 5% for the period to 2010 c. Labour i. The wage levels are low compared to those in Europe ii. However, labour productivity is far from Europe, according to some approximations only 30% iii. Process automation is increasingly penetrating South Africa, largely dominated by Valmet and ABB. On the other hand, the high rate of unemployment forces most companies to follow the recommendations set by the government. Instead of investing in machinery, they employ more labour and create new jobs. 3. Regulation for paper industry a. The current forests are very effectively used and to expand plantations in South Africa, one has to obtain a permit from the Department of Water Affairs and Forestry, due to the scarcity of water 4. Current Players a. Current players include Mondi and Sappi, the two major pulp and paper companies dominating the markets in South Africa. They together with Nampak and Carlton Paper, are responsible for 98% of the total production b. Competition in pulp and paper machinery is generally high, with foreign companies such as Beloit, Voith and Allimand operating in South Africa c. SAFCOL (South African Forestry Company Ltd) was set up in 1992 to run state-owned plantations in preparation for privatization d. Global Forest Products is a joint venture between Mondi and a US investment company, Global Environment Fund, with 67,000 hectares of industrial tree plantations e. NCT Forestry Cooperative Ltd is a cooperative marketing company, formed in 1949 to represent independent and private tree farmers. Its more than 2,000 members own a total of 300,000 hectares of plantations. In 2004, NCT started up a 360,000 tonnes a year wood chip mill in Durban. In March 2005, Japan's Hokuetsu Paper Mills bought up 10 per cent of NCT Durban Wood Chips. Two months later NCT signed a contract to supply 300,000 tonnes of wood chips a year to Hokuetsu. f. Plant locations i. Both Mondi and Sappi are now looking for foreign markets and opportunities for offshore investments in Asia and Europe ii. Additionally, Sappi has established a plantation in Mozambique. g. Capacity and % utilization i. In South Africa, Sappi is currently expanding its Saiccor dissolving pulp mill by more than 200,000 tonnes a year. The company also plans to expand pulp Sources: 1. http://www.remburssi.org/projects/southafrica/sa_tgo/industries.htm 2. http://www.sappi.com/regions/is/service/mediadownloads/Pages/default.aspx 3. http://www.pulpmillwatch.org/countries/south-africa/ 4. http://www.mondigroup.com/microsite/HY2011/files/mondi-half-yearly-report-2011.pdf 5. http://apps.thedti.gov.za/econdb/raportt/Rap44821.html

production at its Ngodwana mill by 225,000 tonnes a year. The company is planning to convert the plantations feeding its mill from pine to eucalyptus ii. In 2005, Mondi completed a new 720,000 tonnes a year pulp line at its Richards Bay pulp mill. Paper Capacity(000 t) Pulp Capacity(000 t) Employees Sappi Southern Africa 1080 2025 6370

5. Trade a. Export and Import i. South Africa is a net exporter of paper and board ii. A positive trade balance of R1.7 billion was recorded in 1995 iii. Approximately 22% of the total production, indicating 507,000t, was exported in 1996 iv. The remaining 1.4 million tons were supplied to the domestic paper converting industry and end-user markets Newsprint
350,000 300,000 250,000 200,000 150,000 100,000 50,000 0 2006 2007 Exports 2008 Imports 2009 2010 120,000 100,000 80,000 60,000 40,000 20,000 0 2006 2007 Exports 2008 Imports 2009 2010

Paper & Paperboard

6. Prices a. Paper i. Average benchmark sack kraft paper selling price increases of around 27% were achieved against the comparable prior year period (9% up on the second half of the prior year), more than offsetting the continued increase in input costs, particularly wood and chemicals b. Pulp Sources: 1. http://www.remburssi.org/projects/southafrica/sa_tgo/industries.htm 2. http://www.sappi.com/regions/is/service/mediadownloads/Pages/default.aspx 3. http://www.pulpmillwatch.org/countries/south-africa/ 4. http://www.mondigroup.com/microsite/HY2011/files/mondi-half-yearly-report-2011.pdf 5. http://apps.thedti.gov.za/econdb/raportt/Rap44821.html

i. Average pulp prices have increased by 2% for softwood whilst prices have reduced by 2% for hardwood during the period when compared to the second half of the prior year ii. Closing benchmark prices at 30 June 2011 were 8% up for softwood and 3% up for hardwood compared to 31 December 2010 prices. iii. The average benchmark price of recovered paper increased by 23%, when compared to the second half of the previous year.

Sources: 1. http://www.remburssi.org/projects/southafrica/sa_tgo/industries.htm 2. http://www.sappi.com/regions/is/service/mediadownloads/Pages/default.aspx 3. http://www.pulpmillwatch.org/countries/south-africa/ 4. http://www.mondigroup.com/microsite/HY2011/files/mondi-half-yearly-report-2011.pdf 5. http://apps.thedti.gov.za/econdb/raportt/Rap44821.html