Sappi's Third Quarter: Costs Surge, but Strategic Levers Begin to Turn
The impact of Middle East-driven cost inflation and a strong rand is buffered by Somerset's ramp-up, cost savings, and a recovering dissolving pulp market.
SAP.JO · Earnings Call · 2026-08-06
The Quarter's Squeeze: Sulphur, Logistics, and the Rand
Sappi's fiscal Q3 was never going to be a walkover. The annual Ngodwana maintenance shut alone cost $22 million, and the broader macro backdrop remained hostile: volatile economic factors, a strong rand versus the U.S. dollar, and cost inflation with its roots in the Middle East conflict. EBITDA came in at $53 million, in line with the revised guidance management had telegraphed a few weeks earlier. As CEO Stephen Binnie put it in the prepared remarks, “the big drivers of higher costs have been chemicals and delivery costs and a lot of that's linked to the war in the Middle East.” — Stephen Binnie, CEO · 2026-08-06
Nowhere is that more stark than in sulphur. The company used a dedicated slide to illustrate a commodity that has climbed from below $200 a tonne to nearly $1,200. Binnie quantified the year-on-year damage at $350 million.
We thought it would be useful to share with you, this is the sulphur price. And you can see a commodity that was below $200 a tonne. It's jumped all the way up to close to $1,200. Just to put it in context for you, we quantified its impact. This is a year-on-year impact for the '26 financial year, $350 million just on that one raw material.
Moreover, the company sulphur price spike is a direct consequence of the conflict, and Sappi is a heavy user given its sulphite pulping process. Logistics costs are another war-related headwind – direct delivery costs for the South African business alone are on track to add $106 million this year. And the South African business, already pressed by a rand that strengthened to roughly ZAR 16 versus levels above ZAR 18 two years ago, faces a double whammy of lower DWP prices and a tougher currency environment.
Green Shoots: Somerset and the SBS Market
Despite the gloom, there were signs of genuine operational progress. The new Somerset PM2 machine is ramping faster than many feared. The company recorded record volumes in North America, and management expects closer to 85% operating rates in Q4, up from about 75% in Q3. This is a company-specific positive in an otherwise challenging market. As Binnie noted when discussing the SBS price increases, “There's no benefit in the Q3 numbers, none.” — Stephen Binnie, CEO · 2026-08-06 That means the full effect of the $60 per tonne price increase has yet to be recognized – a strong forward-looking signal. Somerset PM2 is also benefiting from two competitors having taken capacity out of the market this year, and the company is actively gaining market share among independent converters.
Management is careful to stress that the ramp-up is not yet complete. But the trajectory is upward, and the mill is already EBITDA positive. The decision to swing part of PM1 back to graphic grades when the market is strong gives the company optionality. In the SBS market, supply tightness is real, and Sappi is one of the few expanding players.
Dissolving Pulp Price Inflection and the Cost-Savings Engine
The other major lever is dissolving pulp. After a year of price declines, the quarter saw a notable uptick in DWP prices, driven by higher fiber costs, tighter supply, and healthy viscose operating rates. Although the benefit won't fully show up until Q4, the market is firming. Mohamed Mansoor noted on the call that “net-net, we're not worried about it. We think we can -- if there is lower volumes, I don't think it's that material. But if there is lower volumes, we are confident that we can place that in the Chinese market at a better price for Sappi.” — Stephen Binnie, CEO · 2026-08-06 This confidence stems from Sappi's long-standing relationships and the limited number of players who can switch to paper pulp in the viscose chain.
Meanwhile, the cost-saving program is a key offset. The company has already identified EUR 120 million in annual savings, split roughly between fixed and variable costs. This is not a one-off – management emphasises it is a continuous process. “We're not just sitting back and doing nothing on the cost front.” — Stephen Binnie, CEO · 2026-08-06 Prior to this quarter, the company had also committed to disciplined capital allocation, with CapEx reduced to $240 million for the year, focused entirely on maintenance. The lower profitability of the past few quarters has been painful, but the actions taken on costs and capital are designed to preserve the balance sheet.
With the joint venture with UPM on track to close by the end of 2026, and the North American packaging business consistently profitable, Sappi is positioning itself for a better FY2027. As Binnie said on the prior call, “We're not contemplating any capital raising at this point in time.” — Glen Pearce, CFO or Finance Executive · 2026-02-04 That stance remains unchanged today. The company has substantial liquidity and a covenant suspension through March 2027, giving it breathing room to execute on its strategy. Whether the market will reward the patience is another question, but the operational momentum and the clear line of sight to improved profitability make this a name worth watching.