Paper and pulp producer Mondi planned to cut an estimated €180-million in costs during the 2009 financial year, said group CEO David Hathorn on Thursday.

Mondi, which is listed on the Johannesburg and London bourses, is closing mills in the UK and various European countries as paper producers in the region came under pressure, owing to rising costs and softer demand.

“We would anticipate in today’s marketplace that there will be general cost deflation for most of our businesses, and these are cost savings over and above that. They relate largely to many of the actions that we have already taken,” Hathorn said.

The company has closed its 140 000-t uncoated fine paper (UFP) mill in Hungary, and completed the European UFP reorganisation.

It also decided to mothball the integrated Stambolijski kraft paper mill, in Bulgaria, and the Dynas PM5 kraft paper machine in Sweden.

In the UK, the recycled container board mill in Holcombe was closed, and three sheet-feeder plants were sold. Mondi also sold its recycled container-board mill in Switzerland.

The sale of two further corrugated converting operations in France was also agreed on, the company reported.

A restructuring exercise at the Turkish corrugated business was started, while the Nyborg specialities plant in Denmark and the Zaragoza bag plant in Spain were closed. A restructuring of the Finnish and UK coating businesses was initiated.

Hathorn stated that these actions resulted in 600 000 t of high-cost capacity being eliminated, thereby lowering the company’s average European cost a ton for the related products by around 5%.

“There are a number of other initiatives across the group, the one thing that Mondi has always been very focused on, because we believe in the low-cost strategy, is around cost reduction and productivity gains, and plant efficiency.

“I can confirm that owing to the number of actions already implemented at the back end of the fourth quarter and over the last two months, that we are confident of delivering on this cost-saving target,” he said in a conference call, discussing the group’s results for the 2008 financial year.

Hathorn also reported that steps had been taken to significantly reduce capital expenditure outside the two major projects in Poland and Russia.

Capital expenditure approvals would be limited to 40% of depreciation in 2009, he said.

“The cash flow effects of this initiative started to be seen towards the end of the reporting period, with the main benefits expected to be realised in 2009 and 2010.”

Despite the challenging business environment, Mondi said that it remained committed to completing the development of its new containerboard machine in Poland, and the modernising of a mill in Russia.

“We believe the rationale behind the development of these projects, to secure our position as cost leader in our chosen markets, is reinforced by the current market environment. Our strategy is clearly intact,” said Hathorn.

The construction of the new 470 000-t recycled container board machine at Wiecie in Poland, was progressing well. Mondi stated that the group remained on track for completion in the second half of 2009, within the budgeted cost.

The related €45-million investment in the new box plant and associated infrastructure on the Wiecie mill site was also in progress, with start-up planned for the end of 2009.

The €525-million project to modernise the mill in Syktyvkar Russia was also making good progress and the group stated that it remained on track for completion within the budgeted cost by 2010.

“The key value drivers of this project are to improve efficiency, lower our cost base in Russia and increase energy production and revenue by selling surplus energy to the grid. In addition it will provide modest extra capacity (both pulp and paper) for the domestic market.”

During the period under review, the European market experienced a significant downturn, and Hathorn said that the European market offered soft volumes, mixed pricing, and adverse movement in production currencies. However, this was slightly mitigated by the improved performance of the group’s South African operations.

Underlying profit for the period was down by 12%, to €441-million, or R3,43-billion, compared with the €502-million, or R3,9-billion reported at the end of 2007.

Headline earnings for the period were also down by 49% to 20,3c (euro), compared with the 39,5c (euro) recorded in the corresponding period of 2007.

Hathorn said that given the level of global economic uncertainty that emerged during the latter part of 2008, the outlook inevitably remained “challenging”.

The current economic conditions would impact on short-term demand growth for its products, as well as place pressure on both customers and suppliers which might face liquidity issues, and could have an adverse impact on Mondi’s business.

Further, the lack of credit availability in the market could impact the group’s ability to effectively execute its strategy.

However, the company stated that its geographic spread, product diversity and large customer base would mitigate these risks.