Arjo warns of surge in pulp prices
Friday 10 March 1995
There are worrying signs for publishing groups that the surge in pulp paper prices is going to continue and may exceed 1988 record levels later this year.
The warning came yesterday from Alian Soulas, chief executive of Arjo Wiggins Appleton, one of Britain's top 100 companies. Pulp producers have been taking advantage of economic recovery, particularly in the US. Consumers such as newspaper groups, are finding it increasingly difficult to buy more than a couple of months of stocks of paper.
Arjo, which does not produce newsprint, reported a 4 per cent increase in its paper output for 1994 to 2 million tons. The biggest growth was achieved in the production of high-quality paper for magazines, and branded fine papers. Profits before tax climbed from £122m to £217m.
However, Mr Soulas warned: "The price of pulp on 1 January 1994 was $400 a ton, and now it is $825. Several manufacturers of pulp are pushing for $925 by June, and I believe the price will exceed $1,000 by September or October."
Big consumers of paper, such as newspaper and magazine publishers, have become alarmed at the rising cost of paper and have been stocking up to ease the pain.
Mr Soulas said the currency crisis could exacerbate the problem. "Should the dollar weaken further, then I believe that it will simply accelerate price increases." The rationale is that if buyers can obtain more dollars for their pound, yen or mark, the pulp producers will want a share of the currency profits.
The steep rise in pulp prices has caused two problems for Arjo. It has been unable to pass on all of the increase to customers, and it is unsure whether growth in demand for its papers will continue to increase because of the chance that customers will live off their stockpiles.
Mr Soulas added: "During 1994 we were not totally able to pass on these price increases. On some products our margins have been squeezed, although there has been a healthy growth in tonnage and further benefits from cost- cutting.
"However, 1995 is going to be tougher. The rapid increase in pulp prices takes longer to feed through to a rise in paper prices. I give a word of caution for 1995 on margins, although the first two months have been good with sales in South-East Asia, in particular, continuing to grow."
A geographical and divisional split of Arjo's results showed that paper manufacturing operations in North America lifted profits from £143.5m to £147.2m and in Europe from £36.2m to £64.7m. Worldwide paper merchanting profits grew from £12.9m to £36.8m, while losses from forestry and pulp fell from £21.9m to £11.9m.
Arjo's shares dipped 9p to 237p immediately after the results were announced. The price is still underpinned, however, by some belief in the City that Arjo could become a takeover target.
Two shareholders in Arjo, which is still looking to replace Tony Isaacs who left last year as finance director, own 54 per cent of the shares. They are St Louis, the French food group, with 40 per cent and Mercury Asset Management, the fund managers, with 14 per cent.
Mr Soulas said he was not aware of "any potential change" in St Louis's holding following the death in an air crash of the French company's chairman, Bernard Dumon. "There have been no talks. Things are perfectly stable, and I believe we are happy as we are," said Mr Soulas.
Arjo's dividend payment is rising from £48.7m to £55.5m, up 12 per cent to 7.25p a share.
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