Good day, thank you for standing by. Welcome to the financial results announcement Q3 2023. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star one and one on your telephone, you will then hear an automated message advising your hand is raised. To withdraw your question, please press star one and one again. Please be advised, today's conference is being recorded. Now, I'd like to hand the conference over to your speaker today, Steve Binnie, Group CEO. Please go ahead.
Thank you. Thanks, everybody, for joining us today. As always, I will go through the investor presentation, calling out the page numbers and, at the end, put it back for, for questions. We're gonna start on page three, which is just a summary of the quarter. It was a challenging global economy that we were up against, with ongoing weaknesses in paper and pulp markets. That's something obviously we talked about at the last results call. It has continued into, into the Q3 . The destocking influence, which we did talk about on the, on the last call, did continue, and has been bigger and lasted longer than, than we had expected.
We did start to see a little bit of improvement towards the end of the quarter, but it's still, you know, it's not gonna be a sharp V-shaped type recovery. It's gonna be a gradual recovery, and certainly we saw that towards the end, and we'll talk a little bit more about Q4, but we've seen it continue into Q4. In order to mitigate the impact of the weaker market conditions, we obviously implemented production curtailments to ensure that we didn't sit with an inventory liability. We proactively implemented a number of cost-saving initiatives across the group, and working capital continued to be a focus. Our EBITDA for the quarter, obviously down on the highs of last year, at $106 million.
I'm pleased to say that on the debt side, we continued to do good work. We generated cash, so despite the fact that the earnings was less, we were able to generate cash. Year on year, we're $350 million down on last year. Turning to slide four, the contribution split of our product segments. On the left is the earnings, EBITDA, obviously, in recent years, it's been volatile with COVID and then the great rebound that we had, obviously under a little bit of pressure this year. I think the overriding story is that packaging continues to, you know, contribute a larger proportion as we move forward. That is confirmed if we look on the right-hand side.
Our strategic priority, and we've talked about it many times, is to reposition the business with less exposure to graphics, and invest in growing segments. You can see that in this time horizon, graphic paper has moved from just under 70% down to less than 50%. That, that journey will continue, and we, we, we've set ourselves a medium-term strategic target of getting that be below 30%, and we'll touch on that a little bit more later. Slide five is our earnings bridge, what we've done here is just compare quarter- on- quarter because of the, you know, because of the, the volatility, and it, it, it was a better reference point in terms of the underlying trends.
I think firstly, you can see that sales volumes relative to the last quarter were relatively stable. Obviously at low levels, but it's confirmed that, you know, we've reached the bottom, and as I said to you, it got a little bit better towards the end of the quarter. Not, not, not V-shaped, but improving. We did start to see selling price prices come down, which we did talk about was gonna be something that happened. They've been remarkably stable, but they did give up a little bit in the quarter- on- quarter analysis. Overall, net selling prices were down 7%, but that obviously, you know, that takes into account all the segments. As I said earlier, a strong focus on costs.
Raw material prices are coming down, and that's creating some opportunities, but, you know, some good work done on fixed costs and the like. Ultimately, that gave us the $106 million that I referred to earlier. Slide six. I always mention this when I present this slide. I think it tells a great story because we fundamentally repositioned this business from a balance sheet perspective. We will continue to be disciplined. We're generating cash, even although the profits were less. The end number is you can see, or the debt number at the end of the quarter was 1,176. Interestingly, that includes a translation loss or conversion of our euro debt into dollars.
That was $105 million. If you, if you back that out, we would have been very, very close to the billion-dollar target that we set ourselves, and we're committed to getting our debt below that $1 billion. You can see that we're well on the path, despite the fact that we've got low or short-term pressures. On slide seven, the debt maturity profile. Again, it tells a good story. We don't have any major debt maturing in the next couple of years. There's a couple of shorter-term facilities in Europe and, you know, we, we, we've got excess cash to, you know, to manage through that process. Our next big bonds are only maturing in 2026. Turning to slide eight, the cash flow.
I've mentioned a few times already on this call, but obviously not at the levels of last year, which were record levels, but still positive, and enabled us to get the debt levels down to what we talked about. The CapEx, still around the 400 mark that we talked about last quarter. Turning to slide nine, and I keep emphasizing on these calls, that disciplined capital allocation is an important priority for us. Not to run through the entire slide, but obviously we have certain regulatory and sustainability commitments that we have to meet, and those come first in our priorities.
We do want to reduce our graphic paper business, and, you know, obviously, if there are closures, there could be costs attached to that, and that comes high up in our allocation. We continue to look for cost opportunities with quick paybacks. Ultimately, it's important that we deliver a return on our capital employed, you know, at our targeted level, above 2% above WACC. Then, you know, once, you know, once we've done that, we want our debt below $1 billion, you know, we'll invest for growth. That, that's what we've done with, you know, the investment that we're making at Somerset for the PM2.
We're managing through that project with a commitment to keep the debt down below $1 billion. Then slide 10, it's been a big story over the last few years. The, the costs, obviously, we saw significant rises in 2021 and 2022, but obviously, that's easing now and costs across the board coming down. That's helping mitigate the impact of the, or certainly some of the impact of the weaker market conditions. Moving forward, then turning to the segments, the product segments, and firstly, on page twelve, is the Pulp segment. I mean, firstly, let me emphasize that the demand for Pulp continued to be strong. We, we've seen very encouraging viscose operating rates, which is obviously supporting demand for dissolving pulp.
Internally, we've seen more stable production, particularly obviously at Saiccor, where we did have some challenges. We didn't have any maintenance shuts at Ngodwana or Kokstad in the quarter, so that obviously helped. The prior, we had the big floods in South Africa, so you know, that does impact the year-on-year comparison of the volumes. On the slight negative side, we, you know, we saw selling prices coming, coming down. Net-net, we are positive about dissolving pulp market. There are conflicting forces. VSF prices are down a little bit, and paper pulp prices. albeit, whilst that's not swing capacity, it does, it does, sometimes influence, the, you know, the pricing.
The, on the positive side, as I said, high operating rates for the viscose producers, and inventory levels downstream are coming down, whether it's at the, the viscose level, all the way down to, to retail levels, so coming off their highs. So net-net positive, albeit that there's a little bit of... The other thing that's happening is cotton prices have started going up again, which is obviously a competing fiber. Turning to page 13, the packaging segment. Overall volumes down 26%. This is a little bit of the economic situation, because there is a little bit less spending, but it's almost entirely driven by the destocking and the high, high inventory levels. That's across all our regions.
And, and, you know, we're confident that this will, this will bounce back in terms of volume. Prices been pretty stable, and, you know, obviously, the, the, the, the, there is pressure out there, but, but we've been able to hold selling prices. As a consequence of all that, the, the EBITDA margin did come down. Then graphic paper on slide 14, and obviously this has been, has been weak. We talked about it last quarter. Significantly lower demand. A lot of it is destocking, but it's not only destocking. The, the economic situation, particularly in, in Europe, where we have a big exposure, has dampened demand for, for graphic paper.
Then obviously, on top of that, we all know that there is a longer term downward trend line for graphic papers of about 6.6%. Then, as I said, prices stable somewhat, although they did start to come down a little bit in the quarter, which obviously on top of the volumes, meant the margins were less. Slide 15 has the regions at a very high level. Both Europe and North America, lower volumes linked to the destocking process that I referred to. South Africa, more stable, obviously benefiting from higher DP volumes. Graphically, you see the impact of all of that in slide 16.
I'm not, I'm not gonna repeat what I just said, but you, you can see how that translates into, into margins. Slide 17 is the strategy, our Thrive strategy. We continue on that path with our four pillars. Firstly, on operational excellence, ever more important in times when, you know, when margins come under pressure because there's a strong focus on, on costs. Over time, we, we, we've talked about it in the past, pulp integration is an important aspect. We think that to improve that is something that will help reduce volatility of earnings. Enhancing trust, I've got a slide later on, a lot of the great work that we're doing on the sustainability side, but it's a, it's an important part of our strategy.
On top of that, our forestry certification, I say it every time, it, it gives us a what we believe, a competitive advantage, particularly in well, across all the segments, but particularly dissolving pulp. Then growing business, I, I, I referred to the Somerset expansion, and we talked last quarter about labels upgrade, at Gratkorn. We want to reduce exposure to graphic paper. We made an announcement a few weeks back, couple of weeks back, on, on the potential closure of our Stockstadt mill in Germany. That is a mill that has been EBITDA negative and is been in a weak situation. We're going through a consultation and obviously as we complete that, then we will update the market.
A strong commitment to sustaining our financial health. As I said earlier, we are committed to the, the one billion. We're nearly there. Then from a growth debt perspective, we did have another bond in one of the South African bonds that matured, equates to about $59 million. We, we took that off the table and, you know, we continue to look for opportunities to maximize the use of our cash resources. Slide 18, just confirming that sustainability is at the core of our culture, our Thrive strategy. Slide 19 just shows you a bunch of the awards and ratings that we have. The one maybe to call out as, as the most recent is the FTSE4Good.
That was confirmed in July, and we're very proud of that. Slide 21, in terms of our outlook. As I've indicated, the weak global macroeconomic conditions are still there. I think we're nearly through this, the destocking, and as I've said earlier, there is slight improvement, but it's not a V-shaped recovery, but we are seeing gradual improvement. The DP demand remains strong. As I said earlier, mixed influences, but net-net, we believe to be positive. On the paper side, fair to say that the destocking lasted longer than we expected. However, having said all of that, we continue to focus on the balance sheet. Liquidity remains healthy, and we will match production to demand.
On the final slide 22, most of this I've talked about, but just, just to recap, or finalize, is that, on the back of the slow recovery, we, we anticipate that the Q4 earnings, EBITDA, is likely to be above that of the Q3. operator, that's me gone through the presentation. I'm gonna hand it back to you, for questions.
Thank you very much. If you would like to ask a question, you'll need to press star one and one on your telephone and wait for your name to be announced. To withdraw your question, you can press star one and one again. Once again, that's star one and one to ask a question. Thank you. We'll now go ahead with the first question. Please stand by. This is from the line of James Twyman from Prescient. Please go ahead.
Yes, thank you, and thank you very much for the additional details. I've got three questions, if I may. The first one is, you've managed to stop a very sharp fall in prices in coated paper, both in Europe and North America, which is surprising given how high prices were and how weak demand has been. How have you managed to do that, and how, where do you see that going, whether you can, you know, stop prices falling further in the next coming months as well? That was my first question.
Look, on that one, as we've always said, James, we always said this was primarily, that weakness was primarily driven by destocking. When you have a destocking, particularly to that extent, perhaps more traditional market forces are not the biggest influencing factor in terms of price. I mean, said another way, if we had reduced prices, I, I don't think it would have attracted additional volume. As things are now leveling off and improving, as I've illustrated, the more traditional market forces come to play. That is the old trade-off between volume and selling prices, and that's what our teams, our sales teams are working with at the moment. You know, getting that optimal performance to maximize the sales line.
It's shifting away from a destocking to a more traditional market forces. Obviously, you know, overlaying all that, you know, the macro, the macroeconomic economy is still weak, particularly in Europe. You know, we can't give specific forecasts on where selling prices will be, but I think it's fair to say that they are likely to come down, however, volumes are likely to go up.
Thank you. My follow-ups were, firstly, on CapEx. You're talking about $410 million this year. Is it possible to be able to keep it at that level or lower next year? Because you've obviously got a lot more to spend at Somerset. Just given market conditions, how, how, what can you do there? Then my final question was, there's always seasonal strength in the U.S. in Q4. Given these difficult circumstances, is this something that you still expect to happen?
All right. I think on CapEx, really the story is... Well, I, I'm gonna repeat something that I've always said, right? Our, our maintenance CapEx is around $250, and then we have our sustainability initiatives, which is about $60 or $70. That brings you to the low $300s. The big project that we're undertaking this year and in the next two years, is obviously Somerset. Included in the current year number for Somerset is just over $70 million, and that's how you get to the $400. Now, in terms of the way that we, we, we, we look at the split of the cost to complete Somerset, next year, the Somerset number, I think, Glen, is about $170.
It's 175, yep.
Yeah. That's the, that's the major variable. You know, I'm not giving you a specific number, but the big change from this year to next year is, is really the $70 versus the $170 for Somerset. On the last question, I'll start, and I'm gonna hand you to Mike. Just in terms of where we're at, as I said earlier, we're seeing gradual improvement, and yes, traditionally, Q4 is a better quarter. You know, we are a little bit more positive, but I'll allow, I'll allow Mike just to add to what, what he wants to say there.
Yeah, thanks, Steve. You're, you're spot on. We do seasonally see an improvement in the Q4 in North American graphics, and I'd offer that it's probably a slight improvement that we've been seeing this year, so it's not some kind of V-shaped recovery. We have seen a slight pickup, and we're expecting that to continue through the quarter.
Thanks, Mike. James?
Thanks very much.
Thank you. We'll now move to the next question. This is from the line of Andrew Jones from UBS. Please go ahead.
Hi, just got a couple of questions. I mean, just on following up on that conversation about North American graphic demand. I'm just looking at the PPPC data for June, and it seems like in coated woodfree, the demand was actually sort of lower year-on-year compared to the six-month average, like down 39% in June, versus down 31 for the first half overall. It seemed like it was getting incrementally worse, if anything. I'm curious about what sort of base you're talking about when you're saying, talking about you know, sequential improvement.
Yeah.
Is that, you know, versus the 2Q level? Is that versus the June level? Is that, you know, how much of a pickup have you seen from June into July? Like, what, what's? I mean, just, just frame that for us in the context of these weak industry numbers.
Yeah.
And-
I mean, obviously, they're industry numbers. We're obviously looking at internal data, and we're looking at order activity. It's, as I say, slightly better. It's not a huge recovery, but it's slightly better. You know, June was slightly better than May, July was slightly better than June. We probably lost a couple of percentage points, market. We probably lost a couple percentage points market share earlier in the calendar year, but we, we've started recovering that. You, you maybe want to comment there.
Yeah, that's, that's exactly right. We're seeing and, yes, we're talking industry data here. Looking at our own data, there is, there is a slight improvement over, over the previous quarter, which we, which we're confident will continue in, in the Q4 . Obviously, very, very low levels still, so I can only repeat what Mike said about, about the U.S. It's far from a, a V-shaped recovery. It is step by step. We're, we're tracking the order intake, the industry order intake, week by week, and it is, it's baby steps at best. In that sense, it's very important that we keep our own position, and that's what we're aiming for.
Mm. Okay. I believe you was talking, you know, on the last call maybe, about demand in 2024, then, you know, talking about a return to the sort of structural trend. I think you cited maybe down 20% compared to the 2022 level, would be in line with the sort of trend you were seeing. I mean, how, how are you seeing 2024 demand for, you know, for coated woodfree overall? Do you see, you know, what sort of pickup in shipments do you think is possible in 2024?
Yeah, look, if you'd asked that question six months ago, we would have probably estimated, getting back to somewhere around 80%, between 75%-80%. And, to your point, that was on the kind of longer-term trend line, because, you know, you had the bounce back last year. I, I, I think with the benefit of a few, few more months, data points and reflection, I would say that, and, and certainly how we're thinking about the budgeting for next year, that it's probably, it's probably 5% less than that, the recovery next year. So instead of being 75%-80%, about 70%-75%. And really, that's one of the reasons why we made the announcement about Stock stadt.
I don't know if you recall me saying previously that, you know, if, if, if we had stayed at about 80, then, you know, we, we, our machines were relatively full. But with that shift, it's been worse than we had predicted, that's why we're taking the initiative on Stockstadt.
Mm-hmm. That, that was relative to the 2022 level, when you're saying, you're talking about these percentages?
Yes. Yeah, and look, Andrew, 2022 was, give or take, close to 2019.
Mm.
Because you had that big bounce back, so you know, it recovered. When we say 20% down and, and, and now saying 25, effectively that's over a four-year window.
Yeah. Yeah, that makes sense. Cool, that's it for me. Thanks.
Great. Thanks.
Thank you. We'll now take our next question. This is from the line of Brian Morgan from Morgan Stanley. Please go ahead.
Thanks very much. I'm just following on from that. You're talking about getting back to sort of 70% to 75%. Just looking at the capacity that's, that's coming off the market, so it's nice to come off the market. Looking at my listing here, the only one that I can see is, is Lecta in France. It's about 180,000 tons, or, you know, maybe, what's it? About 8% of demand. And then Stockstadt mill, we don't know how much, what the split is between uncoated fine and, and coated woodfree, but, but it's not a big number. So maybe we're looking 10%-12% capacity out the market. Would you agree that we need to take, that market needs to take a lot more capacity out the market in Europe?
Yeah, look, the one thing I would say, Brian, is that, remember, 2022 got close to 2019 levels, a lot of capacity had come out over that intervening period. Operating rates in 2022, you know, were close to full. You know, we always look at sort of 10%. You know, you want operating rates to be about 90, right? You know, you've got to take that 10% into account. That would also keep you at optimal operating rates. Having said that, I mean, clearly, if the recovery does get to, say, 70, 70%, then it's clear that more capacity will need to come out, yes.
Obviously, we've announced Stockstadt mill. You know, our competitors need to evaluate their own, their own situation. From our perspective, we, you know, we continue to look for opportunities to remove graphic paper. Just remember, Brian, that label, that machine that we've got on labels, effectively is like taking another machine. That's 100,000 tons, right?
Correct. Correct. When, when filled, which of course, will, will happen over the next, the next period, next couple of years, it will effectively take out a machine that was on graphics capacity, even more. It was, it was over 250,000 tons.
Yeah. You had, for us, you know, you had the Gratkorn machine, the Stockstadt machine. Yeah, then we'll continue to proactively manage. Obviously, you know, we had the deal that fell through, and, you know, with those other mills Stockstadt we've made the announcement, we continue to look for options, you know, with the other mills that were part of that process.
Okay, that's great. Thank you. Thanks for the color.
Thank you. As a reminder, if you would like to ask a question, please press star one and one on your telephone. That's star one and one for any further questions.
Okay, operator, we're looking at the screen here. If there's no more questions, I'll give it a second or two as I talk. If there's no more questions, I guess we'll end it here. Is there more questions?
got one question coming through. Please stand by. This is from Andrew Jones at UBS. Please go ahead.
Hi, if no one else is asking, I might as well just carry on. Just, just on the variable cost trends into the Q4 , I'm just curious, you know, how much of a decline we might see. I mean, you've called out sort of a number, did you say down six in the Q3 ? Should that be accelerating overall into the Q4 , given it seems like wood costs starting to roll over? I guess, you know, obviously, energy is still a tailwind, chemicals are coming down. You've got that, I believe your logistics contracts kind of roll off at the sort of mid-year stage, so there's some tailwind there. I mean, can you give us a sense of how much that variable cost could come down for, for the business overall, and if, you know, that varies much between the divisions?
All right, Brian, it's Glen here. Sorry, Andrew. You're right, they, they, they did go down by, by 6%, and it was across all our major cost categories. We're expecting a further reduction in Q4, not to the same degree as what we saw between Q2 and Q3, but in the same direction, it will be less than 6%, but also, again, across all categories.
Okay, excellent. Just on the volume trends, I mean, looks like DP is basically just running full. Packaging didn't really drop off. I guess maybe there's a bit of upside there, but, I mean, do you expect much upside in volumes in packaging? Then just on printing and writing, I mean, obviously quite a long way below sort of normal operating rates. When you're talking about this sort of destocking sort of ending and volume starting to sort of gradually improve, do you have any sort of best guess for sort of a, you know, sort of volume number for the Q4 ?
Look, we can't be that specific. What, what... Maybe, maybe got to go back a step, right? I mean, firstly, we talked a lot about the graphics side, and where we expect it to be, to recover to. I don't think that's all gonna happen in Q1. It's gonna take another couple of quarters to get to that sort of 70%-75% that I talked about. On the packaging front, we are very confident that we'll get back to, to, to, to the 100% that we were previously. Again, that's not gonna happen in Q1, sorry, Q4. It's gonna be over the next couple of quarters. It comes back to what we've been talking about. It's not a V-shaped recovery.
We are seeing improvement, more so in, in, in packaging than, than, than, graphic, but we're not gonna be at 100%, in Q4, which means that there will still be, curtailment, in the, in the business.... I would spread it over two or three quarters, is basically what I'm saying, Andrew.
On, on the packaging, you will have probably listened to your competitors and what they've been saying on their results calls. We had, like, you know, Metsä and Stora and Billerud, you know, all of them basically talking about ongoing destocking and, you know, further volume weakness through the second half of the year. I mean, you, you're obviously, you know, a fair bit more beating your volumes in the last quarter, you know, kind of outperformed to some extent. I mean, what's, what are the regional or market differences that you're seeing which give you more sort of confidence in the, the outlook? I guess North America's probably better than, than Europe, clearly. Can you just give us a bit of a breakdown as to sort of the different packaging grades and regions-
Yeah
-where you see the best and worst dynamics?
Yeah. What I'll do is I'll, I'll give a brief comment, then I'm going to hand it to the three regional CEOs to just briefly talk about our packaging markets. Look, I, I, I've, I've said a few times on, on this call, it, it, it's not a sharp recovery. You know, with reference to our competitors, it's not a surprise for us that, that, that they're still talking about destocking, because the, the stock levels just built up by so much last year, and it's taken longer to recover. Having said that, you know, as we talk to our customers, as we get visibility on their inventory levels, as they give feedback in terms of, you know, where their volumes are gonna be in the future, we are gonna see that recovery. But it's not gonna ...
It's, it's not all coming in Q4. What I'll do is I'm, I'm gonna start with Marco, and then I'll, I'll, I'll hand over to Mike and then Alex. Marco.
Yeah, Steve. Thanks. I think in general, you're touching on the, on, on the most important elements. In, in Europe, we're seeing that the packaging and specialties business has been somewhat more resilient than the graphics business. However, having said that, we've also, to a certain extent, been surprised how much they've been impacted by, by the whole stocking and destocking effect. The value chain of some of these, packaging and specialty products is rather complex and, and sometimes deeper than this one. Therefore, you've got more opportunities or risk, that, that stock is being built up on, on, on different places in, in the value chain.
That, that has surprised us to a certain extent, and also has led to the fact that this recovery took a bit longer. We are absolutely confident that the strategic segments that we have defined in our packaging and specialty portfolio will come back. There's a very healthy long-term outlook for some of these products. As Steve just indicated, we have made strategic choices to be very competitive in some of these areas. Notably, when we talk label, self-adhesive face stock, with a machine like the PM9 in Gratkorn, that will take us a long way.
Thanks, Marco. Mike?
Just to offer, in North America, paperboard destocking is likely to continue into the fall at similar levels. If you break it by segment, our label paper business quarter-over-quarter has been, been slightly improving. Fold and boxboard has been a little bit flatter, and food service board has also been improving. You know, the trends are going in the right direction, although we do think we'll be working through the destocking through the next quarter.
Thanks, Mike. Alex?
Thanks, Steve. In South Africa, it's obviously the container board market, and we've got two main pillars. The biggest being agricultural fruit exports and then the industrial market. We've seen some high stock levels, so some of the destocking. The agricultural market is about 3% weaker, but it's because of weather conditions. There's been some extraordinary weather conditions, so just not enough or not a similar level of fruit available. Then on the industrial market, obviously, with consumers being under pressure, we've seen a slight weakening, but nothing to be concerned about.
Good. Thanks. Thanks, Alex. Okay.
Okay, that's clear. Yeah, so it sounds like South Africa has been sort of holding, holding things up to some extent for other regions, and, you know, that's probably...
Yeah, yeah. Look, the South African business had a more stable, stable quarter. Obviously seeing, as Alex has said, there, there was some destocking going on there as well in the packaging side.
Mm, mm. Okay. Okay, and, just on the CapEx, I mean, you've reiterated guidance, but, I mean, you've got triple spending in the Q4 . Is that still doable, or do you think there's risk on that number?
No, no, no. On CapEx? No, no. We're committed to the $400 million, and it was just timing on the projects. Nothing has changed there.
Mm-hmm.
Okay.
Thank you.
Thank you.
We'll now move to the next question. Please stand by. Next question from the line of Geoffrey Belichamella from Bank of America Securities. Please go ahead.
Thank you very much. Good afternoon, everyone, and thank you for taking my question. I wanted to dig a little bit deeper into the DP trends that you're seeing. Can you kind of extrapolate what volume trends you're expecting into the Q4 ? What is going on with VSF operating rates at the moment? If you can sort of give a forecast of what you expect them to do in the coming quarters, I guess, in the coming year. Have you seen real restocking happening on the textile side as well in China? That would be super helpful. And also, Steve, you mentioned cotton prices are rising again.
Do you think that would imply, in combination with the higher prices from the lows on the pulp side, that we could see price increases in DP as well in the short term? That would be super helpful. Thanks.
Great, thanks. I'll, I'll, I'll take a little bit of that question, and then I'll, I'll let Mohammed elaborate further. firstly, there is a few competing forces here, as I said on in my intro. generally, the demand for DP is strong. I mean, let's just say that first and foremost. specifically to your questions about volumes, you know, the volumes for Q4 and Q3 should be relatively stable. I think that's the first point. and in terms of the other positives, VSF operating rates are high, which obviously supports you know, DP demand. as I said earlier, cotton price is positive, so that will be positive.
The inventory levels downstream, particularly all the way down to the retail levels, while they're still high, they've, they've come down, and, and, and that's gonna be positive. Further upstream, at the viscose level, they, we've, we've seen them coming down pretty sharply. Mohammed, maybe you just wanna give your overall impression on where you think markets are, but generally, yeah, over to you.
Okay. Thank you, Steve. I think just starting with the VSF operating rates, they currently at around the sort of 80%-82% in China. This is based on the CCF index. What is important about calling that out at this time of the year, you know, we are currently in the seasonally slow time, and historically what we've seen is the operating rates are much lower than that, closer to, say, 70%. This time of the year, of this particular season, the industry's been operating at a much higher operating rate, and that's helped demand for DP.
At the same time, the industry has, I think, purposefully kept the VSF price flatter, but at a lower range, and that has allowed the VSF volumes to flow through the value chain, relative to, say, for example, cotton prices, where the pricing has been much more volatile. So what we're seeing at the moment is that viscose inventory levels at viscose producers are at a low level. Currently, quoting again the CCF numbers, you're seeing them at around 18 days of supply. Five-year average, you're talking about 23-24 days, so much lower. So that should support, I think, continued higher operating rates. Then we're going into the seasonally strong time, which starts around September.
That should lend support to a higher VSF price as we get closer to that time of the years, given the fact that the VSF producers are also sitting with low inventories, and that ultimately should start providing some, some pricing support for, for DP.
Thanks, Mohammed. Thanks, Geoffrey.
Yeah, so, I mean, actually, on DP, since we're here, I mean, Steve, have you heard, or Mohammed, if you've heard anything, in terms of capacity increases or projects for capacity increases coming out of either China or Latin America or even South Africa or Europe? Obviously we're seeing a lot of capacity increases in the market pulp market, and obviously DP seem to have some strong trends and strong tailwinds. I'm curious to see if you're gonna get any competition from peers there.
Yeah, this, we think this is a very good opportunity because we're not aware of any additional DP capacity coming. As we've indicated in the past, it, you know, a big project would take some years to pull together, and we're not aware of anything. We still are bullish about the longer term prospects. We think demand for dissolving pulp will continue to grow at 4%-6% per annum. That's about 400,000 a year, 300,000-400,000 tons a year, and there is no new capacity coming. If you look at the—if you project out the operating rates, I would say three years from now, you know, you're looking at a shortage.
That's a very exciting proposition, and we think will be favorable for DP prices.
Consequently, do, do you expect yourselves to kind of participate in, in capacity increases in that market?
No, not, not, not in, not in the, the short to medium term. Our, our focus, as I said earlier, get our debt below $1 billion. We've got to finish the Somerset conversion, and, and, and those are our priorities.
Thank you. We'll now take our next question. Please stand by. This is from the line of James Twyman from Prescient. Please go ahead.
Yes, thank you. Just a couple of quick follow-ups, if I may. You, you've talked quite a bit about where demand is likely to be for coated paper in Europe, at sort of 70%-75% of where it was and the need for closures, there's obviously some serious issues that the industry needs to deal with. The US, I think we're all probably a little bit more hopeful that that market is in much better shape. Could you just talk around that, about whether there is a need for any closures at all there or not? It seems an awful lot better. Secondly, you did mention on the call about cost savings. Just interested to know whether that's, whether that's a significant new initiative that you're doing there.
Yeah. Look, I think in terms of the U.S. market, as we have alluded to throughout the call, the U.S. is not as bad as Europe in terms of, you know, where, where, where the drop in graphics has been. Having said that, there's gonna be a significant decline, just, just like, just like in Europe. More capacity, relatively speaking, more capacity actually did come in, come out in the intervening period. So, you know, at, at, at the height of the, the, the great results last year, there was, there was a severe shortage of, you know, graphic paper in Europe, and operating rates were theoretically well above 100.
I think in terms of a relative drop to say, once again, three or four years ago, and because of the recovery last year, a similar amount, you're still talking 75%, but so much capacity did come out in the intervening period. There's a big difference, particularly for Sappi, right, is that we're converting this machine. That machine will be completed in 2025. From a risk perspective, it's a relatively short-term window. We do think it will bounce back to those levels. It will enable us. If it does, it will enable us to sell our machines.
When, when, when the machine, the conversion is complete, obviously, at that point in time, we will take another big chunk out of the graphic paper market. If I had to summarize all of that, I think there's less risk in the short term, and with the additional capacity coming out, it does mean that longer term, these markets in the U.S. are, in our opinion, gonna be even tighter. We think that will create favorable conditions for the remaining capacity that we would have left in graphic paper in North America, and make or create opportunities for us to sell some more tons out of Europe into the U.S.
Thank you. At this point, there were no further questions, so I will hand back to the speakers for closing remarks.
Thanks, operator. I just want to thank everybody for joining us today. I look forward to discussing the Q4 results in three months' time. Thank you very much.
Thank you. This does conclude the conference for today. Thank you for participating, and you may now disconnect.