Thank you. Good morning, everybody. As always, I will go through the investment presentation that has been loaded. I will call out the page numbers as I move through the deck. I will start on page three, which contains some of the highlights for the quarter. It was a tough quarter for Sappi. The markets for graphic papers were weaker than we had expected. As a consequence of that, we had to take production downtime. That was approximately 85,000 tons of graphic paper. The impact on EBITDA of that downtime was $23 million. However, that enabled us to normalize our inventory levels because of the lower demand. We are in a better position from an inventory perspective as we move forward. Dissolving pulp volumes were good post the debottlenecking projects that were completed in South Africa. For the specialities and packaging, mixed performance.
Some good markets, particularly containerboard down in South Africa, some of the speciality grades in Europe, others being more challenging. The same time, we were going through a ramp-up process following the conversions at Somerset and Maastricht. That naturally has an impact on profitability as you optimize the machine and moving between the grades. As a consequence of all that, just some of the key numbers. You see them on the page. EBITDA was down 11%. Net debt ended the quarter at $1,680 million. In terms of the ratios themselves, the leverage ratio 2.1. I always remind you that we work around a two times target. The lower profitability has briefly pushed that through that limit. We're always disciplined to maintain it at those levels. The EBITDA margin following the profits down at 12.4%.
Turning to page four, which is earnings bridge between 2018 and 2019. The big story here is that costs were higher, predominantly related to the pulp side of it, not just pulp, other of our raw materials as well. In order to offset that, as you know, we've gone through a series of selling price increases over the course of the last 12 months. That has been good for us. However, it has had an impact on downstream demand at the same time as the global economy, particularly in Europe, has been slower. The volumes obviously benefiting from the higher dissolving pulp offset by the production downtime that we took. The exchange rates, both the euro and the rand weakened against the dollar. The net impact of all of that was $7 million on our earnings benefit. Moving to slide five, the product contribution split.
The EBITDA continues to tell the story that we've been going through for some time, that dissolving pulp now being the largest segment. Printing and writing papers will come down further. Obviously, we've got the ramp-ups at Somerset and Maastricht. That will lower those further. Packaging and speciality grades will continue to grow. Moving to slide six, the maturity profile of our debt. We did make a little adjustment there because the repayment of the 2022 bonds, which were refinanced during the quarter, that occurred just after the quarter end. We just adjusted for that to reflect the true picture as it currently stands. You see it does look good, and we have no immediate pressures, and the bond issue itself was very successful with the lowest rate that we've actually ever achieved. Slide seven has our CapEx profile.
You will have seen, obviously, the 2019 number before. The big projects contributing to the $550 million are the commencement of the expansion at Saiccor, the 110,000 tons. We got the conversion at Lanaken from coated mechanical to coated woodfree. Other projects include at Cloquet, we expanded our capacity for dissolving pulp there by 30,000 tons. Glad to say that that's now been successfully completed, and now we have that additional capacity available. The other big project we've had over the last few months is the new wood yard down at Saiccor to enable us to invest for the growth that's coming in. That's now behind us as well. 2020 estimated CapEx is $419 million.
The big project contained in that, obviously aside from the maintenance CapEx, is the Saiccor expansion, which will be completed towards the end of the 2020 financial year. Turning to the segments themselves and the markets, and moving to slide nine. It's fair to say that the graphic paper markets have been tough. During the quarter, we saw declines of between 8% and 13%, particularly tough on the reel side. Whether it's coated woodfree reels or on mechanical reels. If you look across all the categories, between 8% and 13% down, both in U.S. and Europe. That did put pressure on us. As we look forward, there is expected to be significant capacity coming out from competitors over the course of the next 18 months, and that's both in U.S. and in Europe. We estimate between 15% and 20% of capacity.
That is going to relieve significant pressure on the operating rates for the graphic paper business. At the same time, we ourselves, as we ramp up on packaging, will take further capacity out as well. That will help. On selling prices, following the increases of last year, we've actually seen stable selling price increases through Q2. Pulp prices have started falling over the few months, but bear in mind that they're obviously coming from historical highs and were still higher than a year ago. That did put further pressure on the business. Going forward, we will, as always, an ongoing focus on costs to maintain margins. We've obviously got the conversions that have been completed, which will enable us to take capacity out of the segment. We will monitor.
Clearly, if markets continue to be tough and the declines continue to be tough, then we need to look at more assets, and whether those are conversions or closures, we need to monitor the situation. However, we do believe that with the significant capacity coming out, that I mentioned earlier, that will relieve the pressure. The other major focus, and it's the thing that we've been exposed to as we've gone through this cycle, is pulp integration. That is a focus of our attention. We do have projects internally that will enable us to boost it a little bit. Beyond that, we continue to look at that as a key long-term strategic driver. Turning to specialties and packaging, we have seen other conversions coming into the market, but at the same time, we have seen smaller packaging and specialty producers exit.
Those tended to be the non-integrated players, obviously, they were facing the cost pressures of the higher pulp price. Demand continues to grow across the segments, we are strongly encouraged by the long-term prospects and the feedback that we're hearing from brand owners in terms of their push for paper-based packaging solutions. A lot of that's driven by the changing legislation and consumer preference, and the shift towards e-commerce. Selling prices did rise. What I should point out here is that the pulp integration in this segment for Sappi is lower than the overall pulp integration. Those pulp increases had more of an impact on packaging relative to graphic paper. Obviously, equally, as prices come down, we will benefit from that more in this segment. Our strategy is to ramp up those conversions.
Just to point out that they do take time, that you have to go through a very careful, coordinated process with customers to get accreditation. It does mean that you are moving back and forth between grades, different SKUs, testing new products. It has an impact on profitability. If you recall, the same thing happened in Alfeld when we converted a few years back. That's what we're experiencing once again with Maastricht and Somerset. I stress to you that the long-term prospects for this business, we are still very positive. I would also point out, if we hadn't done those conversions, then we would have had to take potentially more downtime on the graphics side because we would have had to fill those machines with an alternative product. Pulp integration is an important aspect.
Sorry, if there's someone else on the line, if you can go on mute. Turning to the regions themselves. Sappi Europe, as I've said, the graphic paper markets were weak. We had to take 46,000 tons of downtime. The good news is that enabled us to de-stock and move forward with better inventory levels. We've taken our pain, and we would not anticipate the same levels of downtime in the future quarters. Selling prices were higher, obviously, as we offset the higher costs that came through. As I said, pulp prices reduced but remain elevated. The packaging and specialty segments, a little bit of mixed performance, but a lot of that was linked to the kind of economic activity that we saw in Europe. The main product category we saw that was in self-adhesives. Having said that, we have started to see things improve in recent times.
The other thing I should mention is that we've got the Lanaken conversion underway at the moment. It's moving from out of coated mechanical to coated woodfree. That's the worst segment for graphic papers for not just in Europe, globally. That will help us. Then, obviously, as we ramp up at Maastricht over the next couple of years, in addition to what we've got now, we could be adding or taking out of graphic papers 130,000 tons out of coated woodfree. Moving on to page 12, Sappi North America. Again, many of the points are similar. The graphic paper market's under pressure. We did see increased imports. I would stress that we are part of that, and that's part of our bigger strategy.
When we converted at Somerset, we knew that we wanted to keep as much of the business as possible, so we are part of the increased imports coming through there. The legacy packaging and paper volumes are growing, and the ramp-up at Somerset continues. As I mentioned earlier, the product mix is not yet optimal. That takes a little bit of time, and we are making significant progress each month, and volumes are picking up nicely. Obviously, the region benefited from good dissolving pulp sales volumes. Again, like what I've said to you on Maastricht for Europe, Somerset will ramp up further, and ultimately there's another 350,000 tons that would shift away from graphic paper to packaging and help reposition Sappi as we move forward. Turning to dissolving pulp on page 13. The markets have been good. Demand was strong.
Unfortunately, VSF capacity has grown at a faster pace than demand, and that's meant that VSF operating rates have been under pressure and put VSF pricing lower than it was. At the same time, the encouraging news is that nearly all the swing capacity, we believe, is now on dissolving pulp. There is new dissolving pulp capacity coming into the market. We believe that the demand is more than large enough to take up that demand. Selling prices, as I said, declining. On the cost side, obviously, much of this business is done in South Africa, and wood prices have been a little bit higher. That did push up costs a little bit for South Africa during the quarter. The strategy, and I've mentioned this many times, we continue to do everything we can internally to grow volumes.
We have now had small debottlenecking projects at Cloquet, at Ngodwana, and Saiccor, all adding volumes. We've got the next 110,000 tons down in Saiccor, which will be available for the 2021 financial year. We look at external opportunities. We're not going to overpay for assets, and I've said that to you in the past. We'll monitor the situation. We don't see any immediate opportunities to boost dissolving pulp volumes externally. The big story there, as you would imagine, in the textile sector is sustainability becomes ever more important as the downstream brand owners are pushing for visibility on the supply chain. Turning to South Africa. Good performance in South Africa. The numbers you see on the left are the dollar numbers and just in ZAR. EBITDA was up 18% year-over-year. Another good quarter.
Strong dissolving pulp sales volumes, obviously benefiting from the projects that we've recently done. Packaging was lower. It was really a timing difference based on the timing of seasonal demand. We had an excellent first quarter, little bit lower in the second quarter. Overall, the business is doing extremely well. We think going forward, there are further growth prospects there. The selling price increases did help us offset some of the costs. Obviously ZAR was weaker. It boosted us as well. Turning to the pillars of our strategy. They're outlined again on page 15, taking each one in turn. Firstly, page 16, ongoing focus on costs, and I think we've done a tremendous job over the years. We've committed in 2019 to take a further $60 million out, and we're on track to achieve that as well.
Ongoing focus on continuous improvement across all our mills. The big story there, it's been evidenced by what has happened, is this pulp integration. We look at our mills in the U.S. and in Europe to see whether we can undertake some debottlenecking projects which will improve pulp integration. The Saiccor expansion that we talked about, obviously we're focusing on the sales side, but it will lead to lower variable costs as well. Pleased to say that the Gratkorn paper mill upgrade that we talked about earlier in the year, that was successfully completed on time, and the mill is operating nicely following the work that was undertaken. Moving to page 17, the rationalizing of declining businesses, it's probably with what we've experienced in the last quarter or two, it emphasizes why this needs to continue as an important focus point for us.
Obviously as we move through the ramp-up phase following the conversions, that will help relieve the pressure, at the same time, all those capacities that are coming out. In Europe, we estimate somewhere between around the one and a half million ton mark, and in the U.S., upwards of 500,000 tons. You look at the capacity in those marketplaces, we're talking 15%-20%. That's going to make a significant difference and push operating rates well up into the high 90s. More short term, as I said, we did take downtime at the mills to lower inventories and de-risk the business. The other thing I would say is, if the markets continue to decline, obviously competitors taking capacity out, we will continue to monitor ourselves.
If it were to continue on an ongoing basis, we obviously have to consider whether we have to take further capacity out. Whether it's through conversions or closures, we will monitor that on an ongoing basis. On to the balance sheet, as I said, committed to the 2 times leverage. Very pleased with the bond issuance that we successfully did during the quarter. Investing in areas where we believe we have strong growth. I want to come back to the overall strategy. This has been an ongoing process to de-risk Sappi and reposition it for growth. We have been taking significant capacity out of graphic paper over a number of years. We've been converting, we've been making the business in a stronger position for future growth and to de-risk.
Yes, there has been some short-term challenges in the graphic paper markets, that doesn't change our long-term strategy, we continue to believe that it's the right one, we've made significant progress, we will continue to do that. In terms of the segments themselves, obviously all the debottlenecking projects, it's gone extremely well. We're very excited about the additional volumes that Saiccor will give us. In South Africa, the packaging business, as I said, it's very strong, we think there are opportunities to grow it further by some investments in Ngodwana and Tugela. Also down in South Africa, as you know, timber supply is a constraint, we continue to look for opportunities to boost the supply. A lot of good work being done on the biomaterials side, we think in time there'll be future opportunities there.
Obviously the conversions of the board grades, the ramp-up of that needs to accelerate. Turning to the short-term outlook, the demand for dissolving pulp continues to be healthy. We will have the impact of the lower prices. As you know, our contracted prices work a quarter in arrears, so you will have the impact on Q3. We know that. However, the longer-term and medium-term prospects for dissolving pulp are very good, and we are confident about the pricing as we move forward and beyond. The packaging and specialty segment, strong demand there. We're ramping up, and the business is in a strong place, products being well-received and excellent quality. Yes, graphic paper markets are weak. However, with all the capacity that's coming out and including the conversions that we're doing, operating rates will increase significantly in the near future.
CapEx for the rest of the year is $370 million. Mainly the projects that I've talked about. Because of these short-term pressures for the financial year, we're saying that the second half of the year will be down on last year. That's the deck itself. I'm now going to hand you back to the operator for questions.
Thank you very much, sir. Ladies and gentlemen, at this time, if you'd like to ask a question, you are welcome to press star then one on your touchtone phone, and that'll place you in the question queue. If you are ready to withdraw the question, you're welcome to press star then two on your touchtone phone to remove yourself from the question queue. Just a reminder, should you wish to ask a question, you're welcome to press star and then one. The first question comes from Brian Morgan of RMB Morgan Stanley.
Hi, guys. Thanks very much for the call. If we could just chat about this demand decline in graphic paper. It's maybe a toughish question, but just to give us a feel, that 8% decline rate that you see in Europe and 13% decline rate you see in North America, if you were to maybe pin it down a little bit further, what portion would you say is general economic malaise, and what portion would you say is price elasticity that you spoke about in the write-up?
Yeah, it's a good question. We have done a lot of work internally on this. We estimate that the real trend line is down about 5%. Of the difference, we've attributed half of the difference to the price elasticity issue that you referred to, and the other half of the difference to the economic slowdown. That's our estimate, based on the analysis that we've done.
Okay. Thanks, Steve. Then carrying on from that, what trend decline do you forecast in your planning?
Yeah, Brian, it has been five. Obviously that's why when we talked at the beginning of the year, we put out the outlook statement as it was. I think as we go forward, and I think that's what your question relates to-
Yeah
We are using a 5%-6% decline over the next three or four years.
If the decline rates are worse than that, could you give us an idea of your margin for error? Just what are your degrees of freedom here? I think that's a better term.
Okay. Well, if you look at the capacity that's coming out, obviously operating rates are in the high 80s. If you take the capacity out that I talked about earlier from our competitors and ourselves, the operating rates are going to be in the high 90s. That gives you breathing space for a little bit of time. It probably buys you some time. If things were to continue to be worse than 5% or 6%, clearly we need to look at our own assets and whether we need to take out further capacity, whether it's through conversions or closures. We would need to do that.
Okay, cool. That's fine. If I can just ask on the U.S. with the Somerset conversion, you say in the write-up that you've achieved customer approvals for the SBS. Could you give us an idea of when you would expect to start running the kind of higher price point paper on that machine?
Okay, thanks. Mark's here with me. I'm going to just pass it to Mark.
Okay. Thanks, Steve. Hi, Brian. Yeah, we're ramping up. The machine is getting qualified with quite a few customers. We expect as we move through the rest of this year, we will see that mix start to change. We do have some very large and some very successful food service board customers, and that is actually where the machine is running the most right now. The folding carton customers are coming along, and we would expect as we get into the end of this year and going into next, it will probably be about 50/50. As we go into this time next year, we would be 75 or 70/30 with the folding carton customers to the food service, because the capacity of the machine is quite large, and we have plenty of room to service both those segments.
Okay. That's great. Thanks very much, guys.
The next question comes from James Twyman of Prescient.
Yes. Thank you. The first one is just on dissolving pulp, what your view is on pricing over the next three to six months. We have seen obviously a lot of weakness recently, the premium to paper pulp seems to be at record levels. Just some idea of where you see that, especially in terms of the Chinese market.
Yeah. I'll give you a little bit of feedback, and I'll hand you to Mohamed, who runs our dissolving pulp business, to elaborate further. From our perspective, yes, prices have come off. You are right. The current differential to paper pulp prices is as narrow as it's been for some time. Being down at $200 or less. As you know, the break-even is $300. We don't think it will go much further lower than it is currently. As we look out to next year and beyond, and you look at the supply-demand balance, both in the paper pulp markets and in dissolving pulp markets, we continue to be confident about the prospects for pricing. The fact that the price gap at the moment between the two grades is as narrow as it is, we think that creates further potential upside as well.
Mohamed, I don't know if you want to expand anything further.
Yes, Steve. I would just add that if you look at the high-cost producers for dissolving pulp, they're largely sitting in China. A major reason behind why their cost structure is very high is their reliance on imported wood. That cost continues to go up because supply is starting to be constrained for a variety of reasons. Two, if you look at pricing in terms of where it is at the moment, it's now at a point where those high-cost mills in China are in trouble. I also don't expect pricing to go much lower than where it is at the moment.
James?
Yes. Thank you very much. If I could follow up just on one other thing. In the European coated paper market, you haven't really taken a lot of capacity out. You've taken it out more in magazine, and sort of hoping that the Stora closure helps things out, which I'm sure it will. If that takes quite a long time to happen and demand remains weak, is there the opportunity to actually start looking into the next stage of conversion sort of sooner rather than later? If so, how much would that cost you, do you think?
Yeah. I'll hand you to Barry now just to expand a little bit further. Yeah, look, it's something we monitor on an ongoing basis. We monitor our competitors and based on what we hear and what we see, we do think significant capacity will come out in the near future, which will help us and help the market balance. Look, obviously the conversions are part of that process of taking capacity out, and what we've done in Maastricht is part of that. Obviously a couple of years ago, we did Nijmegen and took that out of the marketplace. There's been significant capacity come out and obviously more to come from the competitors. Barry, do you want to just add to that?
Just one thing, Steve, and that is that, if anything, the coated woodfree market for Sappi is the one where we do better. It's a natural strength. It tends to be the case that customers are beginning to sort of swerve towards Sappi as a safe haven as other people get out of the market. Our operating rates in the coated woodfree segment, particularly the sheet segment, are higher. As we begin to shift Maastricht more and more from graphics to specialties, that tends to sort of equal out the capacities for Sappi. It will be a while yet before we have to consider any further action. It will depend on just what does happen. I always think that if there is an economic effect on the demand, that will pass. It's nasty while it's happening, but it will pass.
We will go back to what Steve was talking about, the sort of 5% reduction.
Thank you very much. Thanks.
The next question comes from Lars Kjellberg of Credit Suisse.
Thank you. Just a few questions from me. Could you comment where you are today in terms of how much SBS you are producing in Somerset, and what do you expect that to be in, I guess, your fiscal 2020? Also if you can have any view or share your view on what it means for your dissolving wood pulp business if China goes ahead to remove the duties as they've been discussed from various countries, while including, I guess the benefit would be for you for the Cloquet business, but overall for you as a company, what that really means, if anything. Also when you talk about integration of pulp or increase the degree of integration, is that simply because you're shrinking your paper business, or is that really some initiatives to drive up your own pulp production?
Yeah. Okay. In terms of the SBS, as Mark indicated to you, there are other grades on the machine. By the end of this financial year, the total packaging and grades on the machine we estimate is about 130,000 tons, Mark.
Yep.
Your question, I think, was to the end of 2020?
Yeah.
250,000 by the end of 2020. The second question on duties. Bear in mind, you're right, we haven't been selling from Cloquet into China. The removal of the duties theoretically would create an opportunity. Bear in mind that a large proportion of our volumes is committed to long-term customers. I don't really think it's going to have much impact on Sappi either way. The pulp integration. Yeah, the smaller projects, particularly in Europe, because that's where our pulp integration is lowest. I think we're about 51% at the moment. Barry, maybe just talk about some of those smaller opportunities.
Yes, Steve. We have possibilities to move our integration rates to just over 60% with relatively low capital expansions, both in Lanaken and in Ehingen and in Alfeld and Stockstadt. Beyond that, you would need to do something bigger, possibly at Gratkorn, to get us up to around about 70%. That's kind of where we feel the comfort rate is.
Yeah. Just to emphasize Barry's point, we want to get it up to 60 as near as possible. Then, obviously we'll evaluate that Gratkorn project and see what that entails.
Steve, you mentioned tail end of 2017, you came up with this brilliant word called Chexit, as China exited from export markets. Have you seen any change or any return of the Chinese in any market as pulp prices have come down? Is that a factor in seeing the European exports come down quite appreciably in spite of a big increase to the U.S.?
No, we haven't really seen that happen. Not as of yet. Obviously, it's a dynamic environment and we're monitoring the situation, but not as of yet.
Okay. Final question from me. Interesting to hear your comments about strong packaging demand, et cetera, when most packaging companies aren't necessarily saying the same. Where do you see that strength, and what sort of segments would that be in specifically?
Obviously, a big part of that's actually in South Africa. We've done tremendously well on our containerboard site down in South Africa, and that business makes excellent margins and continues to grow. As I said in the deck, we think there are further opportunities. I think that's when you're talking containerboard itself. On the paperboard side, both in Europe and in the U.S., yes, we're ramping up. As we talk to our downstream customers, there is a drive for paper-based solutions, and that's what's giving us the confidence that we can ramp up quickly following the conversions. Barry, anything more you want to add there, Barry?
Well, just one thing. On the lightweight side, it's true that there have been a number of bankruptcies in Europe, and that has tended to have the same sort of effect as in graphics. Customers are going for safe havens, so they come to a financially strong company with multi-sites, and that's Sappi comes very quickly into their picture. They shift volumes to us from suppliers that are no longer there. That's clearly helping our operating rates.
That makes sense. Thank you.
The next question comes from Rossouw Kruger of J.P. Morgan.
Thanks, everyone. Just on specialties, even if you assume you're making around 1% EBITDA margin, say, on the new volumes, it still looks like there's quite a significant decline in what you'd maybe call the organic part of that business. Wondering if you could maybe just talk about the real key drivers behind that.
The margin in the specialties packaging side?
Yeah. You've chatted about a few things, just the real key reasons, because it looks like quite a big move down.
Yeah. The pulp integration percentage that Barry and I were referring to earlier in Europe is 51. However, for the packaging and specialties side, it's only 30%, if you look across the mills there. It has had a much higher impact. As you look globally across the group, because we've been going through this accreditation phase with customers, you're not selling at full pricing. It's called second quality. It's not that it's a weaker quality than ultimately. As you bring on board new customers and as you are demonstrating to them the consistency of your product, the reliability of your service, all of those things, you don't get the optimized selling prices. That does ramp up over a period of time. There's the mix issue as well, and Mark talked about that.
We're still ramping up on the SBS side, that's higher priced product than the other grades. Maybe, Mark, anything you want to add?
I think you've covered it well, Steve.
I think you've covered it well. There is a mix of different customers in the SBS side of Somerset, and that mix will change as we get more and more qualification.
Yeah.
Okay. Thanks all.
Sorry, Ross, just one other thing you have to remember as well. When you're testing the product, you're using machine time.
Right.
You're carrying fixed costs associated with testing that product. You are not getting the margin. This is exactly what we saw when we experienced Alfeld as well. Ultimately, as you ramp up and the capacity grows and you have more and more customers on the machine, you're not switching between so many different grades and so many different products, and you're getting full prices for your product, and the product mix is improving. All of those things help the profitability.
Thanks, Steve. That makes sense. Thank you.
The next question comes from Alexander Berland of Bank of America Merrill Lynch.
Thank you very much. I just wanted to get a little bit more color on you calling H2 down year-on-year, just the drivers. You spoke about, obviously dissolving pulp price, pulp price is down, and then also on the volume on the graphic paper side. It feels like, and correct me if I'm wrong, but if I look at on prices at least where we are on spot, you're probably still looking at prices up a bit on coated woodfree, year-on-year for H2. Folding box board a bit up, if you look in the U.S. on the SBS side, obviously you're still improving your product there, but not having seen too much weakness there either if you look on a year-on-year basis.
Finally, on the paper pulp side, hardwood, softwood, you've been talking a lot about how there's been a big cost headwind from you, now it's come down quite a lot, if you look at spot prices just now. I'm just trying to understand the different drivers for H2 being lower. On top of that, if I may, in your bridge where you look at in your presentation, you said you had $76 million negative headwind from variable and delivery cost. Just of that, how much of that, if you can comment, has been from the pulp prices?
On the dissolving pulp, it's common knowledge what the spot prices in the marketplace are, they are currently, Mohamed, at $848.
That's correct.
They've probably come off $40, $50 over the course of the last few months. Our business is priced quarterly in arrears. We didn't have the impact of that lower selling price in Q2. It's going to be in Q3. That is a big part of it, of why we talked down. In terms of graphic paper, yes, we did have the weaker markets, and we did take significant downtime. However, there is some downtime in Q3 as well. You've got to take that into account. The paper pulp prices, bear in mind there's a bit of a lag there. We sit with inventories, and that's got to work its way through the system. Typically, in terms of its impact on the P&L, you're probably talking a month or two behind. You don't get all the benefits immediately. It progressively gets better.
The final question was on the variable costs and how much-
Yeah, how much of that was pulp?
How much of that was pulp? The majority of that is, as I was saying, pulp. We had some increases in wood costs and some slight increases in the energy cost, but the bulk of that is pulp.
Okay. Is it fair to assume then, be it with a bit of lag, but given that pulp prices are reversing now, that that is the extent of reversal you should get on the variable cost side?
Yeah. Obviously over time. Cognizant of the fact that there is a time lag that I referred to earlier. Yes. Theoretically, if the prices went back to the levels they were 12 months ago, then you would get much of that back.
Just so I understand, when you give that outlook, do you expect prices to stay at spot for the rest of the year, or do you expect any further decrease in other grades? Do you expect any increase in the paper pulp prices?
Look, in the short term, we do think paper pulp prices will come down a little bit further. We do think that that will help the business. Longer term, who knows? I talked earlier about the supply demand dynamics, we think the market for pulp, generally, whether it be paper pulp or dissolving pulp longer term, means that prices are going to be relatively high. In the immediate short term, we do think the paper pulp prices will continue to come down.
Okay, thank you very much.
Ladies and gentlemen, just a reminder, should you wish to ask a question, you're welcome to press star and then one. The next question comes from Zennon Kiran of Munich and Co.
That's me. Zennon Kiran. Good afternoon. In terms of the outlook when you say for the full year, you expect it to be down year-over-year, I'm guessing you want to leave it at that. Is there any further comments you can give as to the magnitude of that?
No, not really. If we thought it was going to be materially down, we would've said materially down.
Okay. That's helpful. In terms of the 1.5 million ton of capacity that you expect to be taken out of the European market, that's purely coated woodfree?
Yes.
You don't have any from Sappi in that number, do you?
Obviously, on mechanical, there's also capacity coming out on that side as well. We estimate that could be as close as to 1 million tons.
For mechanical, you expect 1 million ton.
Yeah.
On top.
Yeah.
Um, at one point-
Coated woodfree, about 1.5.
Okay. In that 1.5, you don't have any from Sappi, do you?
Well, as I said earlier, the Maastricht ramp-up, that will take about 130 over the next couple of years up.
Okay. Right. This 1.5 million tons, that's over a 6 million ton market. Is that right?
Yeah. A bit more than that. I think it's 6.8 million tons.
Okay. In terms of your capital structure, obviously just recently done a transaction. Just to confirm, you don't have any plans to come back to the markets for the remainder of 2019?
No, not at this stage.
Great. Thank you very much.
Sorry, just one thing. Sorry, that coated woodfree market, I said 6.8, 6.4 million tons.
Okay. Out of the 6.4, one and a half million ton.
Yes.
Okay, great. Thank you.
The last question comes from Remy. Sorry, apologies. Nicholas Remy, Octal Management. Hello, Nicholas, your line is open for questions. You can go ahead.
Hi, guys. Sorry. Thanks for the call. Just regarding the national energy regulators announcement about the electricity price hike of 9.41% in April, and how this is to be followed by a further increase of 8.1% in 2020 and 5.2% in 2021. How do you expect this is going to impact your operations, and do you plan on offsetting this increase?
Okay, thanks. I'll give that to Alex.
Thanks. As you're aware, we are largely self-sufficient. We're about 65% self-sufficient in our own generation. We also sell into the grid. We don't think that this is going to have material impact, because as we also are doing further projects in terms of increasing own generation.
Okay, great. Thanks. Also, what's your expected working cap over the next two quarters? Sorry if you've already answered that.
We expect it to come down by between $50 million and about $70 million off of the levels that we had at the end of March. That's a normal season.
Okay. Great. Great. Thank you very much. Cheers.
Gentlemen, that was the final question. I would like to hand the conference back over to Mr. Steve Binnie for closing remarks. Thank you.
Thank you, everybody. Thanks for joining us on the call. We look forward to discussing our results with you at the end of Q3. Thank you very much.