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Ladies and gentlemen, thank you for standing by, and welcome to today's Mondi Group plc quarter 3 conference call. [Operator Instructions] I must advise you that this conference is being recorded today on the 15th of October 2020. Without any further delay, I would now like to hand the conference over to Mondi Group's CEO, Andrew King. Please go ahead.
Good morning. I'm Andrew King, your Group CEO of Mondi. I would like to briefly summarize the morning's announcement before taking any questions that you may have. Firstly, we delivered a resilient performance in the third quarter with good volume growth in Uncoated Fine Paper and our fiber-based packaging products and ongoing good cost control. This progress was, however, more than offset by the impact of planned maintenance shuts, negative currency effects and the lower average selling prices. As a result, overall, underlying EBITDA was EUR 306 million for the period, down 20% from the comparable prior year period and down 13% sequentially. During this period, we paid an interim dividend of EUR 237 million, and we redeemed our 3.375% EUR 500 million Eurobond from available cash. Our financial position does remain very strong with liquidity of around EUR 970 million at the end of the period. If I look then at the performance per business unit. In Corrugated Packaging, we saw demand from e-commerce and consumer applications remaining strong. We also saw good recovery in industrial end uses from the lows of the second quarter. We achieved good volume growth overall in corrugated solutions, measured both year-on-year and sequentially. Given the strong order position and normalized inventory levels, we are currently in discussions with customers around price increases for the various containerboard grades. In Flexible Packaging, demand remained resilient during the period and volumes in our paper bags business grew year-on-year. Following a strong performance in the first half, we saw -- did see some supply chain destocking effects impacting volumes in our consumer flexibles business during the quarter. We continue to leverage our Engineered Materials' coating technologies to develop sustainable packaging solutions. As expected, we saw lower personal care component volumes as a key product matures. Demand in industrial and specialized end uses continue to be impacted by lockdown restrictions, in particular in release liner. We are implementing a range of measures to reduce the cost base in this segment. Encouragingly, in Uncoated Fine Paper, demand did improve as lockdown restrictions in Europe, Russia and Southern Africa eased, with a gradual pickup in activity in schools, offices and commercial printing. Sales volumes were significantly up sequentially, although they are still down on a comparable prior year period. Average uncoated fine paper prices were lower than in the first half of the year. Our South African operations are currently affected by an industry-wide strike. We are engaging with the trade unions and employee representatives to reach an agreement, while we continue to deliver products to our customers. This business unit remains well positioned in the context of the current market challenges, given our cost competitiveness, product diversification and geographic positioning. Before turning to the outlook, just a few other points to highlight. I'm very pleased that the sustainable packaging continues to be a strong focus for our customers. We continue to make good progress in this area. Similarly, our major capital investment projects are progressing according to plan. As previously communicated, we have -- we did postpone most of our planned maintenance shuts to the second half of the year. This was done to protect our employees and suppliers and minimize execution risk. Full details of the shuts are reflected in the announcement. Finally, I would like to recognize the enterprise and commitment Mondi employees have shown, taking care of colleagues, communities and customers in these most unprecedented times. Finally, looking ahead, the macroeconomic outlook continues to be uncertain. However, we are confident that the group will continue to demonstrate its resilience while remaining well positioned for when the recovery does take place. Our confidence is underpinned by Mondi's integrated high-quality, cost-advantaged asset base, culture of continuous improvement, portfolio of sustainable packaging solutions and the strategic flexibility offered by our strong cash generation and financial position. With that, I'd like to hand over to you for any questions you may have. Thank you.
[Operator Instructions] We have the first question on the line from Alexander Berglund from Bank of America.
Hope you're all doing well. I'd like to ask both on containerboard and fine paper, but maybe to start with containerboard. And it seems like we're having a bit of a tighter market right now and then you're in price negotiations. I was wondering if you could give a bit more color on the drivers here. Is it -- should we see that's mainly as a stronger domestic demand in Europe? Or is it also kind of China importing more, which has been a topic? And on China, do we know kind of how much of the increased imports are coming from Europe versus other neighboring Asian countries? And then just finally, on containerboard there, how do you see kind of China going forward? Do you think that it could be a reliable buyer of European containerboard? Or do you think it will be a bit more kind of opportunistic, depending on what prices are in Europe versus -- relative to other Asia? I'll stop there on containerboard, and then I'd like to move on to fine paper. But I'll let you answer that first.
Thanks very much, Alex. Yes, I think certainly we can confirm that the markets -- the containerboard markets are tight, and hence, the reason we are discussing price increases with our customers. We are seeing strong order books, good inventory or normalized inventory levels and all the normal indicators for price discussions. In terms of the drivers behind that, it's, of course, always very difficult to determine in the short term exactly what the causes of that market dynamic is. I mean, clearly, we are seeing a good demand situation in Europe. Clearly, again, things have picked up. I mean it's been resilient, I believe, throughout the lockdown period, et cetera. But of course, we're also seeing a sequential improvement certainly in our downstream businesses, as we've alluded to already. And I believe that's an industry-wide phenomenon, albeit, I think we've done particularly well there. We are well placed geographically, and I think we're doing well within the markets in which we operate. But I would suspect that there is a general pickup in demand across the European landscape. I think, similarly, as you alluded to, I think the Chinese import situation continues. Unfortunately, we don't have up-to-date data on Chinese imports, so I can't comment on exactly what they're doing, and also similarly, where the volumes are particularly coming from. But it would certainly appear that there is no reversal of the trend that we saw in the first half of the year where it's, demonstrably, the Chinese imports were up quite materially. I think it was up to 2 million tonnes higher on a year-to-date basis by the end of the first half on the official statistics. So I certainly don't see any reversal of that, and anecdotally, that doesn't feel like it from what we've seen. And I think to your question on the longer term, I think it's a clear rationale for why China can be, as you -- in your terms, a reliable importer from the rest of the world. It goes without saying that as they locked down on the import of paper for recycling, they have to find containerboard from other sources. Some of it will come from importing a recycled pulp. But I believe long term, that is not an economic solution. It's appropriate potentially to support existing machines in China if you cannot fill them with imported raw material. But longer term, it doesn't frankly make commercial sense. So I think it's a strong argument for why China does become, call it -- as you could say, a reliable importer of containerboard. It will come from all sorts of different sources, but clearly, some of it will come from Europe. And Europe being effectively long in wastepaper, it does make sense to be a sort of supplier for containerboard in the long term for China.
Just quickly on fine paper. I mean your comments seem quite encouraging. You're talking about significant improvement on a quarter-on-quarter basis. I know this is just a trading update, but given it has been an investor concern, is there any more detail you can say there on kind of percentage terms or any scale kind of on the improvement you've seen quarter-on-quarter or how it's been on a year-on-year basis?
Yes. I think as you rightly said, it's a trading update so I won't be getting into too much detail on it. But very clearly, I mean, Q2, the low point from a volume perspective, makes perfect sense because that was the height of the European lockdown in particular. And also in our context, South Africa took a very strong lockdown through that period, and that materially impacted demand, particularly with offices shut, with schools shut and all the commercial printing also then significantly affected. Into Q3, we've seen -- and it was almost directly correlated with the easing of lockdown measures, we did see a nice sequential pickup, albeit we are still lower than we would have been this time last year if you look at Q3 in isolation. So I think this question of how much, call it, permanent demand side loss you've seen from COVID is always going to be extremely difficult to determine because, again, I don't believe we're yet in a back to normal. I would hope, from a personal perspective, that we are not back to normal in terms of the way people are having to conduct their lives at the moment. But I think it would be naive to assume that there isn't going to be some permanent destruction in demand in the fine paper space, and the supply side has to respond to that.We're, in that context, I believe, continuing to strongly outperform the market. We said that at the half year that, yes, our volumes were down but not nearly as much as the market in total. And I think similarly, the recovery we've seen in the Q3, we have outperformed again. Certainly, the European data would suggest that, and that's very encouraging and I believe a function again of our customers looking for that security of supply that comes with ourselves being a long-term player, structurally well positioned on the cost curve and also offering the full portfolio of solutions for them. I think that's a very compelling proposition, and it's reflective of the fact that we continue to gain share even in these difficult times. So I think you will see more of that. Similarly, I believe, that you will have to see capacity coming out of this market over time, but there is a lot of high-cost capacity, which is under extreme pressure right now.
Your next question comes from the line from Wade Napier from Avior.
Just a quick question on the Štetí specialty bag machine that's set to be commissioned in Q4. Given that, that's a conversion project, am I correct in assuming that the ramp-up curve of that mill will be significantly quicker than a normal ramp-up curve? And maybe you can give us some color on that. And then the second question, on the Uncoated Fine Paper markets. I think as you alluded to, Andrew, we would be naive to assume that there's no long-term impact of COVID. I mean maybe you can give us an idea of, I mean, what the difference between a supply in the domestic market in Russia or Southern Africa is versus supplying an export-based market out of Russia or South Africa? I mean what sort of margin impact would that cause going into export markets?
Thanks, Wade. I mean, Wade, on the issue of the Štetí bag machine ramp-up, yes, you're correct in the sense that a rebuild of an existing machine clearly has a different type of ramp-up profile to a commissioning of a new machine. And yes, we would expect to be able to get up and running pretty quickly. By the same token, obviously, what you are doing when you're doing a rebuild is you're having to take the machine itself down for a prolonged period of time, whereas, obviously, on a new machine, it doesn't affect the existing operation of the plant. So that's, in a way, the trade-off there. But that is -- we factor that into that guidance we're giving around, what we call the maintenance shut number for the -- for Q4. It does effectively include the time we are taking to -- while that machine is down for the rebuild, and it is protracted in that case. So it will be down for over a month. That particular machine in Štetí, it's actually down at the moment. That's what we -- that is, we are in the process of doing that rebuild. But yes, once that's done, it should ramp up relatively quickly. On the question of the UFP exports versus domestic, yes, I mean, it goes -- typically, you would be saying you should always be trying to sell as close to home as possible. There's always exceptions to that depending on sort of product mix and the like, and so invariably, exports are typically less profitable than imports. But it's extremely difficult to generalize. I mean, in South Africa, we typically do export to the Southern African region as well. And those can be profitable as well, but you would always prefer to sell into your domestic market. Likewise, when you talk about Russia, it's really -- we regarded the CIS as our core home market for our Russian production. We are demonstrably more cost-competitive than imports. In the Russian context, one has to recognize that Russia has typically -- or CIS has typically been a net importer of paper. So I think if your question is, what happens if demand declines in the CIS, and do we have to export more? I think the logical first step is that it would squeeze out imports. Because, clearly, imports cannot be as cost competitive as the domestic producers, particularly now that we've seen some devaluation of the Russian ruble, which makes those importers even less competitive. So I think that's a more likely outcome than the domestic Russian producers looking to export significant quantities.
Your next question comes from the line from Lars Kjellberg from Crédit Suisse.
I just wanted to return a bit to strength in demand you've seen in containerboard and your price discussions, as you call it. So where are we in demand in terms of year-on-year performance? If you can share that, that would be of interest, and in comparison to where you were trading in the first half.
I think if -- again, Lars, I mean, we're talking about our -- if you look at the downstream business, the corrugated solutions, which ultimately reflects the end demand use, we are both -- as I mentioned, both sequentially and year-on-year up on corrugated. At the half year, we indicated we are around 4% up, I think, year-on-year. And it's not actually a dissimilar number if we look at it in the Q3, in fact, slightly higher than that. So I think our corrugated solutions would indicate that the demand is strong. Clearly, though, that is not illustrative of the whole of Europe. And as a regional player in corrugated, we don't have that type of insight into the pan-European corrugated position. I think it would be lower than that because I think, a, we're in the right geographies from that perspective; and secondly, I think we're doing well within those geographies. But I think it does indicate that there is a decent underlying demand growth -- or demand recovery, should I say, in Europe more broadly. Certainly, that would be indicated by the general industrial -- industry stats that you see. And as I said earlier, to Alex's point, I think it is also supported by some strong pull from exports mainly into China. And that combination, I can only reiterate, has tightened up these markets. Clearly, there's some supply side effects as well. I think people have been focused very much on this new capacity coming in. As always, new capacity doesn't hit the market all in one go, and it takes time to get into the market. Similarly, there's obviously been a number of maintenance shuts. I mean, we, as you know, have had to push our maintenance shuts into the second half, and I'm guessing a lot of other players are having to do that. So that's probably impacted supply side in the short term. So all of these things have tightened up the market. So I think, again, we can only talk about what we see in front of us, which is a very strong order situation and a lowering of the order level -- or stock level from what they would have been in the first half of the year.
And in terms of, again, looking to the future, I guess, we -- the one segment that is very important that you get some sort of momentum in now is in the sack kraft business and into -- especially in the construction area because of those annual contracts. So what sort of momentum are you seeing in that? And I -- we've seen a couple of -- I guess, kraft paper price increase has been announced in the U.S. I haven't seen anything in Europe as of yet. But where do you see the order books in that business and momentum in particular, as we're heading to the price negotiations?
Yes. So as you rightly said, the year-end price negotiations are all important in the sack kraft business because you do have a lot of annual contracts and the like. I think we've been, I would say, pleasantly surprised by the strength of that business. It's always been associated with more cyclical demand side pressures because of the construction and building materials type of exposure. As we said at the half year, and we'll only reiterate, that -- those end users have been very resilient, I believe, through this period. On top of that, obviously, in kraft paper these days, you're getting a lot more growth in the more consumer type of applications. And that is also supporting the resilience of the demand side picture in that business. So I think it's a fairly resilient picture. Pricing, as a consequence, has been pretty stable. There's been some marginal drift in pricing over the course of the quarter, I would say, some downward drift, for want of better term, but it's really on the margin. Otherwise, a stable environment. Clearly, it's frankly too soon to predict exactly what the dynamic will be into those year-end negotiations, but I am encouraged by what is a decent demand picture. Our export position, which is very important in that context, had certainly improved if you look depending on the subgrade. Similarly, our business -- as we have mentioned, our bags business sequentially and on a year-on-year basis is up in volume terms. Now again, that's partly a reflection of the overall market. As you know, we're a sizable player in the overall market, but also, I believe, a function of the fact that we continue to outperform again because people are looking for security of supply in this current world. And if you can supply from a number of different plants, that obviously is very important. And I think there's a trend towards shortening of supply chains. I think people have realized that big, long supply chains when you're importing a lot of volume and the like can be dangerous, as evidenced by the challenges through the COVID lockdowns and the like. So I think people are going more local in that sense, and that plays to our strengths as a big -- with a wide production base, and typically producing for the local market. So I think all of those things have contributed. But generally, I would say, a decent demand environment. Definitely, obviously, no new supply on the horizon, which is encouraging. And so that's the sort of scene as we go into the year-end price negotiations.
Andrew, just 2 final for me. If you can give us a status update on Ružomberok and when do you expect that to start up? And also, how should we think about maintenance for next year? Kind of appreciating that everything has been pushed into the second half this year, but that -- does that have any impact on next year's planning for maintenance?
Yes. Just in terms of Ružomberok, I mean it's very much in line with the guidance we gave at the beginning of -- at the half year, which will be H1 next year. And we're very much in line with that and making good progress on that machine. So we're very encouraged by that. And just to remind you, I mean it is a unique product in that it's a virgin combined with a recycled product. So having both the strength attributes of virgin, but also the cost advantage on the recycled side. So we think that, that's an extremely compelling offering. I didn't quite -- sorry, catch the proper -- the full question on the...
No, I was just thinking about the timing of maintenance as everything's been pushed in. It's not as if you're going to bring down the big mills again in the first or second quarter because you've just taken them down in H2 this year. So it's more thinking about what does that mean? Can you extend some of the maintenance activities and push it into the year after? Or do you...
No. No is the short answer. I mean we would typically -- I think you run -- it's never a good idea to take too long a period between your maintenance shuts. Clearly, it does have some impact on the scheduling within next year in terms of the timing. It's fair to say that we've obviously taken -- certainly of the shuts, we've done more, call it, light shuts than we would have otherwise done because of the COVID restrictions because we've obviously been very sensitive to how many people we can have on site and the like. And obviously, the travel restrictions that apply have meant we've adjusted to some extent. I'm frankly extremely pleased with the way the shuts have gone because there are always operational risk when you take your machines down. But our people have done a fantastic job often with only remote support from the equipment suppliers and the like, which is unusual because, typically, you would have those people flying in. So we've done a great job in that respect. But it doesn't necessarily mean that next year, we would have a, call it, lighter maintenance schedule. If any, actually, I'd be guiding to a heavier maintenance schedule next year, but -- not for COVID reasons, but really just driven by project-related reasons, the most important being that in South Africa, in Richards Bay, we will be taking a longer shut next year as part of our modernization program. As you know, we're doing a full modernization of the -- particularly the recovery boiler. That will be down for longer next year. So if anything, I'm guiding to longer shuts and a longer -- a bigger impact of shuts next year than this year. And there will be some element of, call it, catch-up on some of the activities that you wouldn't have done this year because of the restrictions of people movements. It's not particularly material, but it's relevant. So if anything, it's the other way around to, I think, what you alluded to, which is maybe that you could take a breather on shut for a year. It's anything but that.
Your next question comes from the line from David O'Brien from Goodbody.
Just a few for me, please, if I could. In terms of the destocking you're seeing in consumer flexibles, has that continued into Q4? And how long do you think that phenomenon will last? And on the containerboard side, you were pushing for a testliner price increase in Poland in October. We're midway through the month now. So what has been the outcome thus far? And then finally, you talked about shifting your maintenance, going into the second half this year. Could you quantify in tonnes what type of containerboards you've essentially taken out of the market for H2? Or is it too simple to look at it like that?
Yes. Thanks very much, David. I mean in terms of the consumer flexible's stocking and destocking, as it were, no, I think that is normalized now. There was an element of reversing of that stocking effect in Q3, and I -- but I think that is now finished. And again, I have to stress, it's off a high base that we were talking about that because Q2 was particularly strong because of the stocking effect that took place. So there was some reversal of that in Q3. But it's now, I would say, normalized into Q4. Clearly, in terms of end-use applications, like so many other things, it has been affected by the COVID effect. So you're seeing less, call it, discretionary buying of products. When we all go to the supermarket shelves and you buy that snack bar on the way out of the supermarket, we're not seeing as much of that type of activity. But at the same time, the essentials of what you buy online to -- for cleaning your house and feeding your pets and your children, that is still very robust. So in total, very resilient, as one would have expected of what is a business where 95% of that business is into those consumer nondurable type of applications, food, beverage and other household type of products. So certainly nothing to be concerned about. It's just an ebbing off of the very strong period that we saw through the first, and certainly, the second quarter. I think on the price increases in containerboard, it's -- all I would say is we have ongoing discussions with our customers. I have every confidence in these price increases. I think they are fully justified, and I think there's a recognition in the market that they are fully justified. So we are in the process on those. Obviously, they're all in different stages of maturity because, as you recall, there was the initial discussions around the recycled side. Those have now progressed to the kraftliner side. And I have every confidence of getting price increases. And I believe the full EUR 50 is justified. So we will continue those discussions with the customers, but I -- you will see a price increase. On the -- in terms of tonnes, we don't normally disclose exact tonnes of downtime. I think a better indicator is, simply put, that -- those profit impacts, which tries to summarize the full effect of the maintenance shuts. Clearly, containerboard, there would be some tonnage out of the market or out of production as a consequence of it, but it's a fairly normal occurrence. And -- but yes, we wouldn't be giving you explicit tonnes.
Okay. And if I could just tag on one more. If you'd give us some commentary on how corrugated box prices have trended from Q2 into Q3?
Yes. Again, I would stress, David, I mean we are a regional player here. Clearly, we operate in places where we're not also just euro-denominated. So you have a number of different currencies, not least, for example, the Turkish lira in our mix, as it were. And of course, the currencies themselves can play a big part in the averaging effect. But if I was to try and generalize around that, clearly, as we've seen the containerboard prices coming off over the course of the last 2 years really, we have seen some tracking of that through the box prices over time. I think they've held up probably better than some people might have anticipated through that period. But there has been some mild erosion in the box prices. But when you reflect on it, containerboard prices has now been relatively stable for most of this year. There was a bit of an uptick in containerboard, as you know, in the middle of the Q2 into Q3 that was given up through Q -- well, sorry, Q1 into Q2 that was given up through Q2. And so really, containerboard has been fairly stable, albeit there's been some price erosion through the Q3, and the boxes have reflected that.
Your next question comes from the line from Barry Dixon from Davy.
A couple of questions, Andrew. Firstly, can you give us a sense as to where inventories are? You say that inventories have normalized. Can you give us some sense as to where that is and how you see those tracking through the fourth quarter, particularly in terms of the downtime -- a lot of downtime that seems to be -- about to be taken across the industry, including yourself?And secondly, could you give us some sense as to what's going on with input prices? And particularly, I'm thinking things around timber, OCC and resin prices. And you're saying they were broadly stable through the third quarter. How are you seeing those trending now into the fourth quarter and into next year?
Yes, Barry, I mean, you probably also have access to what industry data is on the inventories. Typically, I think the inventories at an industry level, as we see them, are below what they would have been this time last year, as an example, which is encouraging. Certainly, our inventories are under good control in that respect and are at relatively low levels. And just to clarify in terms of the shuts and things like that, we are largely done with our containerboard-related shuts. The only one that is still in progress is at Richards Bay, which obviously makes a white top product for us. But we are finished with Russia, finished with Poland, which is obviously a very important one for us. So those were done in Q3. And into Q4, we should be back into full production at those operations. So yes, I think the industry inventory levels are typically a bit lower than they would have been this time last year. Certainly, that's similarly reflected in our inventories. On the cost side, yes, I mean, as we say in the press release, it's pretty stable picture. We did highlight at the half year that clearly, year-on-year, we've seen a material drop in a number of input costs, but we weren't expecting much more on a sequential basis from there. Similarly, we weren't looking for much a way of cost increases on a sequential basis. And that is very much what has played out. Obviously now, context and things like the maintenance shuts do bring some additional costs, but that is -- that was in the Q3 numbers. But in terms of input costs, it's relatively been sort of stable going Q2 into Q3, which means year-on-year, they're clearly down. And as we go into Q4, again, the situation remains pretty stable there. Big input costs like wood, chemicals, energy and the like are pretty stable. Clearly, the one, one would -- might point to, which is a bit -- has shown a bit of an uptick recently is the OCC price, which has gone up back end of Q3 and sort of is now tracking a bit higher than it would have been on average for Q3. So I guess that's the only cost item that I might point to there, which has shown a bit of cost inflation on a sequential basis going into Q4. Maybe related to the costs, we do highlight the currency effects where we are seeing -- we saw something of a headwind, Q3 versus Q2 on the currencies. That, if anything, has continued into Q4. Clearly, the weak dollar plays a part, not so much on the cost side, but on a revenue basis because we sell a lot of dollar-denominated products. And we do have a dollar business as well. And then -- but then you've also got some of our production currencies, Central Eastern Europe production currencies, also the Czech -- I mean the Czech koruna, also things like the Swedish krona are a bit stronger versus the euro. And that has an impact on, call it, the euro cost base, but in local currency terms, fairly benign. But that's something just to be noted, which is -- was a headwind in Q3 and has continued to be, if anything, sequentially is slightly higher -- more of a headwind into Q4. Of course, that can also reverse quite quickly. But as we sit today with the spot currencies, there's a bit of a headwind there.
Okay. And just one follow-on, if I may. You sound very confident around the containerboard price increase. Can you give us some sense as to the level of support there is across the industry in terms of implementing those increases. It certainly seems that maybe some of the newer capacity of the German independents aren't quite as confident in terms of those price increases.
Barry, I can't talk to what our competitors are doing. I can only talk to what we're talking to our customers about. And we're talking about a price increase for our customers, which we think is fully justified. What others might be doing is up to them.
Your next question comes from the line from [ Sean Angora ] from [ Cronox ].
Just my first question, in terms of Engineered Materials, if you look at the -- the volumes you're tracking in H1, it was down around 6% or 7% year-on-year. Is that a sort of similar trend going into Q3, before I move on to next question?
Yes, Sean. I mean we made it clear that -- I mean there are 2 issues affecting the Engineered Materials business. The one is the ongoing structural challenge we have in what we call our personal care components area, where we've said we flagged that for some time now we've got the challenge of a maturing product there. There's also some technology changes and the like which we're having to adapt to. And that's a lot of the reason why we're also addressing the cost base at our Gronau facility. And then on the other side of things, you've got what I would define as a more of a cyclical issue with -- particularly in the coatings applications, where you do have a number of industrial type of applications from aerospace but also to graphic arts and the likes. So when you're not having conferences and Euro football championships and the like, that clearly impacts demand for the graphic arts type of applications. And that is impacting that business. Now I firmly believe that, that's -- that part of it is cyclical in nature, and I think a lot of that will come back. But at the same time, we don't just certainly wait for that. We're taking action to make sure that our -- again, our cost base is structured properly, and we are rationalizing the capacity there -- or rationalizing the plant network there, and we'll be transferring the relevant volumes to other plants. But it's important that we respond to that pressure. So it's really a combination of those 2 factors, which have -- are pressurizing that business. And as I said, we are taking proactive measures now to respond to that. But yes, Q3 has been further impacted by all of those measures.
Okay. Great, Andrew. And then just going back to Uncoated Fine Paper business, I know it is tried and that in January you don't want to comment too much on what the actual underlying order books have done. But sort of we're now sitting mid-October and outside of the SA facilities being impacted by strike, I mean, is Mondi having to slow production at any of its facilities? I'm just trying to get a little bit of insight into where this order book is at the moment.
No. I mean as I said earlier, we're in the fortunate position that we are, I believe, gaining good share from more vulnerable competitors. And that, combined with the general we pick up in the market, means that as we sit today, we are running pretty full across our operations, as you say, with the exception being the disruptions in our South African operations.
Your next question comes from the line from Justin Jordan from Exane.
Clearly, you've given quite a lot of detail on the volume and pricing environment, so I'm not going to ask anything on that. But can I just ask something on sustainability? Clearly, you've had some success year-to-date in new contract wins in things like paper bags and then essentially your -- sorry. I'm just wondering, has COVID impacted sustainability as a sort of growth area for you, as it were? Clearly, it's slightly difficult to demonstrate products in lockdown to customers as it were, but are the underlying drivers of sustainability still a key growth area for Mondi in the coming years?
I think the very short answer is yes, absolutely. I think what is, I think, very encouraging -- I mean as you rightly say, you could have easily expected that in the -- with all the COVID disruption, et cetera, that people's priorities might have shifted, but I think it's been anything but that. Certainly, every -- all the conversations we're having with our customers is frankly centered around the sustainability initiatives and the drive for more sustainable packaging. And frankly, not just the packaging solutions within the paper side, we also have opportunity, for example, driving more of our recycled grades and the like -- or the recycle-based products and the like. So I think there's a continued trend here. I mean it's a long-term trend, and it will -- it's not -- it's going to take time for the whole -- the full impact to come through. But again, we are, I believe, uniquely positioned here because we are genuinely seeing opportunities arising that allows us, for example, to produce -- to present the full suite of products that we make to those key customers, being everything from the pure plastic solutions that are clearly still required because there's a lot of functional properties that you simply can't replicate with, for example, paper-based solutions. But similarly, wherever possible, we are able to also introduce the paper-based solution. And I think that is a unique proposition. And we certainly are spending a huge amount of time with our customers discussing all of these different solutions. And I think we're making very good progress. And that said, I have every confidence that this will remain a core driver for us into the future. And similarly, we are extremely well positioned for it. So yes, it's very encouraging, in my view, that we haven't seen any dampening of that resolve amongst our customers to drive more sustainable packaging.
Okay. And I had just one quick follow-up. And clearly, you talked at the half year about some raw material cost inflation -- increasing, OCC is very volatile. But what are you seeing in terms of cost inflation/deflation in, let's say, the chemicals you use or is it starch or in energy cost, for example?
No. As I said, I think it's fairly stable. I mean, obviously, there's always moving parts in all of that. But as I said, the only one, one could really highlight as being something different, if you look at it on a sequential basis, is the OCC. Typically, those other costs are fairly stable now. Obviously, it could always change. I mean you mentioned chemicals, energy and the like. Clearly, there's always going to be some sort of correlation to the oil price and derivatives of that over time. So if -- and as we know, that is always going to be volatile. But at the moment, we're seeing no real cost pressures, on one hand, or relief on the other on a -- certainly, on a sequential basis.
Your next question comes from the line from Brian Morgan from Morgan Stanley.
Andrew, how are you feeling about Oulu converting to kraftliner in the next couple of months? It comes through in the next few months. Could there be a potential flattening in the virgin market?
Yes. Brian, I mean this is something we've known about for a long time. So I think it's not as if it's a surprise. I mean, clearly, when it comes on, like any new capacity, it takes time to be absorbed into the market. Similarly, I would always point out, I think there's always an overestimation of how quickly this capacity does affect the market. I trust that Stora Enso has a vested interest in this market, and we'll make sure that the volumes come in in a sensible way. We must also remember that the virgin containerboard space in Europe is one where you have net imports. It's a net import market. So there is space for, call it, import replacement in the European market. But similarly, there's also capability to export cost-effectively from Europe. So I'm sure there will be a combination of those factors that will allow this capacity over time to be absorbed. Of course, any new capacity that you don't bring on selfishly, you think is the wrong capacity, but that's -- but I think it's absorbable. And overall, I think people sometimes lose sight of the fact that containerboard overall is a growth market. You see good, strong, long-term growth dynamics in containerboard. As we just discussed with Justin, I mean, the sustainability side of things is supporting growth there. But of course -- we haven't spoken about it so much on this call yet, but the e-commerce effect continues to be a major driver there. And I don't think that's going away anytime soon. So all of these good, strong and long-term structural growth drivers are very much in place in containerboard. Yes, in the short term, any new capacity can create some, as I say, indigestion in the market. But longer term, it's absorbable.
Our next question comes from the line from James Twyman from Prescient Securities.
I've just got 2 questions. The first one is just a follow-up on that kraftliner question. You've been quite vague about the timing of when Ružomberok is going to start up. So if it does start up sort of towards the end of Q2, and it's quite a slow ramp-up because it's a new machine, presumably does that mean that the impact on the kraftliner market should be a bit less because you've given Stora a bit more time to get their machine started up? Is that a positive? Or it's -- it would be interesting just to discuss the delay in the timing, whether that's actually a supportive factor there. And then also on the fine paper side, are there any significant fair value movements that you're expecting into either within Q3 or likely in Q4 that move things around that we're not expecting? That would be it for me.
James, I'm not being vague. I'm saying that the machine will start up in the first half of next year. I'd be surprised if anyone gives you any more clarity on machine start-ups because it's not -- you don't turn a key and the thing starts to operate. It's a process. So it will be in Q -- H1 next year. In terms of finessing it relative to timing of other machines, I think that's not how you look at these things. You do it according to the technical requirements around the build of these machines. And clearly, we've had all sorts of impacts around this build, not least the effects of COVID and that. And so I think our team has done an exceptional job in keeping this machine on track for start-up in H1 next year. It's not a direct competitor of the Stora Enso machine because it is a different product. It's a quite hybrid white top product. So it competes essentially in a different space to the Stora machine. So it's not a relevant comparator. I'm afraid I couldn't follow the second...
Fair value being impacted.
The fair value. Sorry, I didn't follow that. The fair value, I mean, as we said at the half year, I mean, we've -- the first half, I think, was just under EUR 20 million we booked there. The second half, we always guided to a lower number, and that is certainly playing out in the Q3. Exactly what it will be in the full year, as you well know, is always a function of sort of the pricing at the time when you do your mark-to-market valuation of the trees there. But as I see it today, I would expect a more modest gain in the second half than we saw in the first half, which, in turn, was a lot lower than it was in 2019.
And if I could just ask one more thing. On -- in the kraft paper business, you do export quite a lot of sales, I think, out of Europe. How is that part of the business doing? Is that holding up as well as in Europe?
Yes is the short answer. As you rightly say, I mean, kraft paper, we do have a big export position because it is a particular product which has a strength in properties, which you only get from that northern softwood. And so it lends itself to export. Clearly, we sell a lot to ourselves in terms of the export market as well because, for example, in the Middle East and North Africa, we're a very strong player in the converting business as well. But typically, the export markets are holding up well. Obviously, it's always dangerous to just generalize because it's not a homogenous market. But on balance, they are holding up nicely, yes.
The next question comes from the line of Cole Hathorn from Jefferies.
Andrew, just 2 questions for me. In Uncoated Fine Paper, you talked about taking market share in a challenging market, and you're well positioned with low-cost production assets and being in the right market geographically. But looking into 2021, what flexibility do you have from the production side to protect profitability, like producing more pulp instead of office paper at certain mills?
Yes. Thanks, Cole. I mean, clearly, you look at the suite of assets and we have a mix -- a lot of mixed-use assets, for want of better term. I mean, Ružomberok, as we've just been discussing, clearly, we are ramping up a containerboard machine in what is ostensibly a fine paper mill. Having said that, the fine paper assets are extremely profitable. They are the cost leader into their delivered markets. And so we certainly believe there will always be a place for those assets, and I don't believe there's any need to be shifting production around.Right now, we also produce -- we have a pulp dryer there, and we produce pulp for the open market. Next year, as we commission the new machine, that pulp will be diverted onto the new containerboard machine. That does essentially free up some pulp capacity if we -- well, pulp drying capacity if we choose to make some more pulp rather than make a fine paper product, for example. But I don't believe that, that's something we will be looking at in the short term because -- I mean you can always tweak it, but that's -- but I believe our fine paper is extremely well positioned. Similarly, obviously, in South Africa, I mean, Richards Bay isn't really a fine paper asset, it's pulp and containerboard, and it makes a finished pulp product that we sell a lot of it into the export markets, some of which gets converted at Merebank. But again, I believe that domestic South African market, we can supply out of Merebank very profitably, and that will continue as a core offering. So -- and then in Russia, similarly, we have a mixed-use mill, which produces the containerboard grades and softwood pulp and also the fine paper. Again, as we discussed earlier, in the CIS markets, that fine paper is unbeatable from a cost perspective and it's got a great market position. And if anything, you'll squeeze out imports certainly in the -- if there's a sort of demand side change.
Great. And then just following up on the kraft paper side. There's been some small price increases announced in the U.S. following the kraftliner price hikes there. Are you seeing any increases in kind of the speciality or kraft paper grades in other regions globally outside of Europe?
Yes. I think one has to sometimes differentiate between, call it, the sack kraft grades. And there in the U.S., you're typically talked about the flat sack kraft. We make this semi-extensible and other types of sack kraft, so there is a slight difference in it. Clearly, it's encouraging if there's some price increases in the U.S. At the moment, we're not looking at price increases in Europe. But clearly, it's -- as you say, it's encouraging if you are seeing some price momentum in the U.S. market. On the speciality kraft paper side, again, there are a number of different niches there, more with their own specific dynamics, and the pricing can be different from one niche to the other. So -- but on average, we're seeing prices are quite stable right now. And really, it's a question of going into those year-end price negotiations, which will determine the pricing environment certainly into the first half of next year.
And our last question for now comes from the line from Ross Krige from JPMorgan.
Just on the restructuring activities in Engineered Materials, I was just wondering if you could maybe give us some guidance around expected costs incurred and the timing of that and perhaps on the cost savings that we might expect from that.
Yes. Thanks, Ross. Clearly, as we said in the announcement, we are still in the process of discussing the extent of the restructuring in Gronau, in particular with our employee representatives. So it would be premature for me to say exactly what the quantum of the cost is. In round terms, it should be -- I'm looking at probably EUR 50 million to EUR 60 million. Or as you say, taken as an exceptional item, the cash element of that would be certainly well less than half of that number, probably 1/3 of that number would be deemed to be cash costs. But that is a work in progress and something we'll be finalizing. In terms of the effects on our earnings going forward, I think certainly on the personal care components, this is a critical measure we need to take in order to stabilize the earnings. It's not about sort of earnings enhancement in the short term, it's about stabilizing the earnings in the release liner segment. Clearly, we are looking to transfer some of the volume to make sure -- to other plants to make sure we continue to serve our customers with the required product. There is some -- clearly also some benefits going forward, but I wouldn't quantify that just at the moment as we look to finalize that restructuring, but we can give you more on that at the next results announcement. But it's not ultimately overly material to the overall group, but an important step for that business in stabilizing the profitability.
Thank you. That was our last question. I will hand back over to Andrew.
Very good. Well, thank you very much, everyone, for your attention. As always, we, myself and/or Clara, are available if you have any follow-up questions. But I hope that is very comprehensive in its nature and look forward to catching up at our next update. So thank you very much again for your attention, and goodbye from my side.
And that does conclude the conference for today. Thank you all for participating. You may now disconnect.