Waiting for cement to dry

Posted On Friday, 18 November 2011 02:00 Published by Commercial Property News
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The cement industry may be expecting an end to the construction sector’s downturn, but the ability of Afrisam, its second-biggest producer, to continue operating is 'under threat'.

Stephan Olivier AfrisamAfrisam may face business rescue

The industry may have finally reached bottom

“The business is profitable and is delivering solid performance on all fronts, despite challenging market conditions”

— STEPHEN OLIVIER

The cement industry may be expecting an end to the construction sector’s downturn, but the ability of Afrisam, its second-biggest producer, to continue operating is “under threat”.

According to the Public Investment Corp (PIC), which owns 20% of Afrisam plus R4,7bn in preference shares, Afrisam’s debt levels are hampering its ability to operate. This is despite the firm’s CEO, Stephan Olivier, saying that the company remains strong.

The PIC has been scathing of two of Afrisam’s other shareholders, Swiss-based Holcim and Bunker Hills Investments The pair, the PIC says, are “seeking to better their own interests at the expense of the remaining stakeholders” because they blocked a conversion of Afrisam’s debt into equity.

The conversion, which was blocked at a shareholders’ meeting last week, could have alleviated Afrisam’s debt burden as current interest payments threaten the company’s ability to continue operating.

The delay in converting the shares “will likely force business rescue proceedings” in terms of the Companies Act, the PIC says.

Bunker Hills, which owns 37% of Afrisam, objected to the conversion as it would dilute their stake in the firm. Holcim owns 15%. But the PIC says all shareholders have bound themselves to vote in favour of the conversion in terms of a transaction agreement. By voting against it, the pair are “in breach of the agreement”, it says.

Olivier declined to comment on the outcome of shareholder discussions, saying only that it is business as usual at Afrisam and that its “ambition of becoming Africa’s leading provider of construction materials remains undimmed”.

The business, he says, is profitable and is delivering “solid performance on all fronts”, despite challenging market conditions. “The positive outlook in the market presents Afrisam with many opportunities.”

The spat comes during a prolonged downturn, which has caused cement demand to dwindle. The industry says demand may have finally hit bottom. Construction activity appears to be turning the corner, but an expected leap in cement supply within the next three years may present another hurdle.

PPC CEO Paul Stuiver has opted to invest in expansion into other African countries. By 2016, PPC aims to generate half its revenue from the rest of Africa, as the uncertainty surrounding the local market persists. At present, 20% of its revenue is generated from projects outside SA.

PPC has looked at eight expansion opportunities within Africa over the course of the year. Four, however, were abandoned based on assessments of their potential for value creation and levels of risk.

Of the remaining four, the firm has announced just one: its US44m offer for a 58% stake in a government-owned cement producer in the Democratic Republic of Congo, Cimenterie Nationale.

Its other three potential projects are greenfields projects.

PPC, which released its annual results last week, is also investing in its local operations. The company’s capital expenditure amounted to R483m in the year to September, and it expects to grow this to at least R700m in the current year. Its large projects include the upgrade of two existing plants in the Western Cape.

The R280m De Hoek project is almost complete, and is expected to be recommissioned by mid-2012. The environmental impact assessment for its R1,3bn Riebeeck kiln is in progress, with construction expected to start in the second half of 2012.

Afrisam also intends to expand its operations. The firm announced earlier this year that it was planning for a R2,2bn integrated cement plant in Saldanha Bay, despite the current slump in demand.

But PPC and Afrisam will have their dominance challenged when plants initiated by new entrants into the cement industry begin to operate.

A R1,65bn cement manufacturing plant is planned in the Limpopo province by Continental Cement (Conticem), Wiphold, the China-Africa Development Fund and Jidong Development Group.

Conticem CEO Anton Weavind says the plant’s construction will begin in March or April next year, when the consortium expects to gain full regulatory approval for it.

On this basis, it will be operational from mid-2014. Weavind is not concerned about oversupply. He believes cement output figures are overstated, and when considered with the average age of cement kilns in SA, a surplus is unlikely.

Another new firm, Sephaku Cement, has two new plants planned. Its Nigerian parent company will also invest in production facilities in Tanzania, Zambia, Cameroon, Senegal and the Democratic Republic of Congo, which may prove to be a competitor to SA companies looking to expand their African footprint.

Afrisam’s Olivier says it views the competition as healthy, and that market growth is likely to create opportunities for new entrants. He says there are signs that the market has turned. The growth rate of cement sales in SA is forecast at 2% in 2011 according to the Cement & Concrete Institute, which is positive for the first time since 2007.

Growth is expected to continue for the next five years. Even amid global uncertainty, Olivier believes average growth of between 2% and 4%/year is realistic.

Stuiver says it is difficult to predict cement demand. “But the company is lean and mean. We’ve taken out all the frills, and are in a position to increase volumes at a moment’s notice.”

PPC expects to lose 0,5Mt to the new entrants, but Stuiver says it may gain 0,5Mt before that, through market growth.

PPC’s results for the year to September have reflected industry conditions, with the company experiencing growth only in Zimbabwe. Its revenue was flat, as higher selling prices compensated for lower sales volumes.

It reported a 24% drop in headline earnings per share to R1,65. Operating profit dropped 19% to R1,7bn.

Analysts’ recommendations for PPC range from “hold” to “sell”. Some of the risks cited include the impact of new supply, the risk of investing elsewhere in Africa, uncertainty about the building sector recovery and even the impact of a possible carbon emissions tax.

Last modified on Thursday, 27 June 2013 21:22
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