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CHEMICALS DIVISION – REVIEW
Overview of Chemicals Protea Chemicals is a respected manufacturer and distributor of speciality, functional and effect chemicals and polymers. It has a presence in every sector of the broader chemical distribution market and serves 15 different industries across the industrial and mining sectors. With operations in southern and East Africa, the business is represented in all major business centres from Khartoum to Cape Town. Financial performance The uncertain economic climate caused by the global recession did not abate during the year under review. This, together with a constantly changing operating environment and the strength of the rand, resulted in a disappointing year. Revenue was 26% lower at R3,3 billion (2009: R4,5 billion) with a resulting reduction in operating profit of 23% to R152 million (2009: R198 million). The operating margin was maintained at 4,5%, although after the exclusion of the profit on the contribution of business to Nalco, this dropped to 4%. Operational performance The global economic crisis that prevailed throughout 2009 continued to impact severely on the international chemical industry during the 2010 financial year. South Africa, although initially shielded from the worst of the initial financial crisis, inevitably felt the knock-on effect of the economic recession. Manufacturing capacity in the South African chemical sector fell 12,5% below the level recorded in the 2009 financial year. At Protea Chemicals, this downward pressure was reflected in a 11% year-on-year decline in sales volumes. Net turnover was down 26% on 2009 and unit prices decreased by 8%. The strength of the rand effectively capped the import parity price and squeezed profit margins. Significantly lower commodity prices and a decline in sales volumes weakened Protea Chemicals’ market position further. Expenses, although contained below budget, increased significantly due to the costs incurred in several strategic projects. One of these was to amalgamate the Protea Food Ingredients business with other relevant businesses in the Protea Chemicals stable to form a national food ingredients business supplying products and services to the South African food and beverage industries. In addition, the establishment of a new office in China added to the increase in expenses. However, this will place Protea Chemicals in an advantageous position in future in the sourcing and purchasing of products and raw materials for its manufacturing requirements. In order to further grow the division’s reach into southern Africa, offices have been opened in Luanda, Angola. Finally, the costs associated with the acquisition and restructuring required to form Protea Polymers Eastern Africa contributed to expenses growth. This, as reported in 2009, was undertaken to expand the geographic reach of Protea Polymers into Kenya, Uganda and Sudan. The process has involved the acquisition of the polymer distribution business of Highchem Industrial Africa, which held exclusive distribution rights for the products of several major polymer producers. Simultaneously, as part of integrating the Highchem deal, the Tanzanian operations of Protea Chemicals were integrated into Protea Polymers Eastern Africa.
Reorganising for future growth Consolidation within Protea Chemicals was undertaken to reduce costs, optimise the allocation of resources and hone the business focus of the Chemicals division. Regrettably, in South Africa, the rationalisation resulted in staff retrenchment. With effect from 1 April 2010, the Protea Chemicals businesses were grouped into four clusters. Each business cluster has a defined focus that will be supported by improved warehousing and distribution, and centralised financial and administrative functions. The four clusters are:
The improved customer service and management capacity, and an emphasis on optimal utilisation of skills, has already yielded benefits for the division. Strategic associates and acquisitions Despite the challenging conditions that prevailed during the year under review, Protea Chemicals continued to focus on strengthening relationships with key suppliers and customers, and developing into new markets. The Nalco Africa Associate was in line with the division’s strategy to reposition itself to add greater value to clients, moving from being merely a distributor of chemical products. This move forward into value added services resulted in a strategically significant associate and acquisition during the year. The association was undoubtedly the most significant strategic agreement reached during the financial year. Nalco, listed on the New York Stock Exchange, is the world’s leading industrial water treatment and process improvement company. Operating across the mining, pulp and paper, oil and petroleum, industrial water and sewage management sectors, it is active in developing and implementing high-tech solutions to improve industrial processes and reduce water and energy consumption and air emissions. In many respects, the activities of Nalco complement those of Zetachem, an Omnia Group company, which is recognised as a major supplier of speciality chemicals to the water industry in South Africa. Zetachem is one of a few South African manufacturers operating under NSF and ISO 9001 certification in the areas of potable water clarification, sludge dewatering and effluent treatment. Protea Chemicals contributed to Nalco Africa its existing product base as well as relevant revenue and profit streams from its petroleum chemicals, Zetachem and mining chemicals businesses. Nalco contributed its technology and the expertise of expatriate executives who will work alongside former Protea Chemicals staff. Although Nalco Africa reduces the overall market coverage of Protea Mining Chemicals and Zetachem, it brings significant benefits through its world-class products, technologies and structured sales and service model. The formation of the associate comes at a time when South Africa is grappling with concerns regarding water contamination through mining acid waste, the effectiveness of sewage treatment processes and installations, and industrial water use. Nalco Africa, well placed to contribute in all these areas, will undoubtedly benefit from the current and future requirements of these sectors. Protea Chemicals acquired Petroleum Fine Products during the 2010 financial year. This strategic acquisition supplements the Protea Consumer Care market offering by expanding the product line to include white oils and petroleum jelly. The acquisition boosted the operating margins of Protea Consumer Care and in December 2009, during its first month of incorporation within Protea Chemicals, Petroleum Fine Products recorded its best ever monthly performance.
Outlook The 14-month downward trend in South African manufacturing output came to an end in December 2009. This was accompanied by an increase in manufacturing sector activity in the last quarter of the year. While these improvements auger well for the supply side of the South African economy, fundamental weaknesses continue to persist in the consumer market where demand is still subdued. A weakening of the rand/US dollar exchange rate would greatly assist a return to prosperity in markets that are currently characterised by excess capacity and eroded margins in chemical product prices. Rand strength remains a threat. Local cost pressures will be driven by the annual 25% a year electricity price increase to be implemented over the next three years. This will reinforce cost pressures in manufacturing. On the positive side, Protea Chemicals is entering the new financial year with a new structure geared to reduce costs and enhance business efficiencies. This will undoubtedly have a positive impact on operations in the year to come. The addition of Nalco Africa will add strength and bring new opportunities. The consolidation of Protea Polymers and its expected increased market penetration in East, central and southern Africa also hold considerable promise for the future.
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