Hulamin’s roaring performance, and how it will sustain the growth

 

The aluminium industry isn’t the sexiest business in the world. Although we use the material pretty much every day – it’s in our beverage cans, cars, and appliances – there’s not a lot of excitement in mining aluminum ore, smelting it, and making it into stuff. Nevertheless, as Hulamin’s year-end results, released on Monday, attest, aluminium can be a very profitable business. With headline earnings up 128%, revenues up 16%, and the share price up 3%, Hulamin is riding high on rand weakness and a good showing by various divisions. And, according to Hulamin CEO Richard Jacob, the good times will continue, even if BHP Billiton closes its smelters. Hulamin’s numbers are a real-world illustration of what a weaker rand should do, boosting the lot of exporters and manufacturers. However, rising costs – electricity and labour especially – and competition from Chinese producers both threaten Hulamin’s long-term success. It’s an interesting bellwether business. If Hulamin can make it, then South African manufacturing stands a chance. If not, we’ve lost to the rest of the world. – FD

To watch this CNBC Power Lunch video click hereRichard Jacob - Hulamin.

ALEC HOGG:  In the studio with us to talk through the financial results from the perennial underperformer, which has suddenly become a market darling, is the Hulamin Chief Executive Richard Jacob.  Richard, you came all the way from Pietermaritzburg.  Are you the only listed company based in Pietermaritzburg?

RICHARD JACOB:  I think we are.

ALEC HOGG:  I thought so.  Sasha tried to throw me a little bit of a trick question.

GUGULETHU MFUPHI:  Durban and Pietermaritzburg put together.

ALEC HOGG:  He wouldn’t have won that one, I don’t think.  The share price is up nearly four percent today, so the market likes these numbers.  What’s not to like about them?

RICHARD JACOB:  Yes, it’s a very decent set of results.  Last year was a turnaround year for us with a number of our strategies coming to fruition, so I’m very pleased with the set of results and I’m very pleased about the future as well.  There are many opportunities looking to come to fruition in 2014/2015

ALEC HOGG:  You’re very pleased with 100 percent.  What is going to make you really ecstatic?  At 100 percent, you can’t keep running at this rate, although the base you’re coming on – who knows.

RICHARD JACOB:  Yes, I think what will make us even more excited is further progress on the journey that we’ve already started, so turnaround in the manufacturing operation, when the can stock volumes hit 50 to 100 thousand tons in the domestic market, and when recycling finally comes to fruition – those are some of the exciting things that lie ahead.

ALEC HOGG:  Richard, you are in the aluminium game as I think anybody who knows your business, would understand.  There’s been lots of discussion and comment around what’s happening at the BHP Billiton Smelters.  ‘Are they going to close?  Aren’t they going to close?  What’s going to happen to your supply?’  Just put us in the picture please, on the latest developments there.

RICHARD JACOB: Yes certainly, what happened in January is that BHP commenced a consultation process with their employees.  They’ve commenced consultation with their employees – about 90 percent of the employees at Bayside – in the pot line and the carbon plant.

ALEC HOGG:  Where’s the bay side?

RICHARD JACOB:  Bayside is Richards Bay and it’s about two kilometres from Hillside, which is also Richards Bay.  We get rolling slab from Bayside and we get melting from Hillside.  Now, the Cast House, which is what produces the rolling slab for Hulamin: that will continue to operate with metal from Hillside, while our discussion over the future continues.  What we’re very pleased about is that BHP has extended our existing slab supply agreement, to December.  At the same time, we are announcing a three hundred million rand investment in recycling.  Not only does that complete the loop in terms of using scrap aluminium from the can-makers and from the markets, but what it also does is it actually increases our self-sufficiency on slab from our own site in Pietermaritzburg.

ALEC HOGG:  By how much?

RICHARD JACOB:  By up to 200 thousand tons of sales…

GUGULETHU MFUPHI:  As against…

ALEC HOGG:  As opposed to about 180.  Therefore, should the worst-case scenario materialise and Bayside and Richards Bay close, we will still be able to produce 200 thousand tons of raw products, keep the can market satisfied, and keep the growth going in the domestic market.

GUGULETHU MFUPHI:  You mentioned so many growth opportunities.  Are you looking at growth acquisitions, perhaps in the future?

RICHARD JACOB:  Yes, all businesspeople have to keep their eyes wide open for opportunities and we’re very fortunate that we have opportunities inside as well as opportunities outside.  Certainly, what we are very excited about is the opportunities to diversify our metal procurement from just Hillside and Bayside to include the scrap, and that’s what this investment is all about.

ALEC HOGG:  And China…are they coming increasingly into the market as a supplier – and perhaps a competitor – to you?

RICHARD JACOB:  Yes, certainly over the last two or three years, Chinese capacity has grown quite sharply and particularly at the moment with domestic conditions in China being a little bit subdued; that has resulted in Chinese manufacturers exporting more.  Certainly, in the aluminium fields we’ve seen growth in the last year or two – exports out of China even into South Africa.  In some segments of the South African market, particularly coastally, the Chinese aluminium has taken up to 25 percent of the domestic market.

ALEC HOGG:  So are they having a negative impact on you or not?

RICHARD JACOB:  Yes, definitely and particularly globally, where they have had quite a negative impact on selling prices, so with oversupply internationally many countries are raising their duty protection against China.  South Africa unfortunately, remains the one country that has no duty protection against Chinese imports of aluminium so it’s an ongoing struggle.  We are however, really excited about the local growth opportunities: both in beverage canning as well as automotive.

GUGULETHU MFUPHI:  Why not work against the duty elements, regarding the Chinese imports?

RICHARD JACOB:  Look, the situation is quite an anomaly at the moment because we export to China, we export to Brazil, we export to Russia and India, and these BRICS countries all have import duties of their own, but in South Africa there’s no symmetry.  There’s a reciprocal arrangement that’s out of balance, and we will certainly be looking to put an application into ITAC later this year for an increase up to fair levels of comparison, so that at least, two-way trade is fair between us, and these countries: Brazil, India and China etcetera.

ALEC HOGG:  Just explain that in terms that we can understand.  You export into China with their duties, but when they export into South Africa, there are no duties.

RICHARD JACOB:   Exactly.

ALEC HOGG:  Un-level playing field.

RICHARD JACOB:  It’s a very un-level playing field.  The best example is Brazil, where Nampak is starting up their can plants at the moment, with imports from Brazil and they’re coming to South Africa duty-free.  We export can stock to Brazil, and we pay a 12 percent import duty into Brazil.

ALEC HOGG:  Why?

RICHARD JACOB:  I think…  It’s just the way the trade regimes and trade politics, have gone over the couple of years.  We certainly think it’s unfair and we’re putting an application in shortly.

ALEC HOGG:  Your share price has done well this year – up more than 50 percent since the beginning of last year – a good improvement.  Are you likely to see that continue?  You’re a long way from the old highs.

RICHARD JACOB:  Yes, certainly our responsibility as management is to deliver an efficient focused business, a business that delivers results and we will remain focused on that for the foreseeable future.  That’s our job.  If the market rerates us, that will be a great outcome.

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