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Jan 23, 2009

Looming synfibre plant closure threatens bleak future for SA plastics industry

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AECI CEO Graham Edwards talks about San Fibres sutdown.
Hosaf marketing director Steven Bird talks about the Hosaf's position
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Diversified speciality products group AECI’s intended shutdown of the last of Sans Fibres’ remaining plants in Bellville, in the Western Cape, could signal the end of the line for South Africa’s nylon synthetic fibre (synfibre) manufacturing capability.

AECI’s Sans Fibres was the only South African manufacturer of nylon and was also involved in the production of polyethylene terephtalate (PET), a plastic polymer that is used heavily in the production of plastic bottles and similar products. In terms of South African PET production, Sans Fibres held 50% of the market share.

The company’s nylon heavy decitex (HDI), polyester light decitex (LDI) and polyester HDI production facilities were shut down in 2007. This followed a decade of difficult market conditions, brought on by large-scale capacity expansions and technological superiority in the Far East, as well as a lack of local market to provide sufficient business.

Sans Fibres’ R2,14-billion recorded sales in 2007 were well up on the previous year’s R1,8-billion. However, while the top line growth looked encouraging, only R9-million filtered down at operating profit level.

The R9-million in operating profits, while an improvement on the R6-million loss in 2006, represented a sliver of a trading margin of about 0,5%, and explains why AECI decided to close the polyester HDI, polyester LDI and nylon HDI portions of its business at the end of 2007.

The decision to close these fibres divisions was heavily influenced by the fact that Sans Fibres’ principal nylon HDI client left the South African market at the end of 2007, owing to serious adverse economic factors, leaving Sans Fibres with only exports left to bring in the revenue.

“That was the last bit of market left in South Africa for that product,” says AECI CEO Graham Edwards.

Sans Fibres continued to produce only PET and nylon LDI, of which the nylon LDI would be produced for end uses in sewing threads, weaving threads, timing belts and aeronautical yarns.

Following the closure of three divisions at the end of 2007, AECI planned to sell the remaining Sans Fibres nylon LDI business to a consortium comprising mainly the management of Sans Fibres, the Industrial Development Corporation and a workers’ trust of Sans Fibres.

However, in September the sale was terminated, owing to a number of adverse developments in the nylon market, such as raw material and other input costs increases, customers’ resistance to higher product prices required to offset the increases, new capacity and superior technology in the Far East, as well as labour unrest at the Bellville plant.

Edwards also cited the pricing and reliability of electricity supply in South Africa as being a contributing factor to the failure of the deal. He said that Sans Fibres required a large electricity supply, and that the increases and expected further increases in electricity prices were worrisome. Further, unplanned shutdowns owing to load shedding and other power interruptions would cause the polymer materials to solidify, taking weeks to restart the operation and causing downtime losses.

As a consequence of termination of the negotiations for the nylon LDI sale and AECI’s unsuccessful attempts to also sell the PET business, it was announced in November last year that the these two manufacturing facilities were also scheduled for closure in early 2009, pending stakeholder engagement on the matter.

This left Sans Fibres with one other production facility, in Stoneville, North Carolina, in the US, which, is expected to remain profitable in spite of AECI having voiced its intentions to exit the business.

Six-hundred and forty job losses will result from the Bellville plants’ closure, but Edwards says that a comprehensive placement and reskilling process will be implemented to ensure that those affected will suffer as little as possible.

Although adequate retrenchment packages will be provided to employees, allowing them ample time to find new jobs, he says that reskilling will be necessary in many of the lower skill-level cases, given a lack of other synfibre manufacturers for the workers to migrate to. Those workers will have to learn new skills appropriate to those other fields of industry.

After the announcement for closure was made, a lengthy consultation process between AECI and all stakeholders of the Sans Fibres business ensued, including employees, unions, customers and suppliers. This was performed as a final attempt to find an alternative to closure.

At the time of this article going to print, Edwards said that no solution existed that he was aware of, and that the closure would proceed as planned unless an alternative solution presented itself. He said that if a plan of action were to be developed during the consultations that could meet all the necessary requirements, it would be happily embraced.

The talks were scheduled to conclude on January 3, 2009. Should the closure proceed, it is scheduled to take place at the end of March 2009. AECI said R150-million would be provided for closure costs, while all the land will be sold and the assets leased or sold.

Edwards also said that, in terms of reinvesting in other business units within AECI, the company has a very extensive capital programme, with resources to the value of about R2-billion being ploughed into its chemical supply business Chemserve, its explosives manufacturing business AEL and its real estate business Heartland.

The situation

Sans Fibres has been supplying less and less of its synfibre products to local clients over the past few years. Edwards said that of the 600 t of nylon manufactured in a month, less than 15 t was being sold locally, meaning that only about 2,5% of the revenue was generated locally, with exports accounting for the other 97,5%.

Sans Fibres reached a point where it would import raw materials such as pure terephthalic acid, monoethylene glycol and nylon 66 polymer, manufacture the products, and export the finished product again. The nylon synthetic fibres are mainly exported to Europe and the Far East, to countries like India, China and Korea, where the same products were being manufactured at much lower cost. However, Graham adds that there are no nylon 66 manufacturers in India or Vietnam.

Edwards commented that it would be cheaper for South Africa to import nylon products rather than try to manufacture them locally, especially when most of the product was being exported.

Sans Fibres held a 50% market share of the country’s PET manufacturing capability. Polyester staple fibre and PET manufacturer Hosaf currently holds the other 50%, and is the only other significant manufacturer of synfibres remaining in the country. Hosaf will now also be the only manufacturer of PET in the country, theoretically acquiring 100% of the local manufacturing capability following Sans Fibres’ closure.

Hosaf marketing director Steven Bird says that Hosaf has suffered from the same or similar market problems as those faced by Sans Fibres. “It’s been no easier. We’ve had to adapt and we’ve had to fight hard. Where possible, we’ve adapted to the changing markets. We’ve also downsized in the certain areas,” he says, speaking of the fibres divisions, indicating a further shrinkage of South Africa’s synfibre production capability.

However, Bird says that one benefit of being in the polyester short staple fibre business rather than the single filament business, is the fact that recycled material can be used in the production thereof, something that cannot easily be done in the filament production industry. This notably reduces input costs for materials, and allows the business to remain fairly profitable, even in trying times.

“We have become cost effective against what is happening in the Far East,” says Bird, explaining how used PET bottles are melted down at the company’s recycling facility in Johannesburg and then converted back into polymer in the company’s Cape Town facility.

Bird adds that Hosaf’s continuous polymerisation plant for PET production is much more modern and efficient than Sans Fibres’ older plant, which dates back to the 1970s, and that it is another reason why their operations are not as threatened.

Now that Hosaf is the only supplier in the entire South African local market, the company is going ahead with expansion plans so as to double its PET capacity, although the company’s decision to do that was unrelated to Sans Fibre’s closure.

The PET expansion is to come on line at the end of February 2009.

Edited by: Laura Tyrer
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