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Nov 11, 2009

PPC expects demand to remain flat, admits to cartel activity

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Demand and sales volumes for Pretoria Portland Cement’s (PPC’s) products, in the 2010 financial year, were likely to remain at similar levels to that of the 2009 financial year, CEO Paul Stuiver said on Wednesday.

He told Engineering News Online that the cement producer was “quietly optimistic” about the year ahead, despite still seeing mixed signals from the market.

While demand levels have not significantly improved in the past few months, the company has also not seen evidence of demand levels worsening significantly, he noted.

One worrying factor was that the residential building sector in metropolitan areas generally started recovering from about nine months to 12 months after an interest rate decline.

South Africa was now about nine months “down the track” following the start of declining interest rates and there still were no signs of an upswing in demand from the residential sector, said Stuiver.

PPC, which also on Wednesday admitted to participating in “market-sharing activity” reported a 25% drop in net profit for the 2009 financial year to R1,1-billion, compared with R1,5-billion the year before.

Its revenues increased by 9% to R6,8-billion in the year ended September 30, 2009, compared with R6,2-billion in 2008, while its earnings a share dropped 26% to 210,1c a share, compared with 283,5c a share.

The producer had warned, in October, that its earnings a share would be impacted on, as a result of an International Financial Reporting Standards 2 charge related to a broad-based black economic-empowerment deal.

MARKET-SHARING PRACTICES STOPPED

Meanwhile, Stuiver announced that PPC had concluded a conditional leniency agreement with the Competition Commission, with regard to the commission’s earlier investigations into the cement market.

He highlighted that the group has admitted to the Commission to participating in “market-sharing” activities.

The Competition Commission had confirmed in a statement that PPC had confessed to being part of a cement cartel.

“The Competition Commission has granted PPC conditional leniency from prosecution under the Competition Act, in exchange for PPC’s complete and truthful disclosure of all cartel activities between PPC and its competitors,” it stated.

The commission had raided and seized documents from PPC and a number of its competitors, in June, in pursuance of an investigation into possible collusion.                                      

The company had initiated an independent study, conducted by legal advisers, earlier this year, which had “revealed market-sharing arrangements” with other cement producers in the 1990s, PPC reported.

The commission highlighted that the company had confirmed the existence of a cartel to divide markets among four cement producers, which were believed to have agreed to divide the market among themselves in order to maintain the market share each held before 1996, when a lawful cement cartel was brought into existence and which was regulated by exemptions to the competition legislation.

“The agreement was implemented up until this year through highly disaggregated sales information each producer submitted to the Cement and Concrete Institute of South Africa (C&CI) through an audit firm appointed by C&CI. The four cement producers are the main members of C&CI,” the commission noted.

Stuiver explained that a few employees who worked for PPC in the 1990s had influenced a number of decisions, which led to the introduction of practices into the organisation that were “disguised as normal commercial behaviour”.

While the market-sharing meetings and agreements had stopped during the 1990s, some of the practices had continued until recently.

Stuiver assured shareholders that PPC had stopped all the cartel practices it was aware of, including the detailed sharing of information, with immediate effect.

In terms of the agreement with the Competition Commission, the cement producer would have immunity from prosecution, conditional on ongoing cooperation with the Commission until the Competition Tribunal proceedings were concluded.

OPERATIONAL PERFORMANCE

Regional cement demand had declined by 11%, while PPC’s cement sales declined by 10% in the financial year. Demand from the construction sector had grown by 11%, which the company said reflected the positive impact from the many infrastructure projects.

This was, however, offset by lower demand from the residential sector.

The company noted that it had, given the lower local demand, also been able to stop the importation of cement into South Africa and been able to start exporting its cement to other African countries.

Further, while both the Hercules mill and the Riebeeck West mill projects were facing some delays, the company was not concerned at present, given the current lower demand levels.

Stuiver explained that the construction of the Hercules mill had proved to be more difficult than initially anticipated, as a result of more difficult ground conditions.

The mill would now only be commissioned in the first quarter of the 2010 calendar year.

The construction of the Riebeeck West expansion project, in the Western Cape, would now likely be delayed by a year or two, added Stuiver, noting that construction had initially been scheduled to start in 2011.

Environmental-impact assessment and other regulatory approvals were currently holding up the process.

However, Stuiver emphasised that the project remained important, as much of its capacity in the Western Cape was very old, while new environmental legislation was being implemented. It made sense for the company to continue with the project, he said.

Meanwhile, the producer was satisfied with progress of its Zimbabwean Porthold cement business, where utilisation levels at both its facilities had improved to between 35% and 45%, compared with below 10% in the previous year.

“The situation in Zimbabwe remains difficult to predict. Should utilisation levels remain as they are currently, we can look forward to a positive contribution from our Zimbabwean operations in future,” Stuiver noted in a statement.

Demand for lime and aggregates had, meanwhile, declined by 30% in the financial year, owing to the impact of the economic downturn on the local steel and alloy industries.

This, combined with higher coal and electricity prices, had impacted on the operating profits and margins of the lime and aggregates business.

PPC noted, however, that there were indications that the steel and alloy industries were moving out of the economic downturn, which could boost demand for lime.

Edited by: Mariaan Webb
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