JSE-listed aluminium products manufacturer Hulamin has announced a R300-million investment in additional scrap separation, processing and recycling equipment, with start-up planned in mid-2015, in a bid to wean the company off its partial dependency on rolling slab from BHP Billiton’s Bayside smelter, in Richards Bay, KwaZulu-Natal.

“There’s no doubt that optimum supply from Bayside is good for Hulamin and good for the whole economy, but we can’t sit on our hands and wait for them to decide what to do with their asset. This investment will contribute further to us being self-sufficient in rolling slab up to 200 000 t,” Hulamin CEO Richard Jacob told Engineering News Online on Monday.

The company would source aluminium beverage can scrap from the market as well as Nampak subsidiary Bevcan, with which it already had an aluminium sheet supply agreement in place.

After announcing in September 2012 that it would review its Bayside facility, which had been under “significant and ongoing financial pressure”, BHP Billiton initiated a formal consultation with employees of its South Africa-based aluminium business in January over a proposal to cease smelting activities and associated services at Bayside.

Hulamin sourced around one-third of its rolling slab requirements from the Bayside casthouse and produced the balance in its Camps Drift facility, in Pietermaritzburg.

2014 SUPPLY COMMITMENT

However, after ongoing discussion between Hulamin and the diversified mining major over the future of slab supply to the aluminium company, Hulamin said on Monday that BHP Billiton had committed to the continued supply of rolling slab to Hulamin until December 31.

The company also withdrew the cautionary announcement it declared on January 16.

“Caution is no longer required to be exercised by shareholders when dealing in the company's securities, [but] we remain in discussions with BHP Billiton over the future of slab supply and the Bayside casthouse [beyond 2014].

“The timeline is a little uncertain, because we’re only one player in these discussions, and we hope for further clarity from the company from around the middle of the year,” said Jacob.

He reminded the market that about two-thirds of the company’s rolling slab requirements were provided in-house, adding that the R300-million investment would enable Hulamin to secure competitively priced aluminium inputs and increase its slab production capacity in Pietermaritzburg. 

“The conversion of the local and regional beverage can market to the all-aluminium can has created an opportunity for a major step forward in the recycling of packaging materials in South Africa.

“The recycling of used beverage cans will contribute to job and wealth creation in scrap collection and distribution, and will have environmental benefits [resulting] from reduced littering and an improved national carbon footprint.  Used aluminium beverage cans are particularly well suited to recycling into new can body stock,” Jacob noted.

COST, EFFICIENCY GAINS

Meanwhile, in its year-end results released on Monday, Hulamin reported continuing cost savings for the 12 months ended December 31, 2013.

“A 10% reduction in employee numbers and efficiency gains from our manufacturing excellence programme and other initiatives netted R96-million in 2013 and over R200-million since inception in 2010,” said the company.

A restructuring of the rolled products operations to achieve international best practice benchmarks was under way, having delivered lower annualised production of 192 000 t in 2013.  

While certain operations, notably slab production, improved operating performance and the hot rolling line maintained its high performance levels, cold rolling and the production of can end stock required “ongoing supervision”, experiencing bottlenecks.

“Also, we had some processing and quality control issues in can end stock, which resulted in lower yield and lower sales in the second half of the year,” Jacob outlined.

These factors, combined with an “unfavourable” first-half mix and planned replacement maintenance to the Camps Drift hot mill, contributed to rolled product sales being weaker in 2013 than in 2011 and 2012.

RAMPANT COST PRESSURES

Meanwhile, the impact of declining cost competitiveness and margin pressure, exacerbated by “rampant” input cost increases, supply disruptions, imported rolled and extruded products in the local market without tariff protection and general weak local demand, prompted the “revalidation of growth assumptions” and a resultant revaluation of plant and equipment, translating to the R1.5-billion after tax, once-off noncash impairment charge. 

This was largely responsible for the company’s swing to a full-year loss of R1.34-billion, from a restated R29-million profit in the prior year.

Turnover for the year under review increased to R7.56-billion, from R6.54-billion in 2012, supported by an improved performance from Hulamin Extrusions and the depreciation of the rand by 17.5%, on average, to the dollar. 

Underlying operating profit before metal price lag and impairments increased by 101% to R375-million – its highest since 2008 – with the weakening currency in 2013 estimated to have contributed about R240-million to this number.

The aluminium price on the London Metals Exchange continued to weaken during the year, leading to a R58-million metal-price lag loss. 

Net interest remained constant at R63-million.

Headline earnings increased by 132% to R183-million, or 57c a share, while normalised earnings, disregarding the impairment charge and once-off costs related to the reduction in employee complement, increased to R201-million, or 63c a share.

Borrowings decreased from R742-million in 2012 to R612-million, reflecting a positive cash flow before financing activities of R135-million.

The board did not declare a dividend for 2013. 

DEMAND GAINS

Demand in Western Europe and the US gradually improved through the year, with Chinese exports of can end stock, plate and foil continuing to grow owing to a major expansion of rolling capacity in China in recent years, which exceeded the growth in their domestic demand.

“The growing competition from Chinese exports negatively impacted international rolling margins. Domestic demand for rolled products showed moderate improvement, led by growth in the beverage can market and a return to normal demand patterns in the automotive industry, in spite of being impacted negatively by the three-week strike in August,” the company stated.

Demand for extruded products benefitted from infrastructure projects, particularly the construction of solar electrical generation plants. 

Hulamin also started qualification of its can body stock products in the fourth quarter, following an agreement with Nampak to the supply 28 000 t of aluminium can body stock from 2013 to 2015.

ALUMINIUM DEMAND DRIVER

Jacob said the continuing application of efficiency and improvement programmes were expected to benefit manufacturing performance and profitability in 2014, as the company progressed towards full capacity use. 

“By implementing new product scheduling technology, with the lighter-gauge can body-driven stock mix at its centre, we expect Hulamin rolled products to achieve optimal profit realisation at a lower nominal output level of 220 000 t/y at full capacity,” the group noted. 

Hulamin expected local sales volumes to grow in 2014 and beyond, as can production was switched to the all-aluminium can, to be completed by 2020. 

“Given Hulamin's current export position, financial performance will continue to be influenced by the value of the rand in exchange with foreign currencies, but we’re certainly looking to continue the good performance,” said Jacob.