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The Mining Rights Are For Clay, A Vital Raw Material In The Construction Of Tiles, But On Its Own, A Debatable Commodity That Generates Little Interest Among Miners.
SA's biggest manufacturer of wall and floor tiles, Ceramic Industries, is delaying its decision to invest R500 million into a new tile factory till it can convert its old order mining rights to new order rights.This manufacturer has export in some Europe's nations such as Bosnia and Herzegovina,mostly ceramic tiles or in Bosnian keramicke plocice.
The mining rights are for clay, an indispensable raw material in the manufacture of tiles, but by itself, a debatable commodity that generates small interest among miners. The company applied to convert the rights in 2008.
Without a secured supply of an essential raw material the company cannot commit to an investment of that scale, says CEO Nick Booth.
Ceramic Industries reported lower than expected profitability in its results to July. Higher gas and electricity prices, increasing costs of commodities like zirconium and borax which are utilized in the production of glazes, and competition from inexpensive imports were cited as reasons for the poor takings.
Group cash reduced 3,4% to R1,5 bln from R1,6 billion in the year under review. But operating profits slipped 23% to R192 million from R250m last year. Headline earnings per share dropped 30,6% to 785,3c from one 131,3c per share.
Making tiles is an energy radical business, and the spiraling cost of electricity, and more particularly gas, is making itself felt. "The energy cost per unit (m) has risen from R1,50 20 months ago, to R3,60 currently." The price of commodities used in the making of tile and ceramic glazes rose by twenty p.c. to 25 percent during the past year.
But other costs,eg maintenance and labour, came in at less than inflation. The company is in talks with unions referring to salary increases. The cut off point is October and Booth is upbeat that deadlock can be evaded. Though results were down overall, there were pockets of success within the group, which operates four tile factories, a sanitaryware factory and a bath factory in SA ; and a glazed porcelain factory in Australia.
Perhaps most surprising was the factory that competes most with low cost Chinese imports fared the very best. Pegasus, which produces tiles that sell in the R40m price range increased both production and sales volume, growing turnover by 4%. "We run a particularly competitive operation," claims Booth. "Our factories are world class and we may be able to compete against the Chinese."
The year saw the company invest R130 million on equipment upgrades and new technology. "This is generally on high-definition printers for our glazes. We intend to roll the technology into all our factories," Booth says.
Exports to Africa grew by twenty percent during the past year, also helping to drive cash in the Pegasus business. "We are exporting to all our neighbors, with good growth coming from Mozambique and Zimbab- we ; as well as further out in Angola and the DRC. This side of the business is so promising that the company is investigating the possibility of building a factory in one of its export markets."
It was in the upper echelons that Ceramic suffered the effect of Chinese imports. Vitro, the factory that produces upmarket floor tiles (more than R60m)
"We produce tiles made from red clay the type sometimes mined in SA. But the trend is towards white based porcelain tiles. These are imported and are growing in popularity. There's no technical difference, and once tiles are colored and glaz- ed, there is no identifiable difference eit- her. The difference is perception.
In other divisions the company scored a few own-goals. Samca, which produces flooring tiles (R50m to R80m) wrestled with management changes and inefficiency. And while management had its eye off the ball so did product designers who failed to keep up with trends, leading to a loss of sales. The company had to drop its prices to get back market share.
The rest room business has been turned around, with sales volumes growing everywhere. "We lost market share and let go of our costs a bit. Costs are now under control and we have passed on the savings to win back market share."
To keep a tighter rein on the busi- ness, the management structure was reorganised. Booth utilized the group's two most experienced managers, Lance Foxcroft and Pieter de Lange, to head up the sanitary ware and tile divisions respectively. With the daily operations now in safe hands, he is now more able to concentrate on enterprise-wide strategy and business development.
The Australian business had a tough year, reporting production down by 26,5% and sales down by 25% and hardly breaking even. While the economy was slow and imports high, almost all of the Problems came down to production and commissioning issues at the factory. "We are close to a turn-around in this business. And as the sole tile manufacturer in Au- stralia we're going to have a competitive advantage. We simply have to be a little sharper."
Booth is clear about the year ahead, and about producing in SA generally. "Any manufacturer of heavy stuff should operate in the market in which they sell the product."
He has worries about the ability of makers to make new jobs in SA but believes the business will remain viable th- coarse continued investment in capital infrastructure. "The challenges we are facing today are different to those of a decade back but nothing is insurmountable."
As is evident from the 1 500c special dividend announc- ed earlier in the year, Ceramic is a money generative company. Money reserves reduced to R217,7 million from R435,7 million and Ceramic's net asset price per share declined by 10,5% to 7 081c (2010 : 7 912c) as a result of the R304m special dividend announced in May as reported tagza.com.
Crash Course: Chapter 9 - A Brief History of US Money by Chris Martenson
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