SA’s biggest producer of wall and flooring tiles, Ceramic Industries, is delaying its call to invest R500 million into a new tile factory until 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, a vital raw material in the construction of tiles, but by itself, a questionable commodity that generates small interest among miners. The company applied to convert the rights in 2008.
Without a secured supply of a vital raw material the company can’t commit to an investment of that scale, says BOSS Nick Booth.
Ceramic Industries reported lower than expected profitability in its results to July. Higher electrical power and gas costs, rising costs of commodities like zirconium and borax which are used in the production of glazes, and competition from cheap imports were cited as reasons for the poor earnings.
Group income decreased 3,4% to R1,5 billion from R1,6 billion in the year under review. But operating profits slipped 23% to R192 million from R250m last year. Strap line revenues per share declined 30,6% to 785,3c from one 131,3c per share.
Making tiles is an energy radical business, and the skyrocketing cost of electricity, and more particularly gas, is making itself felt. “The energy cost per unit (m) has risen from R1,50 twenty months ago, to R3,60 currently.” The cost of commodities employed in the making of tile and ceramic glazes rose by twenty percent to 25 percent during the past year.
But other costs, for example maintenance and labour, came in at less than inflation. The company is in negotiations with unions regarding 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 in the group, which operates four tile factories, a sanitaryware factory and a bath factory in SA ; and a glazed porcelain factory in Australia.
Maybe 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 bracket increased both production and sales volume, growing turnover by 4%. “We run a particularly competitive operation,” says Booth. “Our factories are top flight and we are able to compete with the Chinese.”
The year saw the company invest R130 million on gear upgrades and state-of-the-art technology. “This is generally on high definition printers for our glazes. We plan to roll the technology into all our factories,” Booth says.
Exports to Africa grew by twenty p.c. during the past year, also helping to drive cash in the Pegasus business. “We are exporting to all our neighbours, with good expansion 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 chance of building a factory in one of its export markets.”
It was in the higher echelons that Ceramic suffered the result of Chinese imports. Vitro, the factory that produces upmarket flooring tiles (over R60m)
“We produce tiles made of red clay the type sometimes mined in SA. But the trend is towards white based porcelain tiles. These are imported and are becoming more and more popular. There’s no technical difference, and once tiles are coloured and glaz- ed, there’s no tangible difference eit- her. The difference is perception.
In other divisions the company scored a few own-goals. Samca, which produces floor tiling (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 stay abreast of trends, leading to a loss of sales. The company had to drop its costs to win back market share.
The rest room business has been turned around, with sales volumes growing across the board. “We lost share of the market and let go of our costs a bit. Costs are now in order and we have passed on the savings so as 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 chiefs, Lance Foxcroft and Pieter de Lange, to head up the sanitary ware and tile divisions respectively. With the day by day operations now in good hands, he is actually now more able to focus on enterprise-wide method and business development.
The Australian business had a hard year, reporting production down by 26,5% and sales down by 25% and barely breaking even. While the economy was slow and imports high, the majority of the issues came down to production and commissioning Problems 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 sure about the year ahead, and about producing in SA generally. “Any producer of heavy stuff should operate in the market in which they sell the product.”
He has worries about the ability of makers to create new jobs in SA but believes the business will remain workable th- rough continued investment in capital structure. “The challenges we are facing today are dissimilar to those of a decade back but nothing is insurmountable.”
As is evident from the one 500c special dividend announc- ed early on in the year, Ceramic is a money generative company. Money reserves decreased to R217,7 million from R435,7 million and Ceramic’s net asset price per share fell by 10,5% to seven 081c (2010 : seven 912c) as a result of the R304m special dividend pronounced in May as reported tagza.com.