An overview > Executive report


David Alan Austin

Global markets for beneficiated aluminium products are growing and despite fierce competition, prices in niches in which we specialise are stable.


Hulamin reported record profits for 2014 with normalised earnings up 76% at R355 million. Another landmark achievement was our safety performance with only two LTIs (lost time injuries) taking place during the year.

The strong growth in profits came from an increase in Dollar conversion margins, selling price less cost of metal, coupled with a weaker Rand/Dollar exchange rate and an overall 1,6% growth in volumes. Expenses were well contained assisted by a general fall in global freight rates.

Global trading environment

There are clearly distinct markets for aluminium rolled products, extruded products and castings. Hulamin manufactures and sells rolled products and extruded products both of which are classified as semi-manufactured since they fall midstream between unbenefitiated aluminium and final end user products.

The total global market for rolled products was about 23 million tons in 2014 with the extrusion market of a similar size. CRU forecasts world consumption of rolled products to be growing at 5% per annum. Foil and packaging, each comprising around 25% of end user markets, are the largest individual sectors but transport is the fastest growing due to the rapid adoption of aluminium body sheet in the auto industry. Regionally, Asia is the largest market with China on its own making up around one third of global consumption.

Globally, capacity utilisation is currently at 70% for rolled products but growth in capacity is forecast to be slightly faster than growth in consumption. Substantial new capacity is being installed in China and the Middle East and this will place pressure on conversion margins, particularly for standard commodity type products. There is a wide divergence in the conversion price of different rolled products ranging from $500 per ton for certain commodity type products to over $3 000 per ton for aerospace type products. Supply/demand patterns also differ from region to region leading to significant price differentials between markets.

Sales performance

Group revenue grew by 6,3% in 2014 to just over R8 billion. Sales volumes increased by 1,6% to 214 000 tons. Rolled products volumes increased by 3% from 190 000 tons to 196 000 tons with 70% being exports. Extruded products are only sold into the South African market and sales volumes of these products decreased by 13% as imports continued to increase their market share in difficult conditions.

Our sales by region is shown here and the proportionate contribution by major product stream to profit is detailed in the graph below. We increased our focus on our core product streams and just three streams, beverage can stock, plate and automotive products accounted for 81% of our total contribution from rolled products. However, these same three streams only accounted for 60% of our total sales volumes.

Rolled Products sales volumes versus contribution (%)

Sales in our home base, South Africa, increased from 35% to 37% of total volume. GDP growth in SA was only 1,5% in 2014, down from the 2,3% recorded in 2013. The impact of the economic slowdown was compounded by the continued rise of imports and, as stated above, sales of extruded products fell 13%. Sales of rolled products were boosted by our commencement of supply of can body stock into the local market.

Automotive is our largest local product stream and we supply the local automotive market with both finstock and tubestock for use in heat exchangers as well as extruded material for suspension components. Many of the vehicles in which these products are used by leading OEMs are subsequently exported.

Beverage can products are our core business and comprised 39% of total contribution, up from 38% in the previous year. We supply can end to the local market and are also qualified suppliers to all the major global can makers. We export approximately 80% of the can end we produce. The recent conversion of the South African beverage can market from tin body stock to aluminium body stock provides a wonderful local growth opportunity and we supplied 5 500 tons of can body stock (CBS) to Nampak in 2014. We expect this product stream to grow rapidly in the local market in the future.

Plate products, including heat treatable plate, accounted for 28% of total contribution. Local market sales include tanker plate for use in petrol tankers whilst most of our heat treatable plate is exported to the USA. Heat treatable plate is a high value product, similar to aerospace products, and we were pleased to renew our supply contract with Tesla Motors North America. North America is our second largest market after South Africa and 25% of our sales, were to North America in 2014. These sales included significant sales of distributor commodity type products.

Europe is a key market for us and conditions were stable but competitive. Can end sales were satisfactory and we continue to seek growth in these markets. During the year we exited a number of unprofitable product streams and in total, revenue into Europe remained at 20% of total sales.

Sales in Asia fell from 11% to 8% of total revenue and conditions in these markets are very difficult with prices falling in an oversupplied market. As a result we exited a number of unprofitable contracts and were able to reposition some business from Asia to Australia.

In line with our focus on the key product streams, sales of commodity products declined year on year.

Operational performance

Overall, our manufacturing performance fell short of expectations in 2014. Total rolled products production amounted to 194 000 with an aggregate recovery or yield of 65% against a target of 67%. Whilst our focus on high value product streams was expected to reduce total production volumes, the reduction was greater than anticipated.

Far and away our best performing product stream in 2014 was the plate plant which operated at 103% of capacity achieving consistently good recoveries and excellent on time delivery performance (OTD).

Plant performance for our largest stream, can end and tab, was variable and recoveries were below target. Quality and OTD were adversely affected by problems on the coating line due to technical difficulties with a particular coating agent and the impact of a significant headcount reduction in this area as part of the 2013 right sizing exercise. An alternative coating agent is now in use and key skills have been added. The ramp up to full commercial production of can body stock (CBS) commenced in the second half of the year and was very successful. Can end and can body share a number of production facilities and processes and the additional effort needed to launch can body placed further pressure on can end resources during this period. The can body stock stream is now stable and an improved performance is expected from both can end and can body in 2015.

Production of automotive products was generally stable with good recoveries and OTD. A surface contamination issue arose at the end of the year which resulted in quality claims and a deterioration in OTD performance. The problem has been corrected and delivery performance is now back on schedule.

Performance of the foil stream remained disappointing. Other commodity products are manufactured both to dispose of process scrap from key products and also to make use of spare capacity when available. In general, production in this area met expectations.

Construction of our new R300 million aluminium recycling plant commenced during the year and is proceeding on budget and on time. The furnaces will be tested in May 2015 and then production will start to ramp up in the third quarter of 2015. Total capacity of the new facility is 50 000 tons and it will handle light gauge plant and customer process scrap as well as used beverage cans (UBCs). The plant will provide us with metal units at a considerable energy and cost saving as compared to freshly smelted remelt ingot (pig). This will also provide a source of income to numerous collectors or pickers who may otherwise have had no income. Aluminium scrap is one of the most valuable scrap products available in SA which will encourage a high rate of recycling. Aluminium is infinitely recyclable and in some parts of the world recycling rates for UBCs are above 90%. Hulamin is actively engaging with all relevant parties to promote recycling in South Africa.

Financial performance

Hulamin reported an attributable loss of R1,3 billion in the prior year, 2013. The loss arose from an impairment charge of R2,1 billion that recognised that the carrying value of property plant and equipment was higher than its anticipated future value in use or fair value. Headline earnings which exclude impairments amounted to R183 million in that year.

In 2014, Hulamin reported record earnings whatever the measurement basis applied. Normalised earnings of R355 million increased by 76% over those of 2013 with headline earnings per share of 112 cents up from 57 cents in the previous year. We emphasise normalised earnings as a performance indicator since it excludes non-recurring type gains and losses such as those arising from the sale of capital assets and the conversion of the retirement benefit fund. The determination of normalised earnings is shown in note 22.

Rand turnover increased by 6,3% to R8 billion. Turnover includes metal sold and is affected by LME, geographic premium and product mix. The small increase in overall volumes and a weakening in the average rand dollar exchange rate impacted favourably.

Expenses were generally well contained with freight costs down in dollar terms following a sharp fall in freight rates across most markets. Operating profit (EBIT) amounted to R585 in 2014. Interest costs fell from R63 million to R46 million despite higher interest rates due to a fall in net borrowings. The effective tax rate was 28,6% and with assessed loses now fully utilised cash tax payment will resume.

The balance sheet is strong with a net debt equity ratio of only 11,4%, well below the 18,0% of the previous year. The net asset value is R12,00 per share and although the share price has subsequently risen to levels around R9, this is still well below underlying NAV.

Operating cash flow before working capital rose by R103 million to R597 million. Working capital increases required R79 million of this amount, significantly less than the R211 million required in 2013. Although in rand terms inventory increased by 8% to R2 billion, the actual quantity of material on hand fell from 67 000 tons to 60 000 tons. Our target is to maintain inventory under 50 000 tons but this will only be possible once plant variability is eliminated. EBITDA to sales increased from 7,0% to 8,2%.

Capital expenditure increased significantly from R148 million in the previous year to R335 million in the current year. The aluminium recycling plant and other projects amounted to R92 million with the bulk of the expenditure being spent on ensuring that our plant is maintained to the highest standards thereby improving overall reliability. We spent R16 million on improving shop floor safety in 2014 and similar amounts are budgeted for 2015 and 2016.

R118 million of the residual was utilised to repay loans and net borrowings, loans less cash, fell from R612 million in 2013 to R437 million at the year end. We have concluded a new five year R270 million loan facility with Nedbank to finance the R300 million aluminium recycling plant we are currently building. The recycling plant, which will lower energy consumption and provide new jobs, has been financed through Nedbank’s “Fairshare 2030” programme.

Given the strong results and cash flows the board decided to resume payment of dividends to shareholders. Hulamin intends to follow a policy of distributing one third of earnings each year by way of dividends to be paid one third as an interim dividend and two-thirds as a final dividend.

Isizinda “The Hub”

In 2009, BHP Billiton announced that they would close their downstream aluminium casthouse at Bayside and would in future concentrate on the production of basic melting ingot at their Hillside smelter. This was to be a phased process with rod casting already having ceased, billet terminated in September 2009 and slab scheduled to halt in June 2012. Hulamin has, for many years, relied on BHP Billiton for the supply of 100 000 tons of rolling slab, representing approximately one-third of total requirements.

BHP Billiton did not close Bayside in 2012 but kept producing slab while also seeking an acceptable solution for key stakeholders. In November 2014, we announced that Hulamin has entered into a strategic partnership with the Bingelela consortium to form Isizinda Aluminium, a black empowered company that will acquire the Bayside casthouse from BHP Billiton, subject to Competition Commission approvals. Hulamin will hold a minority stake in Isizinda Aluminium and Isizinda will supply Hulamin with rolling slab for at least the next five years.

The transaction has tremendous positive implications for the downstream aluminium industry and discussions are already taking place around the possibility of restarting the casting of both billet and rod.

The road ahead

Record earnings in 2014 is just one of many landmarks in the Hulamin story and before extrapolating forwards it may be useful to reflect on how we got here.

Hulamin underwent a fundamental change in 2 000 when it increased nominal rolling capacity from 50 000 tons to 200 000 tons. A mill of such size would always be heavily focused on exports given the local market requirements for rolled products of only 50 000 tons at that time. However, as South Africa was generally regarded as a low cost jurisdiction, exports would be able to compete well in global markets.

In June 2007, Hulamin was listed on the Johannesburg Stock Exchange as part of the unbundling of Tongaat Hulett. The graph below plots normalised earnings from 2007 to 2014 as bars. On the same chart two line graphs have been added, one showing the tons of rolled products sold in each of the years and the other the average Rand/Dollar exchange rate that prevailed. It is readily apparent that there has been little correlation between volume and profit over the eight year period. It is equally apparent that there has been a strong correlation between the Rand/Dollar exchange rate and profit. A R950 million capacity expansion programme came on stream in 2009 and was expected to add substantial foil capacity. However, for a number of reasons this additional capacity did not result in improved profitability in the ensuing years.

Normalised earnings versus sales tons
versus exchange rate

There is no doubt that the Rand inflation rate in South Africa has exceeded that of the first world economies and appears set to continue to do so. Energy costs, once low by global standards, have risen sharply and, in particular, the cost of the LPG gas we use for heating and melting is considerably more expensive than the gas available in, for example, North America. Economic theory suggests that over the long term, interest and inflation rate differentials between countries will be countered by changes in currency exchange rates. Looking at the same graph the exchange rate has declined over the period but it does not do so uniformly. Consequently, profits in 2010 were negatively impacted by a Rand/Dollar exchange rate that was, on average, stronger in 2010 than it was in 2009.

The global market place is in a constant state of flux. The rise in Chinese rolled products consumption, which now comprises more than a third of the global total, coupled with a massive investment in production capacity over the last ten years, has created some fundamental changes. Other BRIC nations such as Brazil and India have also invested heavily in their aluminium industries and major smelting and rolling capacity is currently being brought on line in the Middle East to take advantage of low energy costs. These changes in market dynamics coupled with long logistics chains to our export destinations, render our commodity product exports at best, only marginally profitable.

The large divergence in prices between commodity products and high value products was discussed earlier. Hulamin has developed core competencies in some of these high value products and, in particular, in the manufacture of heat treatable plate and coated can end stock. We are qualified suppliers to most of the global can makers including Rexam, Ball, Canpak and Crown and also supply Nampak locally. The demanding specifications required in making these products provide barriers to entry and concentrating on these niche products will provide far greater profit opportunities.

The fast growing SA beverage can market provides an opportunity not only to shorten logistics chains but also to narrow our product range and lengthen production runs. In the future, certain of our mills will be focused almost exclusively on beverage can products and this will allow for better recoveries.

In order to successfully sell technically demanding products into first world markets one has to meet and sustain first world standards. This presents a major challenge and one which can only be successfully met by continuing to invest heavily in training and developing our workforce. Leadership on the shop floor is an area we have identified that can, if properly developed, hugely benefit both quality and recoveries.

For a number of years considerable uncertainty has existed around the future supply of rolling slab and other metal units to Hulamin. The Isizinda Hub, discussed elsewhere in this report, will help mitigate these risks and, by creating a larger downstream value-added local aluminium industrial hub, will also strengthen the case for a local smelter in an electricity constrained country. Our new R300 million aluminium recycling plant will also help address these concerns.

South Africa is one of the few countries in the world with a local rolling industry that does not impose duties on imported products. The rapid growth in installed global rolling capacity means that many producers will seek to unload excess production at uneconomic prices into unprotected foreign markets so as to maintain higher prices in their own markets. Hulamin has lodged an application with ITAC for duty protection and, we anticipate the investigation phase of the adjudication to commence shortly. If the application is unsuccessful and if low priced imported products dominate, this may place our recycling investment at risk since the recycled metal only has value to the extent it can be resold as beverage can products at competitive prices.

South African manufacturers face many infrastructure related challenges not least of which is electricity. It is very encouraging to hear that Government intends taking serious action to address key issues and their success in this area will impact heavily on the future success of all local industry.

New B-BBEE transaction and ESOP

When Hulamin listed in 2007 it created an empowerment structure and an employee share ownership plan. However, as the Hulamin share price fell substantially after listing, neither scheme vested significantly.

In line with our Hulamin values and strategic objective of maintaining a level 4 or better contributor rating under the recently implemented new BEE Codes, we will ask shareholders to approve a new B-BBEE transaction, including an employee share ownership scheme (ESOP), at the annual general meeting in April 2015.

A circular providing full details of the planned transactions will be sent to shareholders and published in March.


Hulamin has a lot of very impressive plant and equipment. However, the success of our business is not determined by our machines but by our people. Thank you all for a great team effort in 2014 and I know we can count on you for an even better performance in 2015. In particular, I would like to thank my Exco colleagues for their help and support without which I would not have been able to also fill the role of acting CEO in the second half of the year during Richard Jacob’s medical leave of absence.

We have commenced an employee climate survey with the help of Deloitte and Talent Map and the findings will be shared transparently with employees. Whilst we cannot promise to resolve all concerns raised, we can promise to take them seriously.

We will ask shareholders to approve a new Employee Share Ownership Scheme (ESOP) at the forthcoming AGM and, if approved, this will give all employees a direct financial interest in the performance of Hulamin.

75th Anniversary

Hulamin celebrates seventy five years of operations at our Edendale site in Pietermaritzburg this year. Over this time we have played an important role in the lives of our many employees, their families and communities. We have always sort to abide by our core values of mutual respect, honesty, integrity and teamwork and we were an enlightened employer long before it was legally required or even fashionable.


Global markets for beneficiated aluminium products are growing and despite fierce competition, prices in the niches in which we specialise are stable. Local market prices will be influenced by the level of imports and particularly those products that are sold into the South African market at prices lower than that in the exporter’s home market.

We will continue to focus on our core competencies and product streams in 2015. Our efforts to simplify the business and establish clear accountability will improve manufacturing performance and in particular, production recoveries. Significant changes in the rand dollar rate of exchange will continue to impact directly on profitability.

Load shedding will have a fundamental impact on the entire South African economy in 2015. Hulamin is currently cutting back 10% of its electricity consumption in terms of an agreement with both the Msunduzi Municipality and Eskom. Power disruptions in January and February had a substantial impact on production and the reality is that Hulamin will lose at least 10% of production and profits if power disruptions continue.

Richard Jacob has made an excellent recovery following an extended medical leave of absence and will resume his post as CEO on 1 March 2015.

David A Austin
CFO and acting CEO

19 February 2015