The External Environment
Our business does not exist in isolation. As we compete in the world aluminium market, with more than 50% of our goods exported, we are exposed to market forces and developments outside of our borders. In this context, it is important that we understand:
- The drivers behind these dynamics and how they interact;
- Their implications for our business; and
- How we can best navigate them in the short, medium and long term.
Our business is impacted by situations and trends in the following broad categories, for which we have highlighted key issues affecting our business in 2017 as well as our approach to managing the challenges and opportunities that they represent:
- Global Primary Industry (incorporating LME prices and geographic premiums);
- South African Aluminium Industry and operating environment;
- South African Economic and Political Environment;
- Global Aluminium Semi-fabrication market; and
- Regional Market Development.
Energy: Inconsistent supply of and increasing cost of energy.
Local smelter: Availability of local primary aluminium
Electricity supply: Electricity supply constraints have started to ease as new supply has come on-line in the form of new power stations. The inability of the local energy supplier to reduce and contain internal costs, and to minimise the pass-on to customers of the cost of new infrastructure, creates the potential for high energy prices in the future.
Gas supply: The commitment from relevant stakeholders to invest in a gas-pipeline to secure consistent, reliable and cost-effective supply is not immediately forthcoming.
Local smelter: Stronger LME aluminium pricing provides support to local South 32 aluminium smelter, however, a new long-term electricity deal is still to be secured and the implications of proposed carbon tax legislation is unclear.
Electricity supply: Exorbitant energy price increases impact on global cost competitiveness which erodes margins earned which ultimately impacts on shareholder returns. Should energy supply remain inconsistent benchmark operational performance is unlikely to be achieved.
Gas supply: The consistency of gas supply has a direct impact on the achievement of benchmark operational performance.
Local smelter: Outlook for local smelter improving, but uncertainty still exists until new electricity deal finalised with Eskom.
Electricity supply: The group has engaged with the Energy Intensive Users Group (EIUG) to lobby NERSA for reasonable price increases to limit the erosion of margins and to remain competitive within the global environment. A demand reduction operating plan is being developed to reduce internal consumption of energy.
Gas supply: The group has diversified gas supply by converting certain lines to CNG as an alternative source of energy. Ongoing discussions with a variety of stakeholders to secure a gas pipeline to the Pietermaritzburg region.
Local smelter: Ongoing engagement with South 32 and key stakeholders to promote growth of the South African aluminium industry and casting in Richards Bay. Increased use of aluminium scrap.
Excess global capacity places pressure on marginal aluminium smelters due to tempered aluminium prices, which are forecast to continue for the next
Capacity in China: Global capacity is impacted by excess capacity in China which results in supply exceeding demand, tempering the LME aluminium price over the next five years.
Environmental Concern: Concerns in China are, however, likely to result in closure of smelting
capacity which will provide a level of support for
LME aluminium pricing.
Geographic Premiums: Low metal premiums have persisted since mid-2015 and have placed additional pressure on marginal smelters.
Steadily increasing LME aluminium price and stable, relatively low, metal premiums provide stability in input costs and margins for rolled products producers.
Shifting global trade dynamics increase uncertainty.
Tariffs on US imports of Chinese aluminium could result in increased exports from China into other regions, while opening opportunities for other players in the US market.
The group will continue to grow its current proportion of high value products in the overall product mix to bolster margins and profitability. The development of new, higher value products will further be bolstered by increased focused investment in finishing capability and maintaining a strong relationship with the group’s current technology partners, consultants, industry experts and academic institutions.
|Impact on strategic objective|
|South African aluminium industry and operating enviroment||Strengthen the core (of the business) to compete|
|Global primary industry||Increase rolling margins|
|South African economic and political environment||Investing in the assets of tomorrow|
|Global aluminium semi-fabrication market|
|Regional market development|
Further details of our risk management strategy is provided here.
The Rand strengthens against the US-dollar and remains at stronger levels for an extended period.
Political uncertainty continues to reduce after the ANC elective conference outcome, and this, together with an overall improvement in business confidence over the latter part of 2017 and into 2018 has resulted in an improvement in Rand strength.
A significantly stronger Rand results in a material decrease in the group’s earnings before interest and tax in the short-term but more stable environment creates supportive investment conditions.
The group continues focusing on improving rolling margins through new high-value products and implementing sustainable cost reduction plans.
The group monitors its investment in working capital and continues to increase inventory efficiencies and reduce its cash cycle.
Market share: Increased competition in global and local markets for market share.
Trade policies: Chinese aluminium producers get closed out of key markets through punitive tariff protection mechanisms.
Market share: Global oversupply of aluminium semi-fabrication products driven by continued capacity investments in China. Investment in capacity exceeds demand growth leading to flat forecast utilisation rates over the long-term horizon.
Trade policies: Growing trend in protectionist trade policies around the world to support local manufacturing industries.
Market share: Rolling margins in key product categories decline in US-dollar terms. The decrease in rolling margins reduces total shareholder returns.
Trade policies: The group may gain an advantage over Chinese competitors for supply into certain export markets, but the group also faces pressure in the local market from low cost imports.
Market share: Develop local and regional sales, including the promotion of local OEM type products. The group continues to focus on improving the route-to-market and niche positions in current high value products.
Trade policies: The group continues to focus on opportunities created in export markets from changes in relative trading conditions.
Market: Low growth in the local market.
Transformation: Increasing focus on the pace of transformation of the local economy.
Market: Low economic growth and constrained local market demand for aluminium semi-fabricated products. Nationally a reduced investment in and failure of key infrastructure in ports, roads, energy and water has impacted on economic growth.
Transformation: Enhancement of a prosperous South Africa for all and advancement of economic growth prospects through a fully inclusive economy.
Market: Low domestic market demand negatively impacts on the group’s ability to generate sustainable financial returns within the local market and hampers the ability to enhance transformation within its supplier base.
Transformation: Varying stakeholder interest in the execution of corporate’s transformation strategies.
Market: The group continues to promote the group’s value proposition in South Africa. Continue to engage with the Department of Trade and Industry regarding incentive programmes for industrial development with local sourcing. The group will also focus on the development of its regional (rest-of-Africa) growth plan.
Transformation: Continued focus on the execution of appropriately designed transformation strategy. Development of the Richards Bay aluminium hub permit growth in black aluminium casting businesses within the Richards Bay region. Enhance leadership development programmes to up-skill and fast track black talent in the business.