Chief Executive Officer’s Report
Since strengthening the management team from 2013 to 2016, Hulamin’s operating performance has improved measurably. In 2017, this high standard was again achieved. I am particularly proud of the Hulamin Rolled Products team that once again showed passion, commitment and the desire for continuous improvement on an already impressive base performance in 2016. In this review of 2017, I will present both the results of these efforts as well as some of the underlying successes achieved during the year.
OVERVIEW OF 2017
Sales volumes for the year to 31 December 2017 totalled a record 233 000 tons, which was similar to the corresponding period’s 232 000 tons. This was made possible by a second consecutive year’s record performance in Hulamin Rolled Products of 215 000 tons, as well as contributions from Hulamin Extrusions and Hulamin Containers. As a result of strong risk mitigation actions, we achieved a second year without external disruptions, although a planned shutdown for 12 days for maintenance and upgrades in the third quarter reduced manufacturing output by approimately 7 000 to 8 000 tons. During this shutdown we completed and commissioned further gas conversions from Liquid Petroleum Gas (LPG) to Compressed Natural Gas (CNG). This now takes our split between these two sources from approximately 70:30 to 55:45. This conversion further mitigates the supply disruption that has made Hulamin vulnerable to the unreliable supply of LPG in South Africa. The Hulamin Rolled Products team once again made significant improvements to efficiencies and implemented cost reductions as the levels of sales and production of can body stock again increased (by 63%). This increased demand allowed us to increase our procurement of scrap by 40%.
In 2017 major changes occurred in Hulamin’s largest export market, the United States of America. In March, the Aluminium Association laid a complaint of unfair trade practices against Chinese foil supply into the USA. After seven months of investigation, the US International Trade Commission ruled that Chinese foil was indeed produced in a non-market based economy and applied anti-dumping import duties ranging from 96 to 162% on these products. Hulamin has supplied foil into the USA since the late 1980s.
In an unprecedented move on 28 November 2017, U.S. Secretary of Commerce Wilbur Ross announced the self-initiation of antidumping duty and countervailing duty investigations of imports of common alloy aluminum sheet (common alloy sheet) from the People’s Republic of China (China). These historic investigations, the first in over a quarter century, were self-initiated. Both these actions have created a window of opportunity for Hulamin to increase its sales footprint and entrench its market position in the United States, where Hulamin has a long history and strong customer base.
During 2017, Hulamin continued to build its synergistic relationship with Isizinda, the JV slab cast house in Richards Bay. The product range, flexibility, volume and recycling performance of Isizinda were all improved, resulting in lower risk to slab supply and the capability to reduce inventory of rolling slab.
Hulamin Extrusions and Hulamin Containers both performed consistently in 2017. In Hulamin Extrusions, the powder coating investment approved and announced in 2016, started up on time, on budget and on specification. This capability provides the opportunity for strategic turnaround and improved positioning throughout Africa in synergy with Hulamin Rolled Products.
Although we maintained our improved safety incident frequency rates, on Monday, 6 November 2017, Michael Gumede, a contractor working on our Edendale site fell to his death. We have felt a huge loss as a result of this most unfortunate incident. Following a thorough root cause investigation, we have taken a number of strong actions to reduce the likelihood of this unfortunate incident happening again.
Hulamin is located in a society with unusual levels of poverty and inequality. Hulamin has committed itself to playing a positive role in addressing these problems through its values and Transformation actions. Hulamin has played an important role in the empowerment and transformation of KwaZulu-Natal for more than 25 years. In 2016, the Hulamin Board approved a revised Transformation plan that focuses on preferential procurement, employment equity, ownership and control as well as enterprise and supplier development.
In the year under review, we have made important strides in establishing the Aluminium Beneficiation Initiative, an organisation focused on developing entrepreneurial activity in the aluminium value chain, the Nyonithwele High School Science and Biology Labs, and a health partnership with the Provincial Department of Health and the American Embassy (PEPFAR Programme).
We remain committed to driving this change from within. To this end, and although we still have a long way to go, we made important progress in 2016 in adapting to the revised BEE Codes as published by the department of Trade and Industry. Our 2016 score (published in 2017) justified a level 5 rating. However, primary aluminium is only available in South Africa from a single source, South 32’s Hillside Smelter, which is not “empowered”. As a result we could not achieve the required Preferential Procurement sub-minimum score to prevent us from being penalised down to a level 6.
Hulamin has an enviable depth of talent and human resources, of both genders and well distributed in accordance with South Africa’s demographic profile. I am therefore extremely proud of the available talent and succession pool that we have available. Due to the unique nature of Hulamin’s operations in Southern Africa, Hulamin relies heavily on developing talented employee from within our own ranks. I am therefore not only proud, but also encouraged that there is abundant talent to secure Hulamin’s future.
A PLEASING SET OF FINANCIAL RESULTS
Turnover increased in 2017 to R10,2 billion (2016: R10,1 billion) as a result of the higher LME aluminium price and a stronger sales volume. The Rand strengthened by 10% to an average of R13,32/USD (2016: R14,73/USD), dampening Rand revenues and eroding profits to the tune of some R267 million (on a like-for-like basis).
The price we pay for aluminium includes the US Dollar London Metal Exchange price as well as a blended international geographic premium. Following the stable regional geographic premium in 2016, these premiums were again relatively unchanged 2017. Hulamin is 50% exposed to movements in the US Dollar value of its aluminium inventory and 100% exposed to the Rand value of this working capital. Changes in this value are known as the metal price lag effect which is reported in Rand. The LME Aluminium price continued to firm during 2017, resulting in an increased metal price lag benefit of R150 million (R50 million in 2016).
Hulamin continues to perform
in spite of a stronger currency.
Chief Executive Officer
Manufacturing costs in Rolled Products were 5% lower than the prior year, a combined result of numerous factors. These include planned cost reduction measures, local inflation, a lower Rand/US Dollar rate (on US Dollar costs), and improved access to natural gas. Costs from the Isizinda joint venture were once again consolidated as Hulamin has effective control of the operation. Comparable earnings before interest and taxation (EBIT) were 33% higher on a constant currency basis.
Hulamin again delivered improved cash flows and capital discipline during 2017. Net cash flow after investment activities of R296 million further reduced borrowings to a manageable level of R317 million. This improvement was underpinned by operating cash flow that amounted to R557 million. Capital expenditure amounted to R261 million (2016: R328 million) and net interest payments totalled R99 million.
With high levels of performance maintained in 2017, we continued to explore opportunities for growth and sustainable performance improvement. The three pillar revision to the Hulamin Strategic plan that was approved in 2016 remains important. These three pillars include:
Strengthening the core (of the business)
The basis for long-term performance, investment and growth remains inside the operation with a strong operational core, Hulamin has the strength to grow, expand and invest.
Growing rolling margins
Hulamin embarked on a major drive in 2017 to improve US Dollar rolling margin (selling prices). This includes elements of mix improvement, product enhancement, new product development, market development and possible downstream vertical integration.
Investing in assets of tomorrow
It is clear that the assets (both hard and human/“soft”) of the past in their current form will be insufficient to grow our business and remain relevant into a future marked by significant change. We are evaluating growth opportunities to significantly uplift our value offering to stakeholders, within the constraints of available resources and risk appetite. This equates to the deployment of people, equipment and know-how. We expect to announce a number of projects over the coming period.
After sustained high performance levels in 2017, we are committed to Hulamin’s sustainable growth and improvement and look forward to unlocking further value for all our stakeholders.