PPC power costs on the increase

PPC power costs on the increase
21 May 2007

PPC south Africa’s largest maker of cement has warned that prices are set to rise as the company and the industry as a whole grapple with rising energy and transport costs. PPC CEO John Gomersall says the company is increasingly going to have to rely on lower-quality coals to fire its large kilns. This is because PPC cannot compete with the demand for coal from the export market.

The coal that PPC will increasingly be using will have a lower calorific value, which means that PPC will have to burn more of it to get the same energy output. Transporting these increased volumes of coal, much of it by road, will exert significant cost pressure because road transport for bulk commodities is much more expensive than rail.

Costs of coal have also climbed to much higher levels, says Gomersall, evidenced by the new three-year supply contract that PPC concluded in the first half of this year. Gomersall will not say when other coal contracts expired or how many there were or how increased prices will affect costs. He does say, however, that these increased costs will not be absorbed by PPC but will be passed on to customers.

Added to this, he says, it is clear there are going to be real energy price increases from Eskom, as the national energy supplier moves to raise prices in order to pay for its huge R150bn capex programme, and to suppress demand from consumers. Eskom has said it would ask the National Energy Regulator of SA to sanction an 18% increase in tariffs.

Economists have forecast double-digit increases in cement prices for much of the next decade.

Commenting on the effects on PPC of the group’s unbundling from parent group Barloworld, Gomersall says the change will be negligible. He adds that it’s important to remember that the two companies have been run as independent businesses for years, each with its own board and shareholder base.

RMB Asset Management analyst Ian Power says PPC’s interim results were good, though there was a degree of margin erosion because of the 200000t of bagged Surebuild cement the company had to import to keep its customers supplied.

All cement producers are importing, as demand has far outstripped forecasts made three years ago. Running at full capacity also has the effect of creating logistics bottlenecks, which pushes up costs and damages margins.

Cement demand grew 12% in the six months to end-March. Gomersall says he does not expect to see the same level of demand in the second half. He says recent claims of major cement shortages developing over the next few years to 2010 are somewhat sensationalised.

Power says PPC is a great business in a sweet spot, but he expects earnings growth to slow in the next financial year, as the company will probably need to import more.

One lever he believes the unbundling will offer PPC’s management to offset any sluggishness that the capital programme introduces is to tinker with the balance sheet and take on debt.

PPC is ungeared, and with Barloworld’s withdrawal there are hopes that this conservatism will be abandoned. Capital expenditure for the period was R372m, and projects under way are running on time and within budget.

The group will be spending R5bn over the next four years to boost production by 30% to about 8Mt. PPC is also closer to concluding its obligatory empowerment transaction, and is expected to transfer 15% of the company into black hands by year-end.

Strong operating performances are expected for the rest of the year. Power says that PPC’s performance will accelerate again in 2009/2010. The 10-for-one share split, he says, will also bring about an improvement in liquidity.
Published under Cement News