BHP Billiton, which supplies the aluminium Hulamin uses to make automotive components and window frames, has given notice that some supplies from its Bayside smelter will end in September.
What does this mean for Hulamin's finances? It's another punch to the guts of a company that's already been dealt heavy blows by the economic crisis. Though Hulamin could invest capital to produce its own extrusion billet, this would add to production costs and take time. Importing is the only real option in the short term.
Hulamin CEO Alan Fourie says having to import product will drive up costs in Hulamin's extrusions business, making it more difficult to compete against imports in an already difficult market.
African Cables, owned by Reunert, is also a customer of Bayside. MD Alan Dickson says having to import extrusion rod will add to costs for his company. African Cables supplies aluminium extrusion cable to Eskom for use in overhead transmission cables.
JSE-listed Hulamin warned investors in April that it had started talks with the mighty BHP Billiton about supplies from the Bayside smelter. It announced last week that these talks had resulted in a decision that extrusion billet supplies would stop. Rolling slab supplies will come to an end in December next year.
There is a 5% import duty on aluminium, meaning a minimum equivalent cost increase, but there will be logistics costs added to that. This is set to change, though. Trade & industry department spokesman Lillian Mofokeng says the minister has approved the scrapping of this duty and that the SA Revenue Service will implement it “soon”.
BHP owns two smelters at Richards Bay: Hillside and Bayside. Hillside has a capacity of more than 700000t/year; Bayside's capacity is 174000t/year.
Bayside produces higher-value products like extrusion billet and rolling slab.
Hulamin buys 50% of its extrusion billet from BHP, and makes the rest itself. Its own extrusion business accounts for 10%-15% of the company's turnover.
BHP Billiton says the reason behind its decision to stop supplying extrusion billet in September and rolling slab in December 2010 is a sharp decline in domestic demand. Sales from Bayside for the nine months to March were 50% down. Dickson says African Cables has significantly decreased its orders from BHP.
But Hulamin, which buys 30%-40% of Bayside's billet, says its first-quarter purchases were less than 20% lower than last year's, which was an extraordinary year for billet sales anyway.
Aberdare Cables MD Harry Coetzee says he was not surprised by the announcement. “We've expected it for some time. Very reluctantly, we've had to look outside SA [for supplies].” Aberdare Cables, owned by Powertech, is importing extrusion billet from the Middle East and North and South America.
Electricity shortages meant BHP shut two potlines at Bayside last March.
Hulamin also has to deal with Eskom's latest 31.3% power tariff increase, which came into effect this month. Ingham Analytics analyst Mark Ingham doesn't think the increased input costs at Hulamin will deal a knockout blow to the company. “Hulamin has managed costs within its own control exceptionally well. Raw material input prices have eased but energy will continue to be a more important cost item.”
He says things are starting to look up for the company. “After a difficult end to calendar 2008 and the first few months of calendar 2009, demand conditions have improved for Hulamin. I expect a much stronger trading environment for the period July through December 2009.”
Source: Financial Mail
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