THIRD TIME LUCKY FOR PPC IN POSSIBLE TIE-UP WITH AFRISAM?

 PPC Southern Africa MD Njombo Lekula believes there is a merger
opportunity with smaller rival AfriSam in the future to build an African cement
titan. Since 2014, both companies have twice attempted to combine their
operations, but PPC shareholders blocked a merger. Lekula said the pressing
issue is cheap cement imports from China and Vietnam that are hurting SA’s
cement industry.

It might be a case of third time’s a charm for SA’s largest cement-maker
PPC in its possible merger with AfriSam.

The last collapse in merger talks was in December 2017. At the time,
AfriSam, chaired by prominent businessman Phuthuma Nhleko, faced an R8-billion
debt load and its major shareholder, the Public Investment Corporation (holding
about 66%), was reluctant to inject more money into the company.

A successful merger with PPC (also involving Canada-based investment
holding firm Fairfax Africa Investments) would have injected R4-billion into
AfriSam. And a subsequent agreement among AfriSam shareholders – including
Nhleko’s investment holding firm Phembani (holding 30.5% AfriSam shares) – to
convert their loans into equity would have erased the company’s crippling debt load.

“Is there an opportunity for a merger in the future? Of course,” PPC
Southern Africa MD Njombo Lekula told Business Maverick.

Lekula believes a merger would be warranted – not anytime soon – because
the cement industry is troubled and choked by high levels of cheap imports and
weak demand because of low infrastructure investments.

Several producers such as PPC and Sephaku Holdings’ cement operations
have seen cement sales and profitability knocked in recent years. AfriSam,
which is not a public company and doesn’t report its financial results, is
probably in a similar boat.

“It made sense to consolidate the industry years ago through a merger
when cement producers were not in trouble and there was excess demand for
cement. But now the industry is unsustainable because of the cheap imports,
which has resulted in cement supply being higher than demand.”

Arguably, it would be opportunistic for PPC to launch a bid for AfriSam.
After all, some dealmakers argue that a distressed business environment is good
for acquisition opportunities.

Lekula disagrees, arguing that a merger with AfriSam or any other player
in the market wouldn’t enhance its earnings; it would simply increase its
cement production volumes for a depressed market that won’t absorb it.

Cheap cement imports

Imports from Pakistan started to make their way into SA at Durban
Harbour around 2007. By 2014, the Pakistan imports were peaking at 1.4-million
tons a year, according to figures from The Concrete Institute (TCI), an
industry body that represents cement makers PPC, AfriSam, Lafarge, Sephaku and
Natal Portland Cement.

After the cement industry approached the International Trade
Administration Commission,   SA
introduced import tariffs from May 2015 of between 14.29% and 77.15% on cement
from Pakistan. The tariffs were effective as cement imports dropped by 497,269
tons in 2016, said TCI chief executive Bryan Perrie.

China and Vietnam stepped in to fill the gap and Imports from China have
been increasing since 2016. But in 2018, cement imports into SA from Vietnam
started taking over, totalling more than one million tons of cement in 2018,
according to TCI.

The local industry has an annual cement production capacity of about 18
million tons, demand is languishing at 13 million tons, leaving a spare/unused
cement capacity of five million tons. When factoring in the one million tons of
imported cement, the spare capacity swells. 

There is a strong market for this imported cement, and import
volumes are steadily growing. Hannes Meyer, a cementitious executive at
AfriSam, said the biggest customer of imported cement is the “man on the street
who builds their own house”.

Some local producers cannot compete on price, resulting in them
mothballing productivity on their cement plants. PPC alone has shut down one
production unit at its Dwaalboom cement plant in Limpopo that directly employs
more than 230 people. PPC’s Lekula said the company is selling cement today at
2008 prices to protect its demand. Because of this, producers’ profit margins are
between 11% and 15% compared with the 28% they made before the growth of
imports, he said.

Beyond PPC, the industry doesn’t have an audit on the number of job
losses linked to cheap imports because “producers are not allowed to even share
information with each other”, said Meyer.

Protection that producers are seeking

SA’s major cement producers want the International Trade Administration
Commission (Itac) to impose tariffs on China and Vietnam-based importers of at
least 45% to curb the imports. Their application to Itac, which will make the
final decision on what level of tariffs to impose, will be finalised next week.

Locally produced cement is subject to additional regulatory
requirements, including carbon tax and requirements for companies to empower
communities around their production plants. They also face escalating energy
costs and labour union pressures that add to production costs, and expensive
quality checks of cement by the South African Bureau of Standards.

Importers don’t have to comply with local regulations or production
costs.

TCI has also applied to the Department of Trade and Industry for
“special designation” of South African-produced cement to be used in state
infrastructure projects.

This will benefit local producers when President Cyril Ramaphosa’s
R400-billion infrastructure fund gets to work. The fund, which is part of
Ramaphosa’s economic stimulus package, seeks to fast-track the roll-out of
already prioritised infrastructure projects that require cement such as
national roads, human settlements, water infrastructure, schools and student
accommodation.

Lekula says: “It’s the people that will suffer through job losses and substandard cement imports. You are doomed as a country if you don’t protect the local economy.” https://www.dailymaverick.co.za/article/2019-11-15-could-it-be-third-time-lucky-for-ppc-in-possible-tie-up-with-afrisam/