Operations review

PPC GROUP

PPC has amended its segmental disclosure to reflect southern African cement operations (which include Botswana and South Africa) and the rest of Africa cement operations – DRC, Mozambique, Rwanda, Zimbabwe, and cross-border sales from southern Africa.

The materials business is reported as a separate segment.

PPC’s revenue was R9,6 billion.



2017 REVENUE SPLIT

2017 REVENUE SPLIT

         
  Twelve
months
ended
March
2017
  Annualised
twelve months
ended
March
2016
 
Revenue (Rm) 9 641   9 187  
EBITDA (Rm) 2 065   2 385  
EBITDA margin (%) 21,4   26  
Operating profit (Rm) 1 027   1 594  
Operating margin (%) 10,7   17,4  
Assets (Rm) 18 035   16 389  

Cement

PPC Cement has a successful track record spanning 125 years as the leading supplier of cement in southern Africa. During this time PPC has expanded into Botswana, Zimbabwe, Rwanda, Democratic Republic of the Congo and Ethiopia. Our unique combination of quality products and good geographic footprint allows us to meet customer requirements in most parts of these countries.

Cement revenue up 3% to R7,8 billion while EBITDA was down 9% to R1,9 billion.

Fixed capital

Overall, real gross fixed capital formation declined by 3,9% in 2016 after increasing 2,3% in 2015, reflecting political uncertainty, subdued economic growth and low business confidence levels. This was the first negative annual growth rate since 2010. According to the South African Reserve Bank, as a percentage of GDP, gross fixed capital formation receded from 20,4% in 2015 to 19,6% in 2016, falling below the 20% level for the first time since 2012.

REAL GROSS FIXED CAPITAL FORMATION % (CALENDAR YEAR)

Source: South African Revenue Service


CEMENT SOUTHERN AFRICA


Review of 2017

The southern Africa business faced a number of headwinds in the period:

  • The South African economy recorded muted growth of 0,3% which affected consumer/business confidence and translated into weak household consumption and gross fixed capital formation.
  • A highly competitive landscape, especially in Gauteng, had an adverse impact on pricing. However, in October 2016 and February 2017, we implemented price increases in select market segments and regions.
  • Volumes in South Africa, impacted by high rainfall inland in the last quarter, still rose by 2%. Volumes in Botswana were flat, mainly due to competition.
  • Imports from China have increased 82% (from 55 000 tonnes to 100 000 tonnes) between the first calendar quarters of 2016 and 2017. In the same period, imports in the Western Cape rose from 23 000 tonnes to 30 000 tonnes.
  • The SK9 project is progressing well. At 62% complete, the majority of approved capex has been deployed. Commissioning of the new kiln remains scheduled for the first half of 2018.

We believe the southern African cement market is showing early signs of improvement, especially in terms of rising prices. We will continue to focus on cost management and enhancing efficiencies at our operations. While challenges remain, we are cautiously optimistic that we have the right building blocks in place to manage these headwinds effectively.

SOUTH AFRICA


Highlights
  • Grew sales volumes and market share in a declining market
  • Curtailed trend of selling price erosion by relying on brand value proposition
  • Reduction in real cost to serve the market through optimal sourcing, leveraging efficiencies of mega plants and improved strategic procurement
  • Hercules vertical roller mill performance improvement (output and conversion cost)
  • More than doubling substitution level of alternative fuel use at De Hoek
  • Dwaalboom kiln 1 (DK1) electrostatic filter converted to a baghouse, reducing dust emissions to less than 30mg/Nm3 in line with 2020 minimum emission standards well ahead of deadline

Demand

We estimate that cementitious volumes (including imported cement) for South Africa were negative for calendar 2016. PPC’s South African equivalent volumes increased by 5% for the calendar year and 2% for the financial year.

The competitive landscape in Gauteng intensified, forcing cement prices down, particularly in the bulk market. In an effort not to follow these low prices, volumes in Gauteng were affected. Inland sales volumes rallied well across all segments in a tough market to end positive for the period.

All sectors in the coastal region again performed well, with double-digit volume increases in a positive market.

After growing for five consecutive years to 2014, imported cement volumes dropped by 37% in 2015 and a further 50% in 2016. Antidumping duties applied by the International Trade Administration Commission (ITAC) of 14% to 77% on Portland cement originating from Pakistan, coupled with our direct and deliberate import strategy, have reduced imports from this country.

IMPORTED CEMENT VOLUMES BY PORT OF ENTRY (SOUTH AFRICA)

Source: South African Revenue Service

In 2016, shipping rates more than doubled which deterred imports. However, the exchange rate improved from highs of around R16 to R13 to the US dollar which negated the high shipping rates.

Selling prices

With the second new entrant growing volumes in a declining market, cement prices were severely compromised. To stabilise prices, PPC effected phased increases in selected regions and sectors in October 2016 and February 2017. While PPC grew volumes, it was also able to maintain the price premium achieved over the years. This is testament that the PPC brand and value proposition of consistent product quality, an industry-leading delivery service and our highly respected technical support team continues to deliver.

Customers

Maintaining our customer base in this competitive environment remains a key challenge, reinforcing the importance of making customers our key focus. As the retail sector strengthens, we have identified the need to focus on our ultimate customers’ needs, behaviours and trends.

The combination of the strong PPC brand and migrated IDM brand performed well in the 42,5N and 32,5N retail markets. Industrial and construction sector sales were dominated by loyal long-standing customers who continue to appreciate the value in the total PPC offering.

Operations

Construction of the new 1mtpa clinker production line (SK9) at PPC Slurry is on schedule and within budget (R1,7 billion) for commissioning in the first half of 2018. Overall project progress is at 62%, and we have committed 82% of the capex. The bulk of equipment is in place with the last few shipments of electrical and instrumentation equipment scheduled for June 2017.

The state-of-the-art six-stage pre-heater structure is designed to achieve optimal heat transfer and is 75% complete. Eskom has started extending the substation and is on schedule for secure power supply to PPC by December 2017.

In response to a media report alleging that the EPC contractor’s foreign nationals are working illegally on the SK9 project, representatives of the departments of home affairs and labour as well as the National Union of Mineworkers audited work permits on site. Less than 1% of permits were found to be deficient and appropriate action was taken. PPC is fully committed to the highest ethical standards and, as part of its project management activities, continues to monitor compliance with all government regulations and protocols for labour employed on the project, including both local labour and scarce skills sourced abroad.

Safety

Nineteen lost-time injuries were recorded at South African cement sites, leading to an LTIFR of 0,56 (refer to page 106).

Outlook

South Africa’s recent credit rating downgrade to sub-investment grade by S&P Global Ratings and Fitch will have far-reaching consequences for the economy, with declining growth projections. The Bureau for Economic Research now expects real GDP growth to measure 0,6% in 2017 (previously 1,0%) before moving to 1,3% (from 1,8%) in 2018.

The forecast is particularly disappointing in light of the expected improvement in the external environment. Stronger global growth, higher commodity prices and positive investor sentiment on emerging markets in general should, under normal circumstances, provide more of a boost to domestic economic activity. However, increased political risk and continued policy uncertainty will probably erode any benefit of an improving global backdrop.

Consumer demand is expected to remain weak on the back of subdued growth in disposable income, tight credit conditions, and low consumer confidence levels. More restrictive fiscal policy and weak employment conditions are some of the factors weighing on disposable income.

The year was characterised by political uncertainty, subdued economic growth and continued low business confidence levels. Disconcertingly, until 2018, these factors are expected to continue weighing on real fixed investment, particularly private sector fixed investment. Private non-residential fixed investment is a major driver of cement demand.

Cement product range

The product range sold in South Africa includes IDM (32,5), SUREBUILD (42,5N), OPC (52,5N) and the specialist brand, SUREROAD (32,5N).

Value creation
  Implication for value   Strategic response
  • Impact of stagnant economic environment, new competitors and selling price pressure on profitability
 
  • Leverage the PPC brand and total offering by delivering a superior service and product
  • Enhancing own product range
 
  • Consolidation in the retail sector
 
  • Pursuing solution-driven offerings
  • Provide leading brand to draw customers
 
  • Cost competitiveness in an inflationary environment
 
  • Perfect own optimal sourcing model
  • Energy-efficiency management
  • Alternative fuel opportunities
  • Clinker factor improvement
  • Enhance fixed-cost absorption

BOTSWANA


Highlights
  • Completion and handover of BWP4 million house to winner in PPC Building Dreams competition
  • Customer diversification drive; attracted customers to PPC from competitors
  • Major construction projects secured despite aggressive pricing from opposition include a multi-storey residential and shopping complex in the city centre and a major 95km pipeline project between Gaborone and Kanye

Company overview

PPC Botswana has a milling, packaging and dispatch operation in Gaborone supporting a national distribution network.

Review of 2017
Botswana’s economic outlook is stable. According to the 2017/18 budget projections, the economy is expected to grow at 4% given the expected recovery of the diamond sector and growth across non-mining sectors. With general elections scheduled for 2019, national development spending is expected to increase in the 2017/18 fiscal year.

The cement market remains challenging, with increased supply from competitors. PPC Botswana grew volumes 1% in the period and maintained its leadership in this competitive environment, supported by sustainable relationships in the retail and construction sectors. Management has a robust business development strategy for lobbying with corporate Botswana on current and anticipated building projects, in the knowledge that riding out these cycles will create value over the long term.

Safety

We are particularly pleased with our safety record, with zero lost-time injuries for the review period. Our aggregates operations achieved a 12-month rolling average of 261 000 injury-free hours while our cement operations exceeded 1 200 000 injury-free hours for the period.

Outlook
The Botswana economy is expected to begin improving after a slump in the prior year, supporting our expectation of an increase in large-scale projects. Our strategy is premised on working closer with government as a strategic partner. We are also looking into forging better partnerships directly with contractors and expanding our retail relationships beyond the current base.

Value creation
  Implication for value   Strategic response
  Continued depreciation of the rand against the pula heightens the advantage for competitors supplying from South Africa   PPC Botswana has an appropriate exchange rate policy
  Product portfolio mix not competitive   Continue to explore further portfolio opportunities, eg introducing specific products to the Botswana market to address competition
  The country’s economy is mainly government driven; as a result, less government spending means little spending on infrastructural projects where cement demand is high   Continue lobbying government at all levels to maintain local status, in line with government’s economic diversification drive

Cement product range
The popular 32,5R, BOTCEM product, manufactured at the Gaborone milling depot, is complemented by the OPC and SUREBUILD brands.

CEMENT REST OF AFRICA


From an international perspective, this year was a very exciting and challenging year with many positives. PPC had three major projects under way outside South Africa, all heading for completion which meant commissioning at the same time. This is the culmination of our strategy to expand PPC’s footprint across Africa in 2010. These greenfields projects included fully integrated cement plants in DRC and Ethiopia, and a milling plant in Harare, Zimbabwe.

By April 2017, all three projects had been successfully commissioned. In March 2017, PPC’s Harare milling plant, which was commissioned in August 2016, was officially inaugurated by His Excellency, President Mugabe. In the same month, PPC Barnet DRC produced its first clinker and cement. This was followed a month later by the inauguration of Habesha Cement in Ethiopia by His Excellency, Prime Minster Ato Hailemariam Desalegn, rounding off a milestone period in our history.

As each of these investments developed from project phase to operations, so the role of the PPC international team evolved from providing guidance and oversight on the project to establishing the business systems and PPC’s operational architecture. Working with the local leadership team, the focus of the PPC international management team in our new operations in DRC, Ethiopia, Rwanda and Zimbabwe has been on developing and implementing country strategies, aligned to the group strategy, but responsive to local market dynamics. In the year ahead, the focus will be on embedding PPC’s best practices and developing local skills that will enable the teams to manage the ramp-up of these businesses.

Demand across the continent is driven largely by government investment in infrastructure. The macro-economic climate in each country adds to the dynamics of doing business. While most of the environments where we operate may seem overcapacitated, cement consumption per capita is still way below global averages. This implies opportunities to unlock latent demand which, in turn, drive our growth prospects. We remain positive that strategies developed in the respective countries will spearhead our success in these markets.




DEMOCRATIC REPUBLIC OF THE CONGO (DRC)


Highlights
  • Hot commissioning started in February 2017 after bulk power supply to the plant completed
  • First cement and clinker produced in March 2017
  • Start of production in April 2017, with first sales in that month
  • In addition to key investment incentives by the country’s investment promotion agency, ANAPI, the ministry of finance has awarded fiscal incentives to the manufacturing business for a four-year period starting from January 2016

Company and project overview

PPC, in partnership with the Barnet Group and International Finance Corporation (IFC), constructed a 1mtpa integrated cement plant for some US$300 million (previously US$280 million) in DRC. The plant is near Kimpese in Kongo Central province in western DRC, 230km south-west of the capital Kinshasa.

The new plant is 60% project debt funded with the IFC and PTA Bank as joint lead arrangers. PPC Barnet DRC is 69% owned by PPC, 21% by the Barnet Group, our local partner, and 10% by the IFC.

Review of 2017
Construction was completed on schedule, but hot commissioning was delayed to February 2017 due to delays in constructing and commissioning the overhead transmission line to supply power to the cement plant. Construction of a village to house company employees will be completed by June 2017, with more than half the houses handed over to date.

A quarry was developed and is ready to supply the factory with limestone and other raw materials during production. Supply contracts for imported inputs including coal, gypsum and cement bags were finalised and adequate quantities delivered to site for commissioning and production purposes. All operational and management staff have been recruited and relevant employees trained at existing PPC facilities in the necessary skills and PPC best practices.

A comprehensive route-to-market strategy was developed that includes branding and advertising, product and pricing strategy, distribution logistics, customer support and service as well as design of the back-office sales system. The PPC brand is well established and recognised in DRC in preparation for the sales launch in April.

The trading environment in DRC remains difficult, with lower pricing levels due to lowcost imports from neighbouring Angola. In addition, a competitor in DRC started production in January 2017 and is actively trading in this market. The local cement producers’ association continues to engage with government on industry protection as it moves towards self-sufficiency. Prices in the local market are expected to recover after support from the government is achieved.

Safety

The business continues to record excellent safety results, with only one lost-time injury during the year translating to an LTIFR of 0,06.

Outlook
After four years at 7,9% pa, GDP growth declined to 6,9% in 2015 and is forecast at 2,8% and 4,1% for 2016 and 2017. This has significantly affected government spending. The exchange rate is deteriorating rapidly against the US dollar and CPI is forecast at 33,5% for 2017. Political agreement was reached between major parties in December 2016 but has not been implemented against the agreed timeframe. A positive political move by the governing party, in conjunction with a recovery in commodity prices, should improve the local economy and, therefore, cement demand.

Strategies to reduce the risk on the project to PPC are being explored.

Cement product range
PPC Barnet produces 32,5R and 42,5R products.

Value creation
  Implication for value   Strategic response
  Shortage of cement specific skills in the country   Expatriates are tasked to transfer skills with the expectation of replacing them with local talent within two to three years
Local operators will be trained by EPC contractor specialists who will stay on site for the next year
The local management team and core operators are trained at PPC facilities to improve skills and become proficient in PPC best practices and procedures
PPC established a technical training centre at the plant to increase the technical skills pool available for recruitment and further train employees to improve skills levels
A technical concrete competence is being developed to increase use of cement in the local market
  Government protection of cement industry against imports   PPC Barnet DRC was a founding member of the local cement industry forum that continues to lobby government for industry protection
Government has implemented several measures to date

ETHIOPIA


Highlights
  • Plant commissioned in February 2017 after bulk power supply completed
  • Plant inaugurated by Prime Minister Desalegn in April 2017, with start of production in June 2017
  • Improved safety performance

Company and project overview

Habesha Cement Share Company (Habesha) is a cement manufacturing business and the first of its kind in Ethiopia, with 16 500 local shareholders. It has constructed a fully integrated cement plant with a capacity of 1,4mtpa in the town of Holeta in Oromia regional state, 35km from Addis Ababa.

PPC owns 38%, while South Africa’s Industrial Development Corporation (IDC) holds around 20%.

Review of 2017
Commissioning started in early February 2017 when the bulk power supply was completed. After the kiln was fired up in April, the plant went into production with first sales in June 2017.

Despite some challenges with the safety culture, the construction team’s adherence to the safety system resulted in no lost-time injuries for the review period. This is a marked improvement on prior years.

The Habesha plant has been designed to world-class standards, and all processes are expected to comply to these standards. Dust emissions are expected to be as low as 30mg/ Nm3. Mine development is under way and all environmental authorisations have been granted. In addition, the mining plan has been designed and will be monitored to ensure compliance to the national mining code.

As the cement industry in Ethiopia is well established, technical cement skills are readily available, particularly operational and maintenance staff. The proximity of the Habesha factory to Addis Ababa has enabled the company to attract some of the country’s most experienced staff.

Outlook
Analysts expect GDP to grow to 6,9% in 2017 (Ethiopia Economic Outlook, FocusEconomis). Cement demand in Ethiopia still exceeds supply and imports are banned. This is expected to remain the case in the short term. Cement sales for Habesha product are expected to grow in line with the factory ramp-up.

Demand is driven by the retail and construction segments, which account for over 85% of the market. Habesha’s route-to-market strategy is designed to leverage these segments through product availability and service innovations.

Our 16 500 local shareholders are our most loyal brand ambassadors as we establish Habesha as a leading Ethiopian cement brand.

Value creation
  Implication for value   Strategic response
  Habesha is a new entrant and needs to establish itself as a brand and gain market share   Brand proposition, Habesha is more than cement, designed to differentiate it from other cement brands
  Habesha’s value proposition   Introduce innovative route-to-market solutions
  Enhanced customer experience   Provide superior product knowledge

Product range
Habesha produces two products

  • Ordinary Portland Cement (OPC) CEM I 42,5R
  • Portland Pozzolana Cement (PPC) CEM II B-P 32,5N


RWANDA


Highlights
  • Achieving majority market share in a declining market
  • Successfully implementing transport management system – currently 40% of local volumes are direct deliveries


Company and project overview

PPC holds 51% in CIMERWA Limitada, the market leader and only integrated cement producer in Rwanda, with a well-established brand. The company’s production plant is in Bugarama, Rusizi district in the southern region, bordering DRC and Burundi.

In 2015, CIMERWA commissioned the technologically advanced 600 000tpa cement production plant at a cost of US$165 million, followed by satisfactory progress with the two-year ramp-up phase and optimisation exercises aligned with growing volumes.

Review of 2017
In CIMERWA’s first full year of trading after commissioning the new plant, market share has more than doubled to over 50%. This growth comes on the back of a 5% decline in domestic volumes for the review period. Export volumes improved, particularly in eastern DRC. However, due to political uncertainty in neighbouring Burundi, opportunities to exploit this key market have not materialised. In support of initiatives to improve customer service and reduce logistics costs, a route-tomarket strategy is focused on developing transport capacity in Rwanda to support growing volumes.

In response to domestic volumes, management implemented operational efficiency initiatives to reduce costs. This was driven primarily by optimising the thermal energy mix and packaging costs. Overall plant performance for the year was satisfactory, with further improvements expected from current initiatives. Emissions were maintained below 50mg/Nm3 in compliance with permit conditions.

Internally, organisational structures were reviewed to ensure successful execution of the business strategy and support the objective of achieving a high level of localisation by 2020. Developing human capital and local talent remain a high priority to advance key technical skills and entrench our position in the region.

To develop secondary businesses in the country, CIMERWA launched empowerment initiatives focused on creating small and medium enterprises (SMEs) to supply goods and services internally and externally. These include tailoring to manufacture overalls and carpentry to supply furniture to the plant and village. The initiatives reflect the company’s strategy to empower local communities.

Safety

Through initiatives to improve safety in the workplace, the 12-month rolling average LTIFR at year-end declined to 0,55, with 60 days since the last safety incident. Good progress is being made on employee training and awareness, equipment redesign and engineering controls to improve safety performance.

Outlook
According to the Africa Development Bank Group, Rwandan GDP growth for 2017 is expected to average 7,2% and recover strongly in 2018 and beyond. Cement growth should follow a similar trend. The gradual ramp-up of operations and optimisation will continue and the plant should reach full capacity in the next two years, benefiting from its location to supply cement to Rwanda, eastern DRC and Burundi.

Aligned with the government’s national development plans and a growing middle class, cement demand is expected to grow steadily over the medium term. The percentage of the population living in urban settlements is expected to rise from 17% at present to 35% by 2020. In line with national plans, six secondary cities were selected to promote urban development outside of Kigali. Support from the government to promote consumption of Rwanda-made products, protect the local currency and reduce the trade deficit will be key to sustaining local businesses.

Value creation
  Implication for value   Strategic response
  CIMERWA’s priority is to grow volumes, increase plant capacity utilisation and realise shareholders’ return on investment   Focus on entering new markets and finding new distribution channels
Increase product offering and realign route-to-market strategy to meet customer expectations
  Operational cost-reduction plans that include using alternative fuels   Reducing electrical energy consumption, localised procurement and optimised inbound and outbound logistics should improve competitiveness and grow secondary businesses
  Forecast devaluation of the Rwandan franc against the US dollar in FY2018   Regional exports remain a key focus
Increase localisation of input materials to preserve foreign currency

Cement product range
CIMERWA produces 42,5N and 32,5N Portland Pozzolana cement.

ZIMBABWE


Highlights
  • The new modern Harare milling plant was completed and commissioned on time and below budget
  • Excellent safety record maintained
  • Cost of production reduced through efficiencies
  • Implementation of energy monitoring system at Bulawayo milling factory in third quarter has assisted with accurate benchmarking and generated energy saving of 16% on maximum demand (kVA)
  • Launch of SURECAST product well received in the market
  • ISO 14000 environmental management systems certification at Bulawayo and Colleen Bawn operations

Lowlight
  • Erratic quality of power supply from national grid
Company and project overview

PPC Zimbabwe is a 70%-owned subsidiary of the group, comprising a clinker manufacturing operation at Colleen Bawn as well as two milling and packaging plants in Bulawayo and Harare. It is both the market leader and largest cement manufacturer in Zimbabwe, with a well-established brand.

After commissioning the new 700 000tpa grinding and dispatch plant in Harare in November 2016, total installed capacity exceeds 1,4mtpa. We remain the only supplier in Zimbabwe capable of offering palletised cement, which has reduced cost and improved customer service.

Review of 2017
Zimbabwe’s liquidity shortages constrained provision of water and electricity, delayed payments to foreign suppliers and, ultimately, the procurement of critical inputs and raw materials. They also depressed consumer spending and aggregate demand in the cashstrapped economy. This was aggravated by persistent rainfall in the last quarter of the review period, subduing domestic cement demand.

Weakening regional currencies against the US dollar continued to position Zimbabwe as an attractive destination for imports while affecting opportunities for exports. Cement importation declined slightly from the prior year while exports decreased considerably. To maintain competitiveness in the market, the focus was on improving operational efficiencies and delivering on our route-to-market strategic initiatives. Against this backdrop, domestic volumes were down 3%.

Construction of the US$82 million (previously US$85 million) Harare mill was completed on time and below budget. The plant was fully commissioned and all performance guaranteed specifications were achieved. This strengthens our position as a market leader in the country and is expected to reduce our lead times to customers. Aligned to the addition of the Harare facility, PPC Zimbabwe launched SURECAST (CEM II 42,5R) cement to expand the product offering and create value for cement product manufacturers and concrete producers due to improved early strength development. Bulk volumes remained relatively flat compared to the previous year, signifying the company’s dominance in the construction sector.

The clinker producing operation at Colleen Bawn performed exceptionally well in the year, with variable production costs dropping 20% on realised operational efficiencies. Project scoping and contractual agreements for the clinker out-loading facility at Colleen Bawn, to improve loading while reducing fall-out dust, were completed during the year and construction is expected to begin in the first quarter of the next financial year. Underscoring our group environmental policy, both Colleen Bawn and Bulawayo milling plants were ISO 14001 (environmental management system) certified.

Safety

PPC Zimbabwe’s operations maintained their zero LTIFR status, with Colleen Bawn at 1 857 days and Bulawayo at 1 413 days. Harare mill project closed at 670 days zero LTIFR status and plant operations had reached 89 days at year-end.

Outlook
Consensus expects the economy to contract by 1,7% in 2017 before expanding by 0,5% in 2018. Although stronger tobacco harvests will see the start of a recovery in 2017, the country’s fiscus will remain under intense pressure as recessionary conditions constrain revenues.

Good rains during 2016 boosted agricultural yields, particularly tobacco which generates significant forex for the country. This is expected to improve liquidity in the short term.

Predominant use of the strong US dollar is expected to continue affecting export competitiveness and remittances, while stimulating appetite for imports. To achieve positive results, economists suggest the country should remain focused on production and improving foreign currency earnings through exports and diaspora remittance inflows. However, ongoing deindustrialisation conflicts with this approach.

The deteriorating economic environment and resultant liquidity issues have resulted in challenges with the processing of foreign payments by the banks in Zimbabwe. During the year, both volume and selling price declines were experienced.

Although capacity utilisation by Zimbabwe’s manufacturing sector rose 18% to 47% in 2016, experts believe this figure only looks good on paper as it was largely due to distortions after over 230 companies closed and are no longer considered in a nationwide survey. For retailers, the economic outlook is more positive as they expect industry capacity utilisation to improve strongly after government intervention in the form of statutory instrument 64 of 2016 which prohibits importation of certain goods.

Commissioning of the Harare mill is expected to reduce outbound logistics costs while increasing accessibility to northern markets. The company is well positioned for the expected economic upturn, and infrastructural developments and investments in the medium term. Harare and Bulawayo operations are suitably located to grow exports into neighbouring countries and this will be prioritised. Strong focus on operational efficiencies, developing our people, route-tomarket initiatives, product innovation, safety and environmental compliance will remain focus areas in the next year to embed our position domestically and regionally.

Cement product range
OPC, SUREBUILD, PMC and Unicem are produced and distributed from the Bulawayo factory while Unicem, PMC and SURECAST are available from the Harare factory.

Value creation
  Implication for value   Strategic response
  The challenging domestic market, socio-political issues, increasing input costs and inability to service foreign debts as well as the introduction of bond notes to alleviate US dollar shortages are expected to increase inflationary pressures and reduce disposable income   We will diversify revenue streams, increase localised procurement and grow export volumes in neighbouring countries
  New entrants and strengthening of the US dollar against regional currencies have intensified competition in the market. Given declining economic activity in Zimbabwe, this trend is expected to worsen   To strengthen our competitiveness, we will improve our route-to-market strategy, enhance our customer value proposition and derive value from our national footprint and operational excellence
  Integration of Harare milling plant   Optimise sourcing model
  Develop technical competence in cement application   Differentiation strategy
  Market competitiveness driven by devaluation of regional currencies and new entrants into the market   Cost reduction and product innovation to enhance value creation

MATERIALS BUSINESS

In line with our strategy to be a world-class provider of materials and solutions, we consolidated PPC Aggregates, Pronto Readymix and 3Q, Ulula Ash and PPC Lime into a materials business, reporting to SA operations through a management committee.

The focus areas for this business in 2017 included:

  • Efficiency improvement and cost control
  • Restructuring our aggregate and readymix concrete businesses
  • Expanding our product offering and customer service
  • Supporting and increasing cement volumes
  • Pursuing opportunities to grow the materials business

PPC acquired 3Q on an asset-for-share agreement of R135 million in July 2016 to extend our readymix footprint. It has also added focus on competing for and securing large project-based work.

Safety

The materials business had a poor year on safety, especially at our lime operations and 3Q. Regrettably, we recorded one fatality at 3Q’s Rustenburg plant and three LTIs across this business. There were also three LTIs at Lime Acres and one at Ulula’s Kriel plant, taking total LTIs for the year to seven.

The division remains committed to ensuring a safe and healthy working environment for all its employees.

Following assessments at Lime Acres, current focus areas include:

  • Safety culture survey
  • Behaviour benchmark
  • Snakes and hazards programme (currently in the roll-out and coaching phase)
  • Renewed focus on mindful leadership visits

Action plans implemented at 3Q include:

  • SHE representative and legal compliance training (completed)
  • First aid and firefighting training (completed)
  • Safety management meetings implemented
  • Revision of all risk assessments (under way)
  • Introduction of snakes and hazards programme (roll out planned for 2018)

Aggregates

PPC has four aggregate quarries: two in Gauteng, South Africa (Mooiplaas and Laezonia) and two in Botswana (Gaborone and Francistown). These quarries supply quality construction aggregates to the building and civil construction sector. Mooiplaas also supplies products for the chemical, metallurgical and agricultural industries.

Review of 2017
In South Africa, sales volumes were down 6% on the comparative 12 months. This reflects lower sales in the readymix concrete segment due to competitor activity, offset by improved sales in the concrete product manufacturers segment. Above-inflation increases for power, labour and certain maintenance spares were partially offset by cost saving initiatives and efficiency improvements. Major projects supplied in the period included the N14 rehabilitation phase 1, Cedar Road phase 1 and Fourways Mall extension.

The aggregates trading environment in Botswana remains tough, especially around Francistown. The Gaborone market improved in the latter part of the year. The strategic consolidation of our operations paid off in improved cost and plant performance, while positioning our business as a major supplier of construction aggregates in the greater Gaborone and Francistown markets.

Outlook
The outlook for our Gauteng-based quarries in FY2018 is expected to improve due to major projects in our operating areas, specifically phase 2 of the N14 rehabilitation project. Increased competition in the readymix concrete, concrete product manufacturers and base course (road construction) market may affect volume and pricing. The tertiary plant upgrade at Laezonia will increase capacity by some 65% and improve operational efficiency and flexibility.

In Botswana, we expect a marginal increase in sales volume from projects in the Gaborone central business district and some road construction projects. The aggregates industry is expected to remain very competitive, but we anticipate an improved performance from the restructured business and optimised support services.

Our participation in construction activity will depend on our regional footprint relative to the location of these projects. Further improvement in all key performance drivers will enable us to provide construction material solutions that increase value to all stakeholders.

Ulula Ash

Ulula Ash supplies fly ash to the southern African market from its beneficiation plant at Eskom’s power station in Kriel, Mpumalanga. Producing both classified and unclassified fly ash, the plant is designed and operated to facilitate excellent turnaround times for tankers collecting loads. Ulula Ash has recently penetrated various markets in supplying cement, concrete, readymix, civil building, blenders, tile adhesives, mining and ash sand operations.

Review of 2017
Volumes increased by 10%, predominantly by capitalising on transport efficiencies and targeting niche markets. Ulula has extended its contract with Eskom at Kriel for another five years.

Outlook
With the upward trend in commodities and the positive outlook for cementitious products, we expect to maintain sales and profitability. Key to growing the business is expanding our capacity.


Lime

PPC Lime is the leading supplier of metallurgical-grade lime, burnt dolomite and related products and solutions in southern Africa. Products are used in key local industries such as steel and alloys, food manufacturing, gold, uranium and copper mining, as well as water purification and other environmental applications. Steel manufacturing will remain the biggest consumer of lime-related products in the South African market for the foreseeable future, with growth potential in environmental applications.

Review of 2017
Sales volumes were affected by a three-month shutdown at a major client. Despite this, volumes were similar to the comparative period with an encouraging increase in sales in the last quarter. Conditions in the local steel industry remain tough, but with improved relationships between government and local steel producers, most steel producers reported better order books for the first six months of FY2017.

Readymix

Pronto is a leading supplier of quality readymix concrete and mortars, with 10 batch plants in the greater Gauteng area supplying key commercial and industrial projects.

3Q expanded our readymix footprint from Gauteng, adding 17 plants based mostly in Mpumalanga and North West provinces, as well as Limpopo and Northern Cape.

Review of 2017
Margins and volumes were under pressure due to reduced selling prices and a concentrated building industry in our operating area. On the cost side, Pronto recorded a solid performance, reducing operating costs by 2,8% after stripping out inflation. Mortars volumes also contributed to Pronto revenue, reflecting their growing popularity especially among larger contractors.

In its first nine months, 3Q did not perform as expected, mainly due to the slowdown in the infrastructure sector of the business and a slowing mining segment. More positively, it increased share in the commercial markets of larger towns in North West and Mpumalanga.

The truck replacement programme began during the year and will be reviewed annually. Two new plants were commissioned in Gauteng – Rosslyn and Sebokeng.

Outlook
The outlook for 2018 remains flat as the construction industry is showing no real signs of recovery. We also expect competition to remain aggressive, both in terms of current cement price offerings and new entrants. Pronto will continue focusing on operational excellence and good customer service to maintain market share and profitability. We anticipate more growth in the mortar sector.

3Q will continue to focus on the project-based business and rural commercial markets. Some expansion into new operating areas is likely. The focus will remain on improving operational performance and integrating into Pronto to benefit from synergies.


Revenue per tonne sold was flat as a result of customer mix, while cost of sales (rand per tonne) was contained through savings on coal costs and operational efficiencies.

Capital expenditure focused on preparing for value-add opportunities by increasing capacity for additional products.

Outlook
New supply agreements for water treatment applications and the slightly better outlook for local steel producers could improve the lime sales outlook for FY2018. ArcelorMittal SA and the Department of Trade and Industry have signed a five-year agreement on steel pricing principles, which is intended to achieve a fair price for steel and enable ArcelorMittal to earn a reasonable margin from domestic sales while being competitive and efficient. The International Trade Commission of South Africa has also confirmed that safeguarding duties for the production of hot and cold-rolled coil are in the final stages of implementation. This should further protect local primary steel producers from cheap subsidised imports.

The focus will be on value-adding opportunities while ensuring the market for high-reactivity metallurgical products is served. Reducing fixed cost and further optimising production operations remain priorities in FY2018.

Value creation
  Implication for value   Strategic response
  Aggregates exposure to regional markets due to small zone of natural advantage in a highly fragmented and competitive environment keeps pressure on revenues and margins   Plant flexibility improvement (product yield)
Operational performance enhancements
Product range diversification (specialised products)
  Lower concrete prices, especially in Gauteng, significantly affect margins for the readymix business   Operate optimally
Identify and target specific projects
Integrate the businesses to reduce operating costs
Identify opportunities to expand footprint in areas where we currently do not operate
  Given the expected upward trend in commodities and positive outlook for cementitious products, we expect to maintain sales levels for fly ash   Grow the business through expansion of capacity
Focus on service of current customers and continued product expansion into new markets
  PPC Lime’s customer base is concentrated in the local steel industry. Any change in local steel production will have a marked effect on PPC Lime results   Ensure we remain the supplier of choice for the local steel industry by maintaining excellent product quality and reliable supply
Focus on diversification and value-add opportunities