Financial Mail - Investors Monthly
HEAVY METAL
Hulamin — Jack of all trades, master of none. It’s time to focus
The global aluminium industry has grown substantially in the past few decades, driven through increased demand from a growing, industrialised population.
In particular this is due to increased demand from the automotive industry for automotive body sheets as well as for beverage cans and for windows, doors and cladding in the construction industry.
This annual growth of 5%6% over the past 20 years has brought plenty of opportunities and much success to most aluminium producers and semifinished product mills in Asia, Europe, the Middle East and the Americas — and with it to all its stakeholders and shareholders. But such success and joy has not been shared by SA’s rolled products monopoly, Hulamin, which celebrates this year its 70th birthday.
Spun off from its old parent Tongaat Hulett in 2007 with high expectations regarding its prospects, the share briefly traded at more than R40. But it has been on a downhill trajectory ever since as Hulamin has consistently disappointed investors.
Richard Jacob, CEO since June 2010, has racked up in these 10 years R1.7bn in operating losses, a total net loss after tax of R2bn and destroyed more than R2.5bn in capital for shareholders. The state received in these 10 years no taxes from the company, and 17% of Hulamin’s staff — 345 people — lost their jobs in recent months.
When listed, Hulamin consisted of six group operations. Today, two have vanished into thin air (Engineering Solutions and Roofing Solutions). One other group, HBS, had been “sold” or — more accurately — given away. This division was previously the absolute market leader of aluminium window systems in SA. The other three groups are still operational.
Of these, the Extrusion Group has been reduced from three production sites to one and “cost-saved” into certain death after many years of losses for lack of investment. This division was also, for many decades, the undisputed market leader.
This leaves only the Rolled Products group and the Food
Container division, which was, even considering its small size, able to produce a loss of R25m in the first half of 2019.
Hulamin’s annual financial report of recent years — 210 colourful pages in 2019 — reads as if it was scribed by US President Donald Trump’s re-election campaign team. The report boasts of great developments and achievements, but in fact these are far removed from reality. Jacob manages every year to give a positive spin to the failure of the past.
In addition, the financial statements for the year to endDecember 2019 had been published so late that Hulamin missed just by days the extended deadline of the JSE. But even being so late, the 2019 results had to be restated in June 2020 and corrected in substantial amounts — destroying important trust in these financial statements.
How has all this been possible? Besides top management chasing a constant dream of maximum tonnage of production volume without looking at profits achieved (in particular in the glorified export market), two main projects in the past years — the foil mill and the Hertwich recycling plant — have been costly. Together, these projects have cost Hulamin R1bn — not only disappointing in their performance but proving a total disaster as both do not perform close to their planned capacity.
Based on these disasters, Hulamin’s management had to admit at its recent AGM that it is valuing all its machines and equipment at scrap value, being R452m or the equivalent of about $25m. This is just 4.5% of
The company must start making consistent profits on its export business, instead of generating all its profits from the local market
the original stated value of $557m that was reflected on the date of Hulamin’s listing in 2007.
So much for the confidence of current management in its most important asset class and its business model.
In particular, Hulamin lacks a clear focus in its production range. The company mentions 10 product groups on the rolled product side — from thin foil to heat-treated alloy plates. Then there are painted coils and cladded fin stock as well as can body sheets, can ends and tab stock to litho sheets for the printing industry. All these products have a capacity of 250,000t a year — which has not been achieved in recent years.
Nowhere in the global aluminium industry will one find a mill of this size with such a wide range of products. Successful and profitable mills are concentrating on one, maybe two, product groups — not 10.
In addition Hulamin, with its average production volume hovering around 200,000t a year, is competing with international aluminium rolling mills with double or triple its output. Rolling mills with a capacity of 2Mt are being built in Asia. Hulamin, a technically competent producer located quite far from its main markets in the US, Europe and the Middle East, needs urgently to reduce its product range to survive. The company should focus on growing its beverage can market and probably the production of heat-treated alloy plates — where margins are higher. Hulamin should immediately stop playing around in all these other niches, where it is losing money.
The company must start making consistent profits on its export business, instead of generating all its profits from the local market. In the US, its most important export market, Hulamin has lacked for some years now a clear marketing strategy after its old and only partner in the US changed owners and (strategic) direction. In the US, the company has just been hit by a temporary 8% antidumping tax, confirming for a second time that it is selling in its export markets at lower prices than in SA. In Europe, Hulamin also seems to lack any strategy and direction.
As for the domestic market, Hulamin should finally start to offer its customers the same prices and service it does to its overseas clients … and not behave as a dominating, arrogant monopoly.
For a sound future, one additional critical issue must also be addressed by Hulamin. Aluminium is an energy-intensive product. There is only one way to reduce this high cost of energy — recycling. Aluminium can be recycled unlimited times, which also makes it environmentally valuable and the metal of the future. Today Hulamin is using less than 18% of recycled material in its production process — and all this after major investment into this important sideline. The recycling equipment installed in 2015 has achieved nothing close to what was planned.
International competitors such as Novelis in Europe and Brazil, or AMAG in Austria, are achieving with pretty much the same recycling equipment a recycling quota of close to 80%. Such a high rate of using recycled material is achieving substantial cost savings, making these two companies very profitable ventures as well as safeguarding their future — to the benefit of all stakeholders. The required scrap is ample and cheaply available in SA.
Obviously, the fastest way to make a return out of Hulamin would be to take it over at the current cost, close it and sell its parts. Net asset value will quickly be realised in this way, and the buyer would receive a sizeable return on its investment.
But this is probably not the right way to serve all stakeholders of the company, and Hulamin could be turned around instead, with a new management team and strategy.
Unfortunately, the main shareholders seem distant. All of them, particularly the ones who are shareholders from the day of the listing in 2007 — such as the Industrial Development Corp (IDC), which holds 30% — have lost big money, but do not say a word or take any action at all.
In the last AGM in August 2020, all resolutions for reappointments of board members and the remuneration were accepted by 97% of all shareholders. Only three critical voices were heard during this AGM.
How is it possible that major shareholders take absolutely no interest in the performance of their company and its top management?
Hulamin is listed in the IDC’s 2019 financial report as their worst performing associated company — and it is safe to say Hulamin will be holding this title again this year.
What must happen for the IDC to move?
Say something and, more importantly, do something.