Seeking ‘Consol’ation from glass shortages
CONSOL Holdings Limited, the largest glass manufacturer in Africa, has been facing constraints in supplying glass bottles as a result of the ripple effects of the Covid-19 pandemic.
According to company’s commercial executive, the manufacturer facesglobal shipment delays and soaring freight rates, among other issues.
Further to this, the business mainly imports raw materials from China, which is currently battling resurgent wave of Covid-19 cases. We unpack these dynamics in detail below and extend the analysis to the Zimbabwe market.
According to a glass sector report by Wesgro, Consol Limited is the largest glass packaging supplier in South Africa with a market share of over 70%.
The remainder of the sector’s market is supplied by Nampak South Africa with a c.20% share, and other smaller players like PG Glass and Glasscor.
In recent months, the Covid-19 pandemic and other developments on the global landscape have compromised the ability of these glass packaging manufacturers to meet the demand for its products.
These mainly include (i) high global shipment delays, (ii) soaring freight rates, and (iii) a growing supply gap.
The delay in shipment of goods was spurred by Covid-19 disruptions, and the problem is likely to remain a concern in the short-term, at the very least.
Shipping data, as reported by logistics platform44, shows that freight times from the Dalian port in China to Europe’s port of Antwerp has increased from 65 days in January 2021 to 88 days in January 2022.
This is also similar to the increase in the journey time from Dalian to the British port of Felixstowe from 65 days to 85 days over the same period, and this has been the case along many other shippingroutes.
In an article by Reuters, Platform44 also expressed that it would take"several years to return to prepandemic supply chain stability".
In some cases, the Russia-Ukraine conflict has made some passages unattractive out of shipping companies’ fear of being caught in the crossfire.
These delays have also rippled into the timely delivery of raw materials to companies such as Consol and Nampak SA,who import from China.
We also note that China’s output for the current year remains under pressure as the economy takes a stringent stance towards containing resurgent Covid-19 cases.
Freight charges are also anticipated to surge and add to the woes of industries that depend on sea freight. The surge in oil prices on the back of tensions between Russia and Ukraine and UAE and Yemen is likely to drive an increase in freight costs in the short-term.
We also note that the availability of container ships will be affected, albeit marginally, given that Russia and Ukraine collectively account for c.3.5% of the world’s dry bulk ships. This could further push the freight charges that companies such as Consol and Nampak SA will incur.
We also observe a growing supply gap in South Africa’s glass industry due to the pandemic’s effects.
In 2020, at the height of the pandemic, Consol was forced to suspend the construction of a US$92 million plant that would have increased capacity from 100 000 tonnes of glass to 130 000 tonnes of glass.
Completion of this plant would have alleviated the current glass shortages, especially to the alcoholic beverages sector, which accounts for 85% of Consol’s sales.
In addition, Consol’s CEO recently expressed that the current plant’s furnaces were in need of repairs and at the tail end of their asset life, adding to the industry’s supply capacity constraints.
The glass shortage in South Africa has also rippled into Zimbabwe through African Distillers’ products. African Distillers imports brands such as Hunter’sfrom South Africa, which have been affected by the glass shortage.
As a result, the business has also been forced to temporarily roll out the brands in aluminium cans in a bid to maintain sales volumes and market share. African Distillers’ parent company, Delta Corporation has also seen a shortage of beer because of packaging constraints.
However, unlike South Africa, the shortage largely stems from the scarcity of foreign currency in the country which has limited the brewer’s imports of glass from countries like Tanzania, Egypt, and to a lesser extent, South Africa.
We have also noted an increase in aluminium cans in several of Delta’s beer brands as a mitigatory measure until currency shortages are resolved. Despite these constraints, both entities are poised to record strong performance figures in their FY22 results following an upbeat third quarter trading update earlier this year.
The adoption of aluminium cans also holds positive implications for Nampak Zimbabwe, an associate company of Delta Corporation.
The packaging company business supplies aluminium cans to Delta Corporations and, given the strong volumes performance by Delta up to their latest third quarter, is also likely to record good volumes performance.
We opine thatDelta Corporation and African Distillers are fairly priced on the ZSE based on current share prices and relative valuation metrics, but we see potential for further price appreciation on Nampak Zimbabwe’s share price despite associated risks with the investment such as liquidity and foreign currency risks.
As always, investors are encouraged to seek advice from their investment advisors for more information.