Cement producer PPC cracked the billon-rand profit mark despite a small drop in demand.

Bruce Whitfield:
Well PPC reporting profits up 16 percent for the year despite a small drop in cement demand in Southern Africa during the six months to the end of March. It cracked the billion-rand mark in terms of operating profit despite that slowdown in demand from the residential sector. Now will infrastructure spend offset a demand in consumer demand that is the big question no doubt that John Gormersall grapples with on a regular basis, he is the chief executive officer of PPC and I mentioned that drop in consumption, it was actually down more than two percent in South Africa, the regional number was offset a bit by better demand out of Botswana but it is South Africa where there is quite a lot of pressure John, good evening.

John Gormersall:
Yes, hi Bruce, good evening. Incidentally these are interims for the first half not for the full-year. Look there is a different truth behind the statistics as usual wit statistics, bear in mind we had Easter in March this year whereas in April last year and so it was in the last month of the first half and traditionally the industry loses about a full week of sales in the month in which Easter falls. So if you take one week of sales out of 26 it is approximately four percent which means that in actual fact the demand was positive by nearly two percent and we can't put a number to the rainfall but many of the regions, that is both provinces and some of the neighbouring countries, the four customs union countries, many of them had rainfall above the 50 year highs and you with recall there was rain on the southern Cape Coast and even in the Western Cape during the summer period as opposed to them normally getting their rain in winter so you know being close to the coalface the market is not quite as bad as it sounds and yes housing is down, speaking to some of the major developers of the sort of starter level of 500 000 to 800 000 or a million units and complexes they are all reducing their stock of units, some of them are not building at the moment, but they say that the moment their stocks are down they will commence building again and so there is a bit of a lull because of the high interest rates and also consumers adjusting their credit situations but it is not all doom and gloom out there from them anyway.

Bruce Whitfield:
So you are seeing it as a lull rather than as a sustained pullback perhaps in cement demand in that domestic sector if I can call it that?

John Gormersall:
I think if we weren't having all the infrastructural activity really starting to take off and a lot of new projects about to take off I think you know the country probably would have moved into negative growth territory but you know we have said, we've looked at our figures, and we believe for our financial year we will see growth of somewhere between two and four percent for the region and you know a lot of our confidence in that is because of all the big projects that are starting up.

Bruce Whitfield:
And the margins coming under a little bit of pressure is that because the input costs in cement have actually risen so dramatically and things like fuel which is not something that you would necessarily associate with cement but it has to get from point a to point b is putting a big pressure on you.

John Gormersall:
There was a 0.5 percent margin erosion in cement, the main erosion came in the lime division where with the power outages affecting the steel producers and Saldanha stopping for, I think it was nearly seven or eight weeks to reline the coryx, which happens sort of every seven years and Mittal stopping a blast furnace and therefore steel output considerably down so lime consumption was down dramatically but it has now returned back to normal levels so it was a one timer really. That had a big impact on the group margin that had the biggest impact on the group margin. As far as the cost increases are concerned you are right I mean the last PPI figure was just under the 12 percent level, I can tell you that looking at PPC inputs year-on-year as we stand now we are running several percentage points above that.

Bruce Whitfield:
And those are input costs in terms of what it actually costs you to make a bag of cement. It is costing you more than 12 percent more to make cement.

John Gormersall:
Effectively, the big things are energy and the diesel price has moved up 28 percent year-on-year as we stand now and that has pushed the delivery costs up by nearly 19 percent and electricity went up by 14 percent from the beginning of April and through the municipalities, Johannesburg, Tswane and Port Elizabeth, we buy from municipalities, they for the last three years have been pushing their electricity prices up even to us industries by one to two percentage points above Eskom so that is running at about 16. Imported spares and consumables between 25 and 30 so there is serious inflation pressures and you know none of it is local.

Bruce Whitfield:
And that is what is so depressing about it because if it is not local, we can't control it despite our best efforts of our Reserve Bank to control inflation through raising interest rates, these are extraneous issues with which you have to contend and just how flexible is your market and what they can expect in terms of price increases from you?

John Gormersall:
I think what is happening around the world at the moment, this problem faces the whole cement and heavy energy intensive industries, take steel as another example, and around the world prices are just going to move up and are moving up again, world cement prices have been increasing, ocean freight rates have gone up. You can no longer import into South Africa anyway, currently to get cement for example into Durban you are probably looking at landing it at about 15 percent above the local price and it is totally out of the question to think about getting it to Gauteng. So you know cement prices, unfortunately are going to move up, and that is a worldwide phenomenon.

Bruce Whitfield:
So how much of the cement that is being sold in South Africa at the moment or has been sold over the past 12 months has actually been imported if in fact there is that pricing pressure that you are talking about?

John Gormersall:
It has only developed in the last, I would say, three or four months. We have tapered for South Africa, our last shipments have come in for this year and we won't bring any other shipments in one of the reasons being as you saw that we squeezed extra capacity out of existing plants and last year we had some idle capacity in the Western Cape and we are now supplying the southern Cape coast and the Port Elizabeth area from the Western Cape at reasonable margins, we have managed to set up the logistics with Barloworld Logistics, and so we are doing that instead of importing. So you know there is a lot of things that we are doing, a lot of things we have done the first half, our imports for the first half in total were down 50 000 tons from 140 000 tons in total last first half last year of which about 50 000 came from Zimbabwe last year and I mean it is almost impossible to get any cement out of Zimbabwe at the moment sadly. In the first half I think we managed only to get about 15 000 tons because of inability to move it.

Bruce Whitfield:
There is just so many extraordinary pressures and ultimately while it is negative it is positive from a PPC perspective because it does give you some pricing power.

John Gormersall:
Yes, I think the other thing is you know we brought back five production lines three years ago, these very old ones, of a total of altogether of about a million tons a year which I mean many of them were sort of about to be put out on pension and we can only run them for a certain amount of time and we will then have to put them out on pension going forward a few years but for as long as there are pressures on supply generally, we will keep that running and we hope to get capacity coming out of our Batsoledi project before too long.

Bruce Whitfield:
You are investing hundreds of millions of rand in new capacity and just looking at the health of the South African economy, the demand expectations within the South African economy for cement, are you comfortable with your level of investment? You are not concerned that perhaps if we would see an oil price, God forbid, going to $200 a barrel, that the economy is going to slow to such an extent that you may be overextending yourselves in the short-term at least?

John Gormersall:
As I said, we brought back a million tons of emergency capacity which was never going to run again and most of those plants are very old and very energy inefficient compared to new technology and high cost to run in terms of maintenance costs. So, I mean it would mean that we would shut them down again that much earlier but you know I think all of these things are relatives. If fuel goes to $200 a barrel, the dollar will probably be incredibly weak and maybe the rand will be a bit stronger so maybe some of the imported inputs won't be that bad but you know that is all conjecture. I think in terms of expanding we have got two projects totalling two-billion in total from beginning to end that are in process at the moment. The work was started in 2003 and the board approved it in 2004/5, these are long-term projects, they are built for 40 years and it’s like the stock market, nobody rings a bell at the top or sounds a siren at the bottom you know.

Bruce Whitfield:
Absolutely, John Gormersall we are going to have to leave it there, it has been a great chat, thank you so much for your time this evening, the chief executive of PPC, an extended chat this evening, good to talk to him.