Specialty chemicals

CHEMICAL SERVICES LIMITED (CHEMSERVE)

A key element of Chemserve's strategy is to expand its mining chemicals product and service offering in South Africa and Africa, and into other geographic areas where the full service model is valued and the mining profile fits Chemserve's capabilities. Chemserve also intends growing its business in Brazil, based on oleochemical expertise it shares with its partners, and into other sectors where this expertise is appropriate. The group will continue to grow and manage its South African portfolio and to expand its businesses in Africa and into other suitable countries.

Chemserve is the specialty chemicals arm of AECI. It manages a portfolio of 20 businesses each concentrating on specific markets, with common values of innovative customer service and bottom line focus. The Chemserve group grows organically in its existing entities and from acquisitions.

Each Chemserve operating company aspires to be the supplier of choice for customers in its markets, supported by the best technology available, a carefully designed service package, and the lowest possible cost base. Technology is sourced from international partners and is also developed in-house. Full service package business models provide customers with innovative solutions to their chemistry-driven requirements and challenge competitors in terms of technology, skills and competencies.

Business environment

2007 was characterised by a high oil price and consequently high raw material and finished product prices, strong currencies in South Africa and in Brazil, and high and volatile commodity costs. These factors all affected Chemserve's pricing, exports, profit margins and transport costs.

The increase in South African inflation, together with the strong rand, increased the group's costs relative to those of its trading partners. Problems were reported with shipping availability on some routes, and South Africa's electricity crisis began to be felt in production and administration.

Although the drop-off in certain manufacturing sectors, especially in the automotive OEM market, had an adverse effect Chemserve benefited from innovative vendor management in platinum, gold and base metal mining in Southern Africa, infrastructure development which created demand for construction chemicals and related products such as formaldehyde resins, and consumer-driven markets such as food, coatings, household and personal care products and some white goods.

The company is weathering the skills shortage and was pleased to find good candidates from previously disadvantaged groups for several important positions.

2007 also confirmed that global purchasing is becoming more prevalent and this has had an effect on the way several Chemserve companies conduct their business.

Chemserve’s management team

	Mark Dytor (46) Having joined Chemserve as a sales representative in 1984, and after successfully managing two group companies, Mark was appointed to the group’s executive committee in 1998 and subsequently to its Board. In addition to his portfolio of chairmanships, he has been tasked with the growth of Chemserve’s mining business. Within the AECI Group, he is a non-executive director of AEL.
	Tobie Louw (45) Tobie joined AEL in 1988 and he will return to this company as managing director on 1 April 2008, succeeding Graham Edwards. He will also join AECI’s executive committee at that time. Tobie left the AECI Group in 1996, returning to Chemserve in 2000 as managing director of Lake International Technologies. In 2005, he was appointed to Chemserve’s executive committee and became managing director of Chemserve Systems. He joined the Chemserve board in 2007.
	Oscar Loreti (44) He joined Chemserve as group technical manager in 2007 and his qualifications include a Masters degree in technology mechanical engineering. Oscar is responsible for driving the group’s SHE management system, ensuring that technical standards are set and maintained, and ensuring that expansion projects are completed professionally. Before joining Chemserve, he had gained experience in engineering-related activities in the steel industry.
	Trevor Street (60) Trevor started his Chemserve career as a sales representative more than 30 years ago. Several management positions followed and he was appointed an executive director on the Chemserve board in 1991. Since 1997, he has served as chairman of several Chemserve subsidiaries and his responsibilities include the pursuit of acquisitions for the group’s growth.
	Frank Baker (54) Managing director and an executive director of AECI. Within the AECI Group, he is also a non-executive director of SANS Fibres. See directorate for more details
	Chris Kotze (42) Chris joined Chemserve’s quality assurance department in 1990. He has held his current position as group information technology manager since 1998. His qualifications include a BSc degree and a diploma in Datametrics.
	John Mahlase (46) He is Chemserve’s group human resources manager and, formerly, its industrial relations manager. Before joining the group as a human resources consultant in 1997, John had gained 11 years’ experience in the discipline. He has an Honours degree in industrial psychology as well as an Advanced Diploma in labour law.
	Chris Povall (50) Chris joined the company 10 years ago as financial manager and was appointed to Chemserve’s executive committee and board as financial director in 2006. Prior to his Chemserve career, he had gained experience in the auditing field and had been financial director of a major media company. Chris has a BCom degree and is a qualified chartered accountant.
	Schalk Venter (41) With a qualification in analytical chemistry, Schalk joined Chemserve Systems in 1991 as a sales representative. He was appointed managing director of this subsidiary in 1997, before moving to AECI Coatings as managing director in 2001. He was appointed to the Chemserve executive committee in 2005 with a portfolio of chairmanships. He became managing director of Akulu Marchon in 2007 and was appointed to the Chemserve board.

Companies

Unlike the consumer-driven boom of 2006, the last year saw a shift to a more sedate mining and construction focus, with continued support from some consumer areas. Some divisions in Chemiphos, Crest Chemicals (Crest) and Lake International Technologies (Lake) were restructured to improve their alignment with their areas of focus.

Companies such as Akulu Marchon, Industrial Urethanes (IU) and Resinkem, which have significant consumer-driven markets, found continued demand for their products despite concerns about trends in the sector and increasing competition from offshore. Senmin, Chemical Initiatives (CI), Industrial Oleochemical Products (IOP), and Lake benefited from the continued high demand in the precious and base metals mining industries.

Plaaskem and Chemserve Perlite had good demand from the agricultural sector with a re-engineered Plaaskem benefiting from widespread rains. The manufacturing sector produced mixed results. For Chemiphos, the poly-phosphoric acid market was less buoyant than in previous years, and Plastamid faced increased competition from specialty plastics imports. Pleasingly, Crest gained from its wide industry coverage and recorded significant growth. ImproChem embarked on further innovative water-saving initiatives, including efforts in Kenya.

South Africa's infrastructural spend generated good sales for Chemiphos, Crest, Dussek Campbell, IOP, IU and Resinkem. The competitive paper chemicals market recorded increased volumes, benefiting SA Paper Chemicals and Specialty Minerals SA. The local leather hide industry had a pedestrian year, and the strong rand curtailed Simitri's exports.

Resitec, together with many Brazilian manufacturing companies and their customers, found exports challenging owing to that country’s very strong currency.

Financial performance

A good first half-year, with 20 per cent growth, was followed by a more sober second half. Group sales for the year grew 13 per cent from R4.7 billion to R5.6 billion, on which operating profit grew 13 per cent from R501 million to R567 million. Organic growth accounted for virtually all of this, with some contribution from two small acquisitions. The acquisitions of 2006 performed to expectation and contributed to the group's organic growth.

2007 was a significant year in terms of Chemserve's capital programme, with major projects underway totalling R865 million for the construction and expansion of manufacturing capacity, as detailed later in this review. R97 million was spent on these projects, acquisitions cost R8 million and an additional R139 million was spent on process improvements, maintenance and safety items.

The average working capital ratio for the year was 19 per cent, in line with the previous year.

Portfolio changes and investments

ImproChem bought Spotzero, a specialised industrial cleaning operation, and IU acquired Polynates, a specialised polyurethane business. Both were integrated successfully.

The sale of Performance Masterbatch and Custom Colour, a masterbatching and colours business, was completed in May.

The group exited its production site at Isithebe, on the KwaZulu-Natal North Coast, and completed the required environmental remediation of this land which has been sold. Akulu Marchon relocated its warehouse operations in Gauteng to the group's new warehouse at Chloorkop. IU moved its Sebenza production facility, in Gauteng, to Umbogintwini in KwaZulu-Natal. These moves were part of Chemserve's site reduction process.

Major capital programe underway

At Senmin, Sasolburg

R387 million has been approved for an integrated acrylamide and polyacrylamide facility at Senmin in conjunction with Ciba Specialty Chemicals, the technology supplier. The latter has a small equity stake in the venture. Commissioning of the facility will start in the first quarter of 2009, with full production reached by year-end.

Also at Senmin, R140 million is being invested in a methane-based carbon disulphide plant to replace the existing charcoal-based plant, thereby eliminating the business's dependence on imported product. A further R125 million is being spent on significant expansion of xanthate capacity. The latter project includes pelletizing facilities to cater for safe transportation to more distant customers. These investments will come on line progressively from mid-2008.

R30 million has been approved for an upgrade of the guar gange depressant plant and this will be on line in mid-2008.

All of the Senmin projects are aimed at strengthening this company's position as a specialty supplier to the mining industry.

At Chloorkop, Gauteng

A R21 million warehousing facility was completed at Chloorkop, as part of transforming this site into a modern chemical park.

A R75 million project has been approved for the construction of a new sulphonation plant for Akulu Marchon, to replace the outdated and somewhat limited operation at Wynberg.

At Umbogintwini, KwaZulu-Natal

CI will commission a R19 million elemental plant nutrient sulphur facility in mid-2008, to meet demand in the African agricultural market.

Economic empowerment

Chemserve embarked on a process to enable each company, and the group as a whole, to generate a broad-based Black economic empowerment scorecard that can be measured and documented on a regular basis. This was followed by a strategic process in which each company identified projects to improve low-scoring areas.

Strategic growth

Mining chemicals

Chemserve has established entities in Botswana, Namibia and Zambia to facilitate business in these countries. Senmin has an operation in Zambia to serve the growing market there and in the DRC and is in the process of replicating this arrangement in Botswana and Namibia.

Furthermore, Senmin has continued its successful vendor management programme in South Africa and will expand these services to Botswana, Namibia and Zambia. CI has grown its sulphur trading capability to ensure supply to the numerous sulphur-consuming mining operations in Southern and Central Africa.

Step-out strategy

Resitec, the Brazilian oleochemical business in which Chemserve acquired a 60 per cent share in 2006, is expanding its activities with a large tall oil fractionation facility under construction at Lages, Southern Brazil. This will be brought on line late in 2008. The business also invested in a food emulsifier plant, which will begin to contribute to earnings in 2008. Chemserve continues to evaluate further acquisition possibilities in Brazil.

Business opportunities are emerging for several businesses in Africa, for example in Ghana and Nigeria for Lake and Chemserve Systems. Opportunities are also being identified as mining chemicals companies become established in new territories.

Lake has been drawn to Australia with successful sales based on Galoryl* and Biofix* technologies, for the fertilizer market, and has established a warehousing and sales operation near Perth.

Challenges and outlook

2007 mirrored the previous year in terms of the impact on margins of high and fluctuating raw material prices, and a strong rand. Margins for the group as a whole were under unprecedented pressure and their recovery will be a major focus in 2008.

The group is concentrating on bringing its major capital projects in Brazil and South Africa to completion safely, on time and in budget, whilst keeping the market supplied during a period of global product shortages. Personnel with the right skills are in place to manage the projects within established structures.

Of major concern is South Africa's power crisis, which will affect Chemserve's ability to run its plants efficiently and to capacity, and which could delay major mining and industrial projects that would augment the group's future customer base.

The operational focus will continue to be on safety and efficiency. Short-term programmes, with an expectation of quick results, and longer-term strategic projects are in progress to improve safety performance and increase the efficiency of operations.

*Trademark