Operational review / Diversified chemical Chemical Polymers 85% of revenue Resins 15% of revenue Revenue increased by 79% 539 employees 3 production facilities 106 000+ tonnes of UF resin produced 121 000+ tonnes of PET produced 54 KAP Integrated Report 2017
A specialised chemical manufacturing division Safripol is the only producer of high-density polyethylene (HDPE) and one of two producers of polypropylene (PP) in South Africa, while Hosaf is the only South African producer of virgin polyethylene terephthalate (PET), which is used for packaging in the beverage industry. Woodchem SA is the largest producer of urea formaldehyde (UF) resins in Africa and the only producer of impregnated paper used in the board industry in South Africa. Revenue split Zambia Zimbabwe Woodchem Piet Retief Safripol Sasolburg Hosaf Durban 43% * Safripol 42% Hosaf * Included for six months 15% Woodchem Manufacturing plants Sales and distribution 3 KAP Integrated Report 2017 55
Operational review / Diversified chemical Chemical The group acquired 100% of Safripol for R3.9 billion, effective 1 January 2017. Safripol is engaged in the manufacture of polypropylene (PP) and high-density polyethylene (HDPE), which are used in the manufacture of a broad range of plastic injection and blow moulded products, fibres, extrusions and packaging materials. This business operates with a similar business model to the group s other chemical operations, Hosaf and Woodchem. This division operates state-of-the-art equipment in worldclass manufacturing plants, with the lowest emissions and energy consumption levels in its sector. The high level of technical expertise required to manage these plants was a key determinant in creating a focused chemical division. Business environment Products PP Used for a wide range of applications, such as furniture, clothing, textiles and automotive components HDPE Used for a wide range of applications, such as plastic bottles, chemical containers and toys Safripol produces PP and HDPE resin at state-of-the-art facilities in Sasolburg with propylene and ethylene sourced from Sasol in South Africa. As a result of the high-quality propylene and ethylene procured, Safripol is able to manufacture superior grade PP and HDPE, which allows it to actively compete in this global market. Hosaf produces PET resin from three key chemical raw materials, which are sourced from international suppliers. Because of its high intrinsic viscosity and clarity, PET is used in South Africa primarily in the bottling industry for carbonated soft drinks and water. Woodchem manufactures formaldehyde gas through a continuous process of catalytic oxidation of methanol and absorption of the gas in liquid. Formaldehyde from Woodchem is further processed into UF resin for use primarily in the timber panel industry. Woodchem is the largest manufacturer of UF resin in South Africa. Specialist décor paper is imported and treated with urea and melamine resins through a paper impregnation line, making it ideal for use as decorative laminates, industrial laminates and laminates for melamine-faced board (MFB). PET, resin and polymers Primarily used in the manufacture of bottles for carbonated soft drinks Formaldehyde and UF resin Primarily used in the timber panel industry Impregnated paper Primarily used in the timber panel industry to manufacture MFB 56 KAP Integrated Report 2017
Our aim is to deliver premium products through leading technical expertise and world-class technology. Leigh Pollard, CEO: Chemical division Group strategy Key facts Market leadership The chemical division is the only manufacturer of PET and impregnated paper in southern Africa, and the largest manufacturer of UF resin. With the addition of Safripol, the division is now a market leader in polymer manufacturing. Inclusion of Safripol in the diversified chemical segment (for six months), producing: 61 000 tonnes of PP 78 000 tonnes of HDPE High barriers to entry Following the R700 million upgrade of the PET manufacturing facility, the chemical division comprises the latest technology manufacturing equipment, which produces on a globally competitive basis. Hosaf continues to produce bio PET made from renewable sugarcane resources Woodchem paper impregnation volumes of 44 million m 2 Industry diversification Adding value through specialisation The division is balanced in terms of its exposure to the timber and bottling sectors. The R3.9 billion investment in Safripol added further diversification into the packaging sector. Research and development of new product derivatives and manufacturing processes remain at the forefront of the division s strategy Product volumes Member and financial contributor to PETco in support of national PET recycling initiatives, with a goal of 0% waste to landfill and certified waste disposal PET 37% UF related 26% HDPE (six months) 21% PP (six months) 16% Leveraging our African base With the Hosaf upgrade and Safripol acquisition the division is well placed to take advantage of existing markets in neighbouring countries. KAP Integrated Report 2017 57
Operational review / Diversified chemical Chemical Commentary The chemical division performed well for the year, showing revenue growth of 79% and operating profit growth of 111%, primarily as a result of the acquisition of Safripol. Demand for PET, PP, HDPE and UF resin remained stable for the year, which allowed the division to operate all plants at full capacity. Demand for impregnated paper grew strongly, in line with PG Bison s value add strategy. Currency and raw material commodity price fluctuations were well managed, thereby protecting margins. Safripol performed to expectation for the period. Good progress was made during the year on the expansion project at Hosaf, which involves increasing production capacity from 128 000 tonnes to 240 000 tonnes per annum. Construction activity on site and the manufacture of the plant is well advanced and it is expected that this expansion has been commissioned during September and October 2017. The expansion will improve the competitiveness of Hosaf by providing economy of scale benefits, and the technology being utilised will facilitate improved quality and performance criteria of the PET produced. The chemical division showed revenue growth of 79% and operating profit growth of 111%. 58 KAP Integrated Report 2017
Outlook The acquisition of Safripol and the various expansion activities initiated by the division create a solid platform for growth, as the division is able to access broader product markets and explore export opportunities. Hosaf s production capacity after the expansion will match anticipated domestic consumption. The paper impregnation line provides opportunities for volume growth through market share gains, which will yield significant economy of scale benefits. The installation of a third formaldehyde line at Woodchem in order to meet domestic demand remains under investigation. KAP Integrated Report 2017 59
Diversified chemical Case study The acquisition of Safripol supports KAP s strategic drivers High barriers to entry The acquisition of Safripol established a diversified chemical division, incorporating the existing operations of Hosaf and Woodchem. Safripol s inclusion in the group added another industry-leading industrial asset that is complementary to existing operations and, together with Hosaf, has established a unique polymer business cluster. Together, Hosaf and Safripol have an estimated 37% market share in PP and 70% in HDPE and PET. There is only one other local PP supplier, with the rest of the market being supplied by imports. The business model, with global indexed and US dollar-priced products and raw materials, provides a pure US dollar margin business within South Africa. An overlap in the customer base between Hosaf and Safripol further provides additional value to customers: Synergies within the polymer cluster add to increased revenue, increased operational efficiencies and cost savings, due to wider product offerings, value creation and integrated management and support structures. Distribution efficiencies will be created by combining deliveries and improving utilisation of transport through return loads on long-haul deliveries. Sales and marketing structures will extract greater value from a consolidated client base. Research and development teams from Hosaf and Safripol have been integrated and will ensure consistent applications of world-class and leading technical expertise to deliver premium products. The combined and complementary products of Safripol and Hosaf created a polymer cluster that strategically positions the chemical division to provide three of the five polymers that underpin the plastics industry: polyethylene (PP) is a lightweight, high melting point plastic with high stiffness, hardness and strength. PP is used in the manufacture of injection-moulded articles, blow-moulded containers, pipe, sheet and textile fibres. High-density polyethylene (HDPE) is polymerised from ethylene to produce a plastic with excellent stiffness and environmental stress crack resistance. It has superb chemical resistance and low water absorption and is ideally suited to the food industry. Polyethylene terephthalate (PET) is used in the beverage and packaging industries, and primarily in the bottling industry because of its high intrinsic viscosity and clarity. 60 KAP Integrated Report 2017
Industry diversification Adding value through specialisation Solid returns on capital employed KAP Integrated Report 2017 61