Operational review / Diversified chemical

Chemical

539 employees 3 production facilities

106 000+ tonnes of UF resin produced

121 000+ tonnes of PET produced

Polymers 85% of revenue Resins 15% of revenue

Revenue increased by 79%

54 KAP Integrated Report 2017

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.

A specialised chemical manufacturing division

Revenue spLIt

* Included for six months

15% Woodchem

42% Hosaf

43%* Safripol

Zimbabwe

Manufacturing plants

Sales and distribution

Zambia

3

Piet RetiefWOODCheM

DurbanhOSAF

SasolburgSAFRIPOL

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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).

business environment

ChemicalOperational review / Diversified 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 world-class 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.

products

PeT, resin and polymersPrimarily used in the manufacture of bottles for carbonated soft drinks

hDPeUsed for a wide range of applications, such as plastic bottles, chemical containers and toys

PPUsed for a wide range of applications, such as furniture, clothing, textiles and automotive components

Impregnated paperPrimarily used in the timber panel industry to manufacture MFB

Formaldehyde and UF resinPrimarily used in the timber panel industry

56 KAP Integrated Report 2017

key factsGroup strategy

“Our aim is to deliver premium products through leading technical expertise and world-class technology.”

Leigh pollard, CeO: Chemical division

Inclusion of Safripol in the diversified chemical segment (for six months), producing: • 61 000 tonnes of PP• 78 000 tonnes of HDPE

Hosaf continues to produce ‘bio PET’ made from renewable sugarcane resources

Woodchem paper impregnation volumes of 44 million m2

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

Product volumes

PET 37%UF related 26%HDPE (six months) 21%PP (six months) 16%

Market leadership

High barriers to entry

Leveraging our African base

Industry diversification

Adding value through specialisation

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.

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

With the Hosaf upgrade and Safripol acquisition the division is well placed to take advantage of existing markets in neighbouring countries.

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.

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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.

Chemical

Commentary

The chemical division showed revenue growth of 79% and operating profit growth of 111%.

Operational review / Diversified chemical

58 KAP Integrated Report 2017

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.

Outlook

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Diversified chemical

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.

Case study

The acquisition of Safripol supports KAP’s strategic drivers

High barriers to entry

60 KAP Integrated Report 2017

Case study

Solid returns on capital employed

Adding value through specialisation

Industry diversification

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