Firming up Carib’s foundations
THE future of Caribbean Cement Company Limited (Carib) hinges on increased prices and demand in the domestic market even as the local manufacturer pushes to diversify its export revenue streams.
Carib’s general manager, Anthony Haynes, said that Venezuela remains to be developed, but he expects that the company will be able to start shipping 10,000 tonnes a month once it secures a deal to enter the market under the Petrocaribe Trade Mechanism.
“This market has the potential to become (Carib’s) largest export market,” Haynes told the Business Observer.
Mayberry Investments Limited’s VP of research and special projects, Tanya Waldron-Gooden, said that the Venezuelan government has embarked on an ambitious housing project to build two million homes in seven years, dubbed the grand housing mission.
“This can be potentially good if (Carib) is able to get a piece of the business.”
For the nine months to September 30, 2011, Carib exported 176,110 tonnes of cement and 31,228 tonnes of clinker and, according to Jamaica Money Market Brokers’ (JMMB’s) manager of client portfolios and investment strategies, Roy Reid, total export volumes should total 234,000 tonnes, or 30 per cent of total sales volume by the company for 2011.
Both Reid and Waldron-Gooden believe that the export market provides the answer to Carib’s problems, but ultimately the plant has to increase its output closer to its 1.8-million-tonne capacity.
Reid expects total sales volume to come in at 785,000 (33 per cent higher than 2010), which means that Venezuela alone could bring the Rockfort, Kingston, plant past 50 per cent capacity utilisation.
In South America, Carib has exported cement to Guyana, Suriname and Columbia, while the company has also entered Haiti and the Dominican Republic. That aside, Haynes believes that “sustained growth in the domestic market is key to the company returning to profitability as is correcting prices to cover inflation”.
The decline in the economy over the last three years, coupled with increases in dumped cement volumes, according to Carib, saw the cement manufacturer’s domestic sales fall drastically from 720,260 tonnes in 2008 to 531,605 tonnes in 2010 — the lowest level in the last ten years.
“The presence of dumped cement also means that prices are suppressed and the company is not able to recover increases in its input costs,” Haynes said. Carib only managed to increase prices by five per cent in July, even though it quoted increases in energy prices ranging from 21 per cent to 40 per cent, depending on the fuel being used.
Now, he says the company is encouraged by the return to growth in the macroeconomy and the reversal of the free fall in the domestic market over recent years.
“At the same time, effective cost management of our supply chain and the tight liquidity situation remains a focus area.”
Financial analyst John Jackson, publisher of Investors’ Choice magazine, argues that should Carib increase its domestic sales by 100,000 tonnes it should be able to return to breakeven, at the very least.
“The only question is: When will Jamaica return to this position?”
Carib’s financial woes, which resulted in the company racking up net loss of near $3 billion over the 21 months to September 30, 2011, are not entirely unlike cement majors such as Cemex, which has recorded accumulated losses of US$4.9 billion between 2008 and 2010. They operate in markets where demand has fallen off significantly and face higher energy prices as well.
However, Carib has another factor to deal with — a near $2-billion-a-year operating lease that is pays to its parent.
Carib’s expansion in 2008, which was largely paid for by debt borrowed by Trinidad Cement Limited (TCL), increased the local manufacturer’s yearly operating lease from $678 million in 2008 to $1.8 billion and more since 2009. In other words, TCL services the debt and Carib reimburses TCL through the operating lease.
Since TCL’s debt re-profiling negotiations have allowed it to suspend all debt servicing Carib “has consequently suspended servicing of the operating lease arrangement,” according to Haynes.
“So no cash payments are being made,” he said.
The lease liability, however, continues to be recognised in the financial statements, even though Carib’s directors expect to negotiate a reduction in the lease charges with its parents when the re-profiling exercise reaches the approval and documentation phase expected to be completed by January 2012.
Going forward, Reid also thinks Carib needs to reduce its debt load, which increased from $6.17 billion in 2010 to $8.26 billion as at September 30, 2011.
Carib “is currently highly leveraged and this is having an impact on its liquidity and solvency ratios. Reduced cash flows from operating activities have also impacted the company in this regard as the company has had to place a heavier reliance on cash flows from financing activities. (Carib) should aggressively pursue efforts to re-profile its debt to enable the company to have more flexibility in managing its cash flows and meeting its shorter-term obligations,” Reid said.
Jackson believes Carib should go to the local equity market to raise capital to reduce its debt load when prospects improve.
“It is my view that one mistake they (Carib) made was to not raise capital on the stock exchange in 2004/2005 when the market doubled,” said Jackson.