Articles

Turning chemicals into cash

Omnia Holdings' decision to buy Protea Chemicals for more than R600m two years ago has enabled the chemicals group to diversify its income base, ensuring balanced growth across the business. Protea Chemicals, one of southern Africa's biggest distributors of industrial chemicals, was full of promise. Why else would Omnia have snapped it up? Its industrial chemicals division now contributes around 49% of total group revenue, while the agriculture division contributes 32% and explosives 19%. In 2005 the agriculture division contributed 78% and chemicals 4% of group total revenues. "There's a good balance today in having three legs to the business, which are in different customer markets. We'll look at opportunities to strengthen any of the three legs," says Omnia group MD Rod Humphris. Its shift into a diversified chemicals business has enabled Omnia to create a balanced portfolio of businesses that has assisted in dealing with a volatile agricultural sector. Humphris and his management team are confident regarding the future prospects of Protea Chemicals. He wasn't prepared to disclose the value of long-term contracts secured by Protea Chemicals with major cement manufacturers. The contracts were won by its industrial chemicals division on the back of expansion plans concerning the refinement of waste gypsum and growth of SA's construction sector. To benefit from the construction industry Omnia is spending more than R30m to build an EcoGypsum facility in Rustenburg, to be completed by mid-year, and provide Protea Chemicals with an additional revenue stream.

There's demand for gypsum, which is produced as a by-product of cement, in SA. Cement contains around 5% gypsum and most cement manufacturers produce their own. Omnia management at Protea Chemicals' new monocalcium phosphate plant, which provides the industrial chemicals division with an opportunity to supply new animal feed products, expects more revenue streams. Humphris says: "We also have opportunities to distribute polymers into East Africa, where we have operations. We'll invest in capacity to handle the significant volume growth expected in our polymers business." To ensure that its business operations react relative to growth, the group intends to double its capital expenditure programme to R180m from the current R90m. Omnia's explosives division, which trades through a division known as Bulk Mining Explosives, is set for a great year. The group anticipates that its agriculture divisions - Omnia Fertilizer and Omnia Specialities - are set to experience normal levels of demand for their products in SA in the current planting season. Omnia group is also seeking further growth from trading carbon credits, which is gaining impetus in SA companies. Possible revenues created by reducing greenhouse gas emissions generate the momentum. To trade in carbon credits is part of the Kyoto Protocol, which is a legally binding international agreement to reduce greenhouse gas emissions. Omnia has been given approval to trade in carbon credits by SA's Minerals & Energy Department and is awaiting registration (expected by end-February) from the international Clean Development Mechanism Executive Board. However, revenues from trading in carbon credits could only be realised by 2008. "We anticipate to get about R70m per annum until 2012 from trading in carbon credits," says Humphris. "We're still in a process of investigating the kind of technology to implement at our plant. It will be a scrubbing technology to remove greenhouse gases and will cost the group about R35m," he adds. Omnia now sits with a market capitalisation of more than R2bn.

Despite positive growth expectations, Omnia still faces some challenges. Rainbow Chicken has lodged an R80m claim against Omnia for allegedly supplying a contaminated feed ingredient that killed its chickens. "The matter is with our insurers and we believe this claim will have no financial impact on Omnia," says Humphris. The Competition Tribunal is also reviewing a case of alleged uncompetitive behaviour by members of the fertilizer industry. And because of its overseas operations, Omnia is always susceptible to a strong rand. Despite these challenges, Omnia still has opportunities to export, particularly into Africa. "We have a number of projects in place to add more value to the business," says Humphris.

Written by Gugulakhe Masango and originally published in the Financial Mail - 25/01/2007