Johannesburg – Chemicals maker AECI [JSE:AFE] has concluded several strategic capital expenditure projects in southern Africa and further afield, which will enable it to take advantage of growth in the manufacturing and mining sectors to which it supplies.

An update on the four major undertakings was provided to shareholders on Wednesday at the announcement of the group's interim numbers. These already reflect the fruits of these expansions, although full benefits are only expected to trickle through to the bottom line in full-year 2010 and in 2011.

"This capacity expansion shows foresight and will become a competitive advantage for the company going forward," said Kholofelo Maele, chemical industry analyst at Frost&Sullivan.

The most significant of these is a local detonator plant, on which AECI has spent R554m to date, and which is now fully operational.
 
Meanwhile, AECI has also expanded in Africa - in Zambia, the Democratic Republic of Congo (DRC) and Botswana - as well as in Indonesia. Projects in Zambia and the DRC are to supply to copper mines in these countries and although the undertakings are still in start-up mode, AECI said they are gaining momentum.

Maele said the projects in sub-Saharn Africa are likely to benefit from strong demand for AECI's products, which are set to be a key competitive factor for the group going forward.

Further offshore, AECI is also operating in Indonesia, where the company has now established itself as an explosives supplier to the coal mining market in the region. AECI is also contemplating further investments in South-East Asia and the Middle East, although these will depend on future market conditions.  

The group's interim figures included a 127% soar in headline earnings per share to 238 cents, compared to the same period in 2009, while operating profit jumped 48% to R484m.

Rand volatility raises problems  

Recently completed capital expansion made a small contribution to the bottom line, where most of the benefits stemmed from the increase in demand for AECI's products – reflected in a sales volume increase of 15% in the six-month period under review.
   
While the demand recovery was encouraging, CEO Graham Edwards has warned that market conditions are still precarious and management is not ruling out the possibility of a double-dip recession in the world economy.  

"We are being conservative and we are not looking to repeat the volume growth we saw in this half," said Edwards.    

Volumes in the manufacturing sector as a whole in South Africa increased 6.2% in first half of 2010 compared to the same period last year, according to Statistics SA. In the second half, volumes increased by only 3.4% year-on-year (y/y).

South African mining volumes show a similar trend with the first half up 6.6% on the same period last year, while second-half volumes increased 4.2% y/y.

Edwards said that while the volume increases are encouraging, they come from a low base and are expected to be flat going forward as opposed to showing an increasing trend.

The shaky state of the recovery is not the only thing worrying AECI - the company's bottom line suffers from volatility in the rand/dollar exchange rate.

"It's not that the strong rand in itself bothers us so much; it's rate of change in the exchange rate," said Edwards.

"We have to adjust our prices along with the rand's movement and that is very difficult to judge correctly."

 - Fin24.com