The Mining Rights Are For Clay, An Essential Raw Material In The Manufacture Of Tiles, But On Its Own, A Questionable Commodity That Generates Small Interest Among Miners.

SA's biggest producer of wall and floor tiles, Ceramic Industries, is delaying its call to invest R500 million into a new tile factory till it can convert its old order mining rights to new order rights.This manufacturer has export in some Europe's countries like Bosnia and Herzegovina,mostly ceramic tiles or in Bosnian keramicke plocice.

The mining rights are for clay, a vital raw material in the manufacture of tiles, but by itself, a marginal commodity that generates tiny interest among miners. The company applied to convert the rights in 2008.

Without a secured supply of a necessary raw material the company cannot commit to an investment of that scale, announces BOSS Nick Booth.

Ceramic Industries reported lower than anticipated profitability in its results to July. Higher gas and electricity prices, increasing costs of commodities like zirconium and borax which are employed in the production of glazes, and competition from inexpensive imports were cited as reasons for the poor earnings.

Group cash decreased 3,4% to R1,5 bln from R1,6 bln in the year under review. But profits slipped 23% to R192 million from R250m last year. Headline revenues per share fell 30,6% to 785,3c from 1 131,3c per share.

Making tiles is an energy intensive business, and the skyrocketing cost of electricity, and more particularly gas, is making itself felt. "The energy cost per unit (m) has risen from R1,50 twenty months ago, to R3,60 currently." The price of commodities employed in the making of tile and ceramic glazes rose by twenty percent to 25% in the past year.

However , other costs, for example maintenance and labour, came in at less than inflation. The company is in negotiations with unions relating to income increases. The deadline is October and Booth is upbeat that deadlock can be evaded. Though results were down overall, there were pockets of success within the group, which operates 4 tile factories, a sanitaryware factory and a bath factory in SA ; and a glazed porcelain factory in Australia.

Maybe most surprising was the factory that competes most with cheap Chinese imports fared the absolute best. Pegasus, which produces tiles that sell in the R40m price bracket increased both production and sales volume, growing turnover by 4%. "We run an especially competitive operation," says Booth. "Our factories are top class and we are able to compete with the Chinese."

The year saw the company invest R130 million on gear upgrades and new technology. "This is typically on high-definition printers for our glazes. We intend to roll the technology into all of our factories," Booth announces.

Exports to Africa grew by 20% in the past year, also helping to drive cash in the Pegasus business. "We are exporting to all of our neighbors, with good growth coming from Mozambique and Zimbab- we ; as well as further afield in Angola and the DRC. This side of the business is so promising that the company is examining the likelihood of building a factory in one of its export markets."

It was in the higher levels that Ceramic suffered the effect of Chinese imports. Vitro, the factory that produces upmarket floor tiles (upwards of R60m)

"We produce tiles made from red clay the type typically mined in SA. But the trend is toward white based porcelain tiles. These are imported and are increasing in popularity. There is not any technical difference, and once tiles are coloured and glaz- ed, there is not any identifiable difference eit- her. The difference is perception.

In other divisions the company scored 1 or 2 own-goals. Samca, which produces floor tiles (R50m to R80m) fought with management changes and inefficiency. And while management had its eye off the ball so did product designers who didn't stay alongside of trends, leading to a loss of sales. The company had to drop its prices to win back share of the market.

The toilet business has been turned around, with sales volumes growing across the board. "We lost market share and let go of our costs a bit. Costs are now in order and we have passed on the savings so as to win back market share."

To keep a tighter rein on the busi- ness, the management structure was reorganised. Booth deployed the group's two most experienced chiefs, Lance Foxcroft and Pieter de Lange, to head up the sanitary ware and tile divisions respectively. With the daily operations now in good hands, he is now more able to concentrate on enterprise-wide method and business development.

The Australian business had a tough year, reporting production down by 26,5% and sales down by 25 percent and barely breaking even. While the economy was slow and imports high, most of the Problems came down to production and commissioning Problems at the factory. "We are close to a turn-around in this business. And as the only tile manufacturer in Au- stralia we're going to have a competitive advantage. We just need to be a little sharper."

Booth is clear about the coming year, and about producing in SA in general. "Any producer of heavy stuff should operate in the market in which they sell the product."

He has concerns about the capability of makers to form new jobs in SA but believes the business will remain practicable th- coarse continued investment in capital sub-structure. "The challenges we face today are different to those of 10 years ago but nothing is insurmountable."

As is clear from the 1 500c special dividend announc- ed earlier this year, Ceramic is a cash generative company. Money reserves decreased to R217,7 million from R435,7 million and Ceramic's net asset price per share declined by 10,5% to 7 081c (2010 : seven 912c) as a result of the R304m special dividend announced in May as reported tagza.com.