annual report 2007

Operational Review

Peter White
BSc (Hons) Textile Technology
Divisional Managing Director

Hosaf

Profile
Hosaf manufactures and distributes PET resin for the bottle and packaging market, polyester staple fibre for the traditional and industrial textile sectors and recycled PET resin which is used in-house as a raw material substitute.

Period under review

Hosaf continued to improve utilisation of the polymer facilities through process changes and by the end of the period under review had increased the capacity of the continuous polymer plant by 14%. As a result, Hosaf now has a PET capacity of 60 000 tonnes per annum. Overall, Hosaf’s performance was positive in spite of rising raw material costs, with increased revenue and operating profit.

Optimisation work in conjunction with technology partners enabled Hosaf to once again increase PET sales over the first half of the period under review. A technical breakdown in early 2007 had a negative impact on PET sales during this time. This means the full effect of the increased capacity will only be seen in the next reporting period.

Market conditions in the traditional fibre sector remained poor despite the introduction of quotas on Chinese textiles. The adjustments made in 2005 to adjust production volumes allowed Hosaf to match output to market conditions, but the market size is at a critical level.

Industrial fibre sales and margins came under pressure from imports of Chinese recycled fibres. Improvements were made in the performance of Hosaf’s recycling plant and sales increased by 36% over the previous period, enabling management to offset the impact of usage of recycled raw materials at the Cape Town site (now up to 40% of feedstock used).

Hosaf continues to introduce more specialised fibre types but success has been limited. Management is committed to introducing technology to finalise these projects, which will bring margin growth.

Prospects

Hosaf expects growth in local PET resin demand to continue at 8% per annum. The debottleneck initiatives of the polymer plants have now been completed and will enable Hosaf to take advantage of demand growth and PET sales are expected to grow 13% in the next 12 months.

No growth is expected in the traditional cotton staple market despite the quota measures introduced in 2006. This sector is expected to remain under price pressure.

Industrial fibres will continue to feel the pressure of recycled fibres from China. Management will continue to improve the technology at the recycling plant. This will improve the quality of the recycled chip and therefore increase the percentage used in Cape Town to over 50% of all feedstock.

Growth in speciality fibres has been slow. Management plans to bring two new higher margin products to market during the next reporting period.

Hosaf will be entering into formal contracts with technology partners in 2007/8, which will result in a substantial increase in production capacity. An investment of approximately R100 million of capital expenditure is anticipated, along with substantial working capital investment. The project will be completed by December 2008.

This capacity expansion will position Hosaf as the dominant player in the South African market, and will enable the company to take advantage of the continuing increase in demand for PET resin, both in South Africa and overseas.

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