Atmospheric Gases

Key highlights

  • CO2 demand increases year-on-year
  • Increase in bulk volumes despite product shortages
  • Commissioned the new Durban filling plant
  • Cost reductions through site consolidations and significant plant cost savings
  • Significant supplier settlement led to additional revenue

Key challenges

  • Extended shutdown of a key supplier resulted in unplanned CO2 shortages
  • Lower-than-desired reliability of bulk production with a high cost burden
  • Risk of electricity and water shortages affecting plants

Performance review

Key performance indicators (KPIs)

1 Capital expenditure (CAPEX) refers to spending by Afrox in order to acquire or maintain fixed assets.
2 Feedgas refers to essential gas stock inputs required to create products.
3 Delivered in full and on time (DIFOT) is a measure of product delivery efficiency.

The Atmospheric Gases segment consists of three significant business streams:

Refer here for details and other product processes and distribution.

PGP

The PGP business stream is a low-volume business with a significant revenue impact. PGP contributed 38.6% of Atmospheric Gases revenue and 46.2% to GPADE.

Volumes were impacted by a decline in market demand. This was caused by economic difficulty resulting in market shrinkage and customer closures leading to overcapacity of products in traditional markets (e.g. iron, steel and welding industries). Current market conditions are expected to persist and may adversely affect revenue growth and make margin improvement a challenge in future.

Gas

A risk area remains infrastructure, specifically electricity and water shortages that have the potential to adversely affect plants and production. Disruption to this portion of the business could cause chain reaction issues within the rest of the business. The resolution of a R165 million settlement with AMSA resulted in the tonnage portion of the segment exceeding planned revenue by 95.1% year-on-year.

Liquid

Bulk gases

The segment ended the year well, even though volumes are only marginally higher year-on-year (2% increase from prior year).

The development of new markets for our products, particularly in process industries, allows us to grow our customer base in new ways. An example is individually quick-frozen (IQF) food, for which Afrox is a market leader, providing unique resourcing opportunities through the Linde Freezerpool agreement (refer below for more information). The high-quality IQF process created a broader base for operations by offering a sought after product with excellent preservation technology.

The high fixed costs of operating plants that were formerly contracted to large supply schemes led to an increased cost burden on the bulk business. In addition, the overall reliability of bulk production facilities did not meet our expectations due to direct reliance on supplier manufacturing processes.

There continues to be high levels of demand for CO2 as a by-product of various refinery processes by suppliers. Afrox’s primary CO2 feedgas supplier performs a statutory shutdown every four years for maintenance purposes. One such shutdown occurred in 2016 and continued for longer than anticipated, resulting in more unforeseen CO2 shortages. It caused a significant shortfall against the Company’s 2016 forecasts and proved to be irrecoverable. Despite this significant event, the bulk gases business was able to capitalise on various ad hoc projects to reduce the overall impact and was aided by the robust pipeline of opportunities developed through focused business development and optimisation of existing facilities. This will be supported by a strong drive to develop new product sources in Africa through an ability to liquefy and transport bulk products in large volumes.

The Linde Freezerpool rental agreement

The Linde Freezerpool agreement allows Afrox to import and use industrial-sized Linde freezers on demand for flexible time periods. This reduces the high capital outlay initially required by customers in previous years, where Afrox built freezers on an ad hoc basis for individual customers. The availability of freezers for all Linde-owned businesses reduced risk for Afrox and improved flexibility and convenience for customers.

Medical gases1

As a result of the increasing disease burden globally, the healthcare industry continues to grow in spite of adverse economic conditions. Many private hospitals continue to expand, increasing the number of patient beds and in turn, the demand for medical gases. This market is characterised by strong bargaining from private and state hospitals aiming for greater cost efficiencies.

Our healthcare segment and medical gas products performed well due to a state contract extension and growth in the medical gases pipeline portion of our market. An improvement in our Swaziland sales contributed positively to sales volumes (1.8% year‑on‑year), as did the number of first-time medical installation sales in South Africa.

A significant contract was extended in the year and positive negotiations continue. We remain focused on working with partners to improve the medical gases reticulation systems.

Afrox developed a unique cylinder called an integrated valve regulator (IVR) in 2015 to provide customers with an integrated cylinder and valve regulator product to provide additional value. Despite the closure of the gas equipment factory (GEF), IVR supply continued with minimal interruption in the year due to a supply agreement with a partner. Afrox secured an additional IVR supplier, providing improved security of supply and further opportunity for growth.

Hospitality and special gases

Hospitality gases (excluding LPG)

Afrox strives to ensure steady supply of products to retail franchises and hospitality based businesses as these were identified as a significant growth area for the business due to consistent demand, regardless of economic conditions. Examples include tourism markets, fast-food franchises and shopping centres. Hospitality gas volumes decreased by 10.1% year-on-year.

Special gases

Refrigerants, helium and aerosol gas products are examples of special gases. The 10.3% volume increase was mainly attributable to the positive movement of bulk chemicals and helium. Afrox is reviewing the higher costs incurred for products like helium in order to improve performance for the next financial year.

1 Although not strictly atmospheric in nature, manufactured medical gases are included and reported as part of atmospheric gases.
Historic helium and natural gas agreement

Afrox recently entered into a milestone agreement with alternative energy company Renergen Limited, through its subsidiary TETRA 4 Proprietary Limited. The agreement will allow for commercialisation of the Free State helium and natural gas (NG) field.

The 187 000 hectare helium/NG field in Virginia, near Welkom, has 25 billion cubic feet of proven NG and helium reserves that Afrox will market and distribute through an exclusive offtake agreement. This is the first and only onshore reserve of its kind in South Africa, allowing Afrox to supply these products to numerous specialised and industrial markets instead of relying on imports for helium.

Tag ‘n Trace

Afrox developed a class-leading individual cylinder control (ICC) solution to the business in recent years. The ICC is also referred to as Tag ’n Trace Individual Cylinder programme. Good progress was made in 2016 and the ICC will further reinforce our compressed value proposition by providing data on cylinder use to improve cylinder utilisation. The customer response to the solution has been positive and the rollout was extended to 2017. The ICC led to reduced cylinder holdings disputes, thus improving debt collection and providing a competitive advantage. This value-adding offering applies to all high-pressure cylinder-driven portions of our business.

A case study of biogas in energy progression

The availability of NG will impact LPG volumes in the long term. Afrox is seeking new opportunities to market and distribute clean energy products. We recently partnered with bio-tech start-up, New Horizons Energy, to turn organic waste destined for landfills into usable products for South African industries.

New Horizons Energy will turn organic waste into usable bio-methane at purity levels of over 90%. Although the methane-derived gas is not of a medical standard, its applications and purity levels make it ideal for a range of uses, including heating applications in food production, metal fabrication, and generating electricity.

Currently, South Africa is reliant on methane supplied from Mozambique, but New Horizons Energy plans to supply local bio-methane to businesses across South Africa. Afrox has plans to roll out more anaerobic digestion plants to other provinces in future, leveraging off our extensive supply chain and gases expertise.

Future focus areas

  • Afrox foresees the future base load coming from the bulk portion of the business as opposed to the tonnage side as traditionally experienced. We intend to continue our focus on developing applications to aid the food and beverage industry, as well as environmental processes to address the trend of volume decline we have experienced over the last three years. Traditional applications for gold recovery will also be prioritised and we will review a multichannel approach to serve our customers better. The development and rollout of ICC solution will further assist this focus, as will improved pricing performance in the next year.
  • From a medical gases perspective, Afrox will focus on retaining current customers and negotiating for increased business. We will seek to cement relationships with key stakeholders and increase the percentage of contracted private businesses customers that we serve.
  • In addition to pursuing more cost-saving initiatives on site, Afrox embarked on an analysis of our ASU plant footprint to optimise production requirements.
  • Our customer service level was identified as an area for further improvement. In response, our specialised sales and marketing teams are engaging well with customers in this highly specialised technology-driven environment, harnessing knowledge of product and distribution to provide improved solutions for customer needs.

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