Insimbi grapples with effect of scrap metal export ban

Small-cap metal alloys supplier Insimbi Industrial has reported lower profits and a 95% fall in cash generated for the six months to end-August as it grappled with the effects of the ban on exports of recycled metals that have forced it to increase its working capital cycle to 42 days.

The group said on Monday that the impact of higher inflation on its business was worsened by operational issues at Transnet and Eskom.

Insimbi said volumes were down 11% in the six months under review compared to the prior period. The group, worth about R433m on the JSE, said cash generated from operations plunged from R100.1m to R4.6m as it was forced to increase its working capital cycle to 42 days from 38 days to remain competitive in the local market after the ban on exports of recycled metals.

The controversial ban, considered an urgent and necessary means to reduce prices and discourage syndicates from looting infrastructure, was imposed in November 2022 as the state battled to tackle metal infrastructure theft that costs the broader economy an estimated R187bn a year.

The government extended it by another six months in June.

As a result, exporters like Insimbi have been forced to supply more material to the local market, where it offers payment terms to remain competitive, as opposed to the export markets where the payment terms were upfront or upon shipping.

“An unfortunate consequence of these circumstances is that local customers are exploiting the situation and extending their agreed payment terms,” Insimbi CEO Fred Botha said.

“As a result, almost R140m which should have been received by August 31 was only received from these debtors in the first five working days after month-end. This impacted significantly on our cash-flow statement and our debt-to-equity ratio at the reporting date.”

Headline earnings per share fell 5.8% to 15.46c from 16.41c in the prior period.

Insimbi operates in four business segments — nonferrous, ferrous, refractory and plastics — and supplies alloys to the steel sector, as well as ceramic refractory linings to the cement, paper and pulp, steel and platinum industries.

The Germiston-based group said it was this diverse asset base, coupled with the offset by a weaker rand, that shielded it from the impact of the government ban on exporting recycled metals. The ban is in place until December 2023.

The group said it had mitigated the risk on local debtors by obtaining insurance cover for all customers where available, but the additional ramifications of load-shedding had put it under pressure. 

“Due to load-shedding impacting on the local supplier base, the group has been importing more material, where payment terms are not as favourable as those from local supply,” Insimbi said. “The concomitant impact on businesses has been worsened by the ongoing and significant issues at key parastatals for logistics and power, respectively Transnet and Eskom.”

Calling for an improvement at the state-owned entities, Insimbi said any improvement in logistics and a sustained reduction in load-shedding, or greater energy supply from alternative sources, would increase GDP growth.

Despite record hikes in fuel and transport logistics, as well as the instability of power supplies, Insimbi said it continued to manage increases in operating expenditure through sustainable cost reductions that have resulted in a “leaner and resilient business”.

Operating expenditure decreased by 15% or R28.7m, the firm said, as a result of the continuous focus on cost savings and optimising of its operations and assets. When compared to the previous comparative period, occupancy costs were reduced by 30% as a result of renting underused properties, an 11% drop in vehicle expenses and a fall in personnel expenses of 6% or R15m. 

Botha said that while the operating environment is expected to remain challenging, the group is strategically focusing on recycling and beneficiating ferrous and nonferrous metals to meet the demand for its products from local and export clients.

“The global focus on decarbonisation and vehicle electrification should support copper and aluminium prices, in turn boosting our revenue and margins,” Botha said, highlighting that the sharp increase in announced renewable energy projects by companies across the board was therefore a promising indicator.

“I am confident that our interim results and rolling 12-month earnings are tangible evidence of Insimbi’s resilience and potential, even under difficult conditions.”

Meanwhile, all eyes are on the anticipated outcome of the case in which the SA Revenue Service (Sars) has taken on six trusts that sold Amalgamated Metals Recycling (AMR) to Insimbi eight years ago for nearly R300m, suspecting them of underpaying capital gains tax on the transaction.

AMR was founded in 2002 and has grown to be one of the largest informal employers in SA. The government estimates that the SA waste sector is valued at R15bn.

gumedemi@businesslive.co.za