Magnesita Acquires Sormas As Input Prices Increase

According to RHI Magnesita, steel and industrial demand remained robust in the September quarter. Raw material assets and refractory facilities ran at high capacity and an order book with visibility through the first quarter of 2022.

A “temporary higher level” of approximately 2x net debt-to-EBITDA is expected at year’s end, according to the FTSE 250 firm, owing to reduced profitability in the third quarter and increased inventory levels to minimize supply chain disruption. It also announced that it has agreed to pay €38.8 million (£32.82 million) in cash to buy an 85.22 percent share in Turkish refractory manufacturer SORMAS.

The lower output from the group’s Radenthein plant in Austria would adversely impact second-half EBITA by around €8m, affecting sales volumes for high-margin refractories primarily used in non-ferrous metals projects. There have been further rises in sea freight and demurrage prices, as well as increasing energy and consumables expenses, according to RHI Magnesita’s supply chain position. Low freight dependability created supply chain delays that affected manufacturing schedules, and deliveries were nevertheless utilized to guarantee customer supply.

Higher expenses forced the company to adopt substantial price hikes for customers; this resulted in a projected revenue advantage of €100 million so far in 2021. Up to €30 million in extra income is expected in 2021 due to further price hikes that are now being discussed. Global logistics are becoming less reliable, which has led to a rise in inventory in the third quarter due to the possibility of disruptions in raw material delivery.

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Managing logistics and other areas of rising cost pressure has necessitated the addition of more personnel and systems resources. The business claims to have already improved delivery dependability and reduced manufacturing backlog. As new facilities start up in 2022, investments to enhance the company’s production network are on pace to “substantially improve” the group’s cost position and delivery capability.

In August, Hochfilzen, Austria’s European dolomite center, opened a new container rail terminal. Valenciennes, France’s improved tunnel kiln for producing burnt dolomite products, went into service in September.

A new rotary kiln planned for Hochfilzen was anticipated to start operating by 2022, with mining of dolomite raw material beginning in the fourth quarter. The third quarter saw the commissioning of new capacity in Radenthein for the non-ferrous metal and glass industries, enabling the closure of a second European site. Additional capacity for these markets will be available in Contagem, Brazil, starting in the second half of 2022. There were plans to scale up production at Urmitz, Germany’s capacity expansion facility, in the first half of 2022 to provide worldwide clients with functional goods and high-performance mixtures. Brumado, Brazil’s new raw material magnesite smelting facility, was expected to be operational by 2022.

According to RHI Magnesita, China’s power constraints may drive up the price of imported magnesite-based raw materials and reduce their supply in the fourth quarter. The firm is looking at other supply channels to minimize that risk, which may impact China’s production and consumer demand. However, momentum improved in September when pricing hikes took effect, which was in line with the company’s expectations for the whole year.

To meet the €310 million EBITA full-year forecast, the company needs a “strong performance” in the fourth quarter, which the board says is supported by the usual seasonal boost in cement but is also dependent on the approval of further price increases with clients being discussed. SORMAS will “substantially increase” the group’s locally-manufactured product range and serve as a manufacturing center and platform for development in Turkey and the broader region, according to RHI Magnesita’s stated goal to grow in regions where it is now underrepresented. SORMAS had gross assets of €27.7 million and net cash of €3.7 million at the end of 2020, with an underlying EBITDA of €6.4 million.