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Rising Global Zinc Prices Eat Into Eveready's Profits

Mar 19, 2008 (Business Daily/All Africa Global Media via COMTEX) -- Rising zinc prices in the global market slapped a Sh200 million bill on Eveready East Africa in raw material costs for the year ended September 2007.

The surge in input costs saw the firm's profit before tax drop from Sh234 million in 2006 to Sh180 million last year, a 23 per cent change.

The management attributed the drop to an "unprecedented" increase in the cost of Zinc, which took up virtually the entire increase in sales, from Sh2 billion to Sh2.3 billion.

Eveready East Africa says it made losses of up to Sh40 million in the first two months of this year as a result of the post-election crisis.

Managing director Steven Smith said the company's operations in Western Kenya, Nyanza and Nakuru, its manufacturing base, was affected by the post-election violence which has had a direct impact on the company's operations.

The company had at the height of the violence issued a profit outlook for 2008 citing disruption of its dry cell business. The company, which went public in 2006, also attributes the slump in profitability to shareholder service costs that increased operating expenses by Sh30 million.

Publishing and printing of material inviting shareholders to and hosting annual general meetings has recently emerged as a key drain on companies that go public at the Nairobi Stock Exchange.

Legislative changes - allowing electronic distribution of annual report and accounts and other company announcements - have been proposed as one way of reducing costs associated with shareholder services.

The Economic Survey 2007 says output of dry cells dropped by 1.7 per cent in 2006. The survey attributes the failure of the local industry to compete with imports and a shift to digital devices that do not rely on the traditional battery for power for the market erosion.

Besides, rising input costs is likely to derail the performance of Kenya's only battery maker further as it has no say on high zinc prices in the international market. Zinc accounts for 14 per cent of Eveready's costs. However, in the last 14 months, prices for the metal have risen by 67.5 per cent, to US$3, 300 per metric tonne, according to Platts, the commodity news service.

Platts is forecasting further Zinc price rises throughout 2007, driven by increased demand for the metal, to reach around US$3, 700 a tonne by year-end. The metal's prices are being pushed by Chinese demand, some of it from the very same Chinese battery producers now undercutting Eveready in the East African market. China now accounts for 27 per cent of the world's consumption of zinc.

Prices for the metal have more than doubled since 2002, from a base level of US$1050 a metric tonne. This has now prompted moves to increase supply as investments in Zinc mining increase in producer countries.

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