Packaging company, Caribbean Container Inc (CCI) has reported combined losses of $833M for the years 2002 and 2003 and has defaulted on long-term loans to Republic Bank Ltd that went to finance the paper mill operations. Total loans stood at $2.65B as of the end of 2003. Accrued interest on the unpaid loans amounted to $142M in 2003.
The annual report for 2003 states that the company continues to service its long-term loan and working capital obligations with NBIC and its working capital facility with Republic Bank. However the long-term loans with RBL, amounting to US$9.9M for the paper mill have not been serviced and are in default. CCI quotes the bank's position as saying "although the company is in default ...and it is unlikely in the foreseeable future that the company will be able to service this debt, the bank would prefer the company to operate without foreclosure, without prejudice to the bank exercising its usual and normal rights at any time under the terms of the debenture dated July 22, 1999, provided also that the company continues to operate within the limits of present approved short term financing facilities and works towards achieving at least break-even position prior to the interest charged on the long-term loans in the book of RBL."
In the notes on the accounts it is reported that in the present depressed economic environment there also appears to be limited investor interest in making significant investments in projects that offer a longer-term return ..."
Trading results for 2003 saw turnover increase to $586.2M from $560.8M in 2002 but losses widened to $442.6M as compared to $390.6M in 2002.
This deterioration, the company says, started in early 2003 when it became evident that the expected increase in paper, hence packaging prices, projected in the 2002 restructuring plan would not materialise due to global recession and changes in global trading patterns. This was further compounded by an increase in surplus within the Caribbean that has forced packaging prices to the lowest level in many years."
Managing Director Ronald Webster reports that from January 2002, the pretax cost per liter of fuel has increased by 83%, 35% in 2004 alone. Ocean freight and handling also showed substantial upward movement. From October 2003, paper prices started to rise and imported paper delivered (CIF is now 25% higher than for the first six months of 2003; a large portion of this increase is freight related. These increases are significant, the cost of energy alone accounts for 28% of sales revenue (mill and box plant) to-date for 2004, while at the same time US$ based market prices for packaging have remained constant since 1999.
Webster reports that despite the constraints the company has seen volume sales increase by 18% from 2003 to 2004 much of which came from an increase (21%) in exports. Domestic sales by volume were up 12%. The box plant sales in US$ in 2003 were 5% above 2002 and for the year to date, 2004, 16% above the same period in 2003.
Supply agreements were reached with Canadian and South American paper mills for the specialty paper grades that cannot be produced at the CCI mill. But competition increases from box and paper makers in South America with access to low cost energy and this has stemmed any increase in prices per tonne, Webster says.
He reports that the Guyana market continues to show growth, primarily in the non-traditional sectors. CCI finances all of its foreign inputs for domestic sales out of its exports proceeds, this also helps to ensure price stability. Webster warns that should CCI for any reason cease to operate domestic customers would be forced to source close to US2M to fund packaging from overseas suppliers. "Without the local competition that we provide prices could escalate well beyond this figure."
In anticipation of an increase in paper and packaging prices the mill was restarted in October 2002 after a twelve-month closure. Webster reports that certain design flaws in the original equipment are being corrected as part of a two-year programme and 12% of the cash cost per tonne of paper produced is allocated to this purpose.
Waste paper collection in Guyana and Trinidad continues to improve but tonnages are still below the level necessary to adequately support box plant sales growth. To correct this shortfall a collection programme is due to commence in Suriname in October and in Barbados in early 2005. Recently there was increased competition in the Caribbean for waste paper primarily from Venezuela and India and prices are being forced upward. Waste paper from North America is available but prices are too high due to demand from East Asia, Webster states. He adds that the domestic collection programme provides indirect employment for 100 people and removes 200 tonnes of paper waste from the municipal waste system every month. Webster lists five short to medium term risks for the company. These include the loss of experienced staff due to migration. Reduced waste paper availability is seen as the company's lifeblood; fuel price movement beyond $47 per barrel over an extended period; equipment failure through financial inability to re-tool and repair box plant equipment; and official bureaucracy that hinders a just-in-time foreign purchase system.
Despite the company's outlook appearing "grim", Webster says the company has shown positive gains from January 2003 and subject to no unforeseen disruptions should achieve the highest annual sales on record by the end of 2004. We believe the 2004 results will fully justify the decision to stick with the paper mill project.