Divfood forced to pass on tinplate price increase.

Dear Customer,

It is that time of the year again, when we approach our Annual Price Increase,  and in the context of all the craziness that's been going on in the world markets, in terms of  commodities and oil and gas,  I am going to do my level best to provide you with a macro-level overview on the challenges that Divfood South Africa faced with regards to the 2009 Annual Price Increase.

There are two key points that make up the Price Increase :

1.  Tinplate Cost.  

We source our tinplate from ArcelorMittal (AMSA), whom we all know is the world's largest Tinplate Manufacturer.  Traditionally, in South Africa, our prices have always been increased from the 01st of April whereas in the rest of the world, it is the 01st January each year.  Since acquiring Iscor, AMSA have honoured this tradition and therefore our price increase will be effective 01 April 2009. (This could change in the future.)

We have been in negotiations with AMSA since October 2008, and they have been tabling prices which we found to be extremely high and unacceptable.  In brief, to agree on a price with  AMSA, we use the Metal Bulletin average published price in US$  in a basket of 08 countries.  This figure is normally tossed around many times, because of the changes in prices that take place in  the various countries.  The agreed price  in February 2008 was $1029.00 per tonne.  For 2009, AMSA have been proposing prices higher than the MB average, and to complicate the negotiations this average has been slowly creeping down since December 2008.   As I write this email, I donot have the finalised price per tonne for 2009, but from my own calculations, I estimate this average to be approximately $1390.00 per tonne, giving us an increase of 35%.   This will be confirmed in a follow up letter  in the next week or two.

2.  Exchange Rate.

Commodities in South Africa are priced in US Dollars, and the strength in the US Dollar has certainly hurt the nominal price of commodities in 2009.  Our steel (tinplate) from AMSA is purchased in US Dollars, and in February 2008, when we had agreed on the price of $1029.00 per tonnes, the exchange rate was 7.30 to the Dollar.  As at today, the exchange rate is approximately 10.00 to the Dollar, and this is the figure (ER 10.00) that was used in the negotiations with Mittal, giving us an increase of 37%.  Once again this will be confirmed in a week or two.

In Summary :

We have resigned ourselves to a 72% increase in tinplate costs from ArcelorMittal for 2009, effective 01st of April.

Tinplate is a significant portion of the overall selling price of our products, so this negotiated price with AMSA will have a drastic impact on all our selling prices.  Because of the magnitude of this tinplate price increase it seems unlikely that our selling price increase to you will be less than 40%.   We are busy running models at the moment, implementing the tinplate increase and all other costs increases to derive at new selling prices for all our products.  We are expecting selling price increases in the range of 40% - 60% for all goods despatched after the 01st of April 2009.

Whilst we have negotiated over the past few months to secure  competitive pricing levels with AMSA, we are left with no choice but to pass on this higher costs in 2009. Unfortunately we can no longer prolong the inevitable, and we will be forced increase our prices from the 01st of April 2009.  Management of Divfood are committed to reducing costs and they will continue looking for ways at reducing the overall costs to our customers.

I wish to Thank You for your valued business over these years, especially to those customers that have been with Divfood for the last 15-120 years, and I hope that you will understand the necessity for this price increase.

I have attached some articles on the tinplate prices from various sources.

Yours sincerely,

Sajid Madhanlala

Divfood South Africa