UPDATE: Sorbic International Faces Big Short Term Hurdles
LONDON (Alliance News) - Chinese sorbic acid producer Sorbic International PLC is still targeting a doubling of production levels, but its facing short term difficulties due to hurdles being thrown up by local government authorities, non-executive Chairman John McLean told Alliance news Tuesday.
Twice the company has started to build a new plant to boost output, one of which was in Inner Mongolia, and the other in Linyi City, in the Shandong province in China. However, both times it was told by the local authority to stop building because the authority wanted the site to build houses. Sorbic wasn't the only company to be moved, as the Linyi authorities want to relocate all the industrial companies on the site to another area.
Sorbic reported a drop in revenues, and a significantly larger loss for the year ended September 30, as plans to rebuild its existing facility in Inner Mongolia were abandoned, resulting in an impairment loss of GBP6.7 million during the year. It said that its pretax loss for the financial year widened to GBP6.1million, compared with a loss of GBP144,406 a year earlier. Before the impairment loss, the group reported a profit from operations of GBP603,671, compared with GBP21,699 a year earlier.
"That has written off all the direct costs of Inner Mongolia, plus a percentage of the equipment that we committed to having in Inner Mongolia, but we can actually utilise elsewhere," McLean said.
McLean said that the group is now in compensation negotiations, although he refused to comment on how much it was looking to get from the authorities.
"In terms of Inner Mongolia it was a massive step backwards, as we had built parts of it," said McLean, adding "Having drawn the line in the sand in Inner Mongolia, and we know where we're going there, the focus is now in Linyi."
Linyi authorities have indicated they will compensate Sorbic by helping funding the construction of a new, bigger and better facility in Linyi, close to the company's existing plant.
The company said that it has cash on the balance sheet of around GBP5 million, and the compensation from Inner Mongolia and Linyi will all help fund the new and improved production facility.
"There is some pools of cash coming our way, touch wood, but nothing is recorded in our books as it is all in negotiation," McLean said.
McLean said that he expects the Linyi negotiation packages to be sorted out by the middle of next year, with a view to starting construction of the new plant in late summer, early autumn. He said that this would mean that production would start by March 2015.
The company produces and sells the food preservatives sorbic acid and potassium sorbate, a majority of which is sold to overseas markets such as Europe and the US. The market is currently being driven by the fact that the main food preservative alternative to sorbates, sodium benzoate, is being phased out in the US, Europe and Japan.
McLean said that the company's geographical focus has shifted. "Our focus initially was very much on China and Europe, but following the economic slowdown, specifically in Europe, we've moved towards the US. We actually see the US as our largest area of growth in the near term."
McLean said that around a year ago, the US accounted for approximately 25% of sales, whereas now the US accounts for around 50%, with the other 50% made up of Russia, Europe and the Chinese domestic market. He said that the standards required in the US are far higher than requirements in China.
The biggest short term problem and a significant headwind for the business is capacity. Its current plant is running at its limit, and is not able to produce any more product. McLean said that the company is now looking at other ways to increase production and meet demand.
"Acid is more of a commodity than potassium sorbate, and there are other people that produce acid, which effectively we could buy in. That is something we are considering," he said.
Another hurdle the company faces is the issue of its outstanding convertible loan notes, which it has until August next year to sort out.
"Yes that's on the agenda, and yes we are in discussion with that. The likelihood is that there will probably be some sort of reconstruction that will actually help all parties," he said.
Sorbic said revenues for the year fell to GBP14.6 million, down from GBP16.8 million last year.
"We've gone through quite a turmoil in China, going through the in-elasticity of demand and supply... it has been quite challenging," said McLean.
Shares in Sorbic International were down 11.1% Tuesday afternoon, at 8.00 pence per share.
By Rowena Harris-Doughty; rowenaharrisdoughty@alliancenews.com; @rharrisdoughty
Copyright © 2013 Alliance News Limited. All Rights Reserved.
Twice the company has started to build a new plant to boost output, one of which was in Inner Mongolia, and the other in Linyi City, in the Shandong province in China. However, both times it was told by the local authority to stop building because the authority wanted the site to build houses. Sorbic wasn't the only company to be moved, as the Linyi authorities want to relocate all the industrial companies on the site to another area.
Sorbic reported a drop in revenues, and a significantly larger loss for the year ended September 30, as plans to rebuild its existing facility in Inner Mongolia were abandoned, resulting in an impairment loss of GBP6.7 million during the year. It said that its pretax loss for the financial year widened to GBP6.1million, compared with a loss of GBP144,406 a year earlier. Before the impairment loss, the group reported a profit from operations of GBP603,671, compared with GBP21,699 a year earlier.
"That has written off all the direct costs of Inner Mongolia, plus a percentage of the equipment that we committed to having in Inner Mongolia, but we can actually utilise elsewhere," McLean said.
McLean said that the group is now in compensation negotiations, although he refused to comment on how much it was looking to get from the authorities.
"In terms of Inner Mongolia it was a massive step backwards, as we had built parts of it," said McLean, adding "Having drawn the line in the sand in Inner Mongolia, and we know where we're going there, the focus is now in Linyi."
Linyi authorities have indicated they will compensate Sorbic by helping funding the construction of a new, bigger and better facility in Linyi, close to the company's existing plant.
The company said that it has cash on the balance sheet of around GBP5 million, and the compensation from Inner Mongolia and Linyi will all help fund the new and improved production facility.
"There is some pools of cash coming our way, touch wood, but nothing is recorded in our books as it is all in negotiation," McLean said.
McLean said that he expects the Linyi negotiation packages to be sorted out by the middle of next year, with a view to starting construction of the new plant in late summer, early autumn. He said that this would mean that production would start by March 2015.
The company produces and sells the food preservatives sorbic acid and potassium sorbate, a majority of which is sold to overseas markets such as Europe and the US. The market is currently being driven by the fact that the main food preservative alternative to sorbates, sodium benzoate, is being phased out in the US, Europe and Japan.
McLean said that the company's geographical focus has shifted. "Our focus initially was very much on China and Europe, but following the economic slowdown, specifically in Europe, we've moved towards the US. We actually see the US as our largest area of growth in the near term."
McLean said that around a year ago, the US accounted for approximately 25% of sales, whereas now the US accounts for around 50%, with the other 50% made up of Russia, Europe and the Chinese domestic market. He said that the standards required in the US are far higher than requirements in China.
The biggest short term problem and a significant headwind for the business is capacity. Its current plant is running at its limit, and is not able to produce any more product. McLean said that the company is now looking at other ways to increase production and meet demand.
"Acid is more of a commodity than potassium sorbate, and there are other people that produce acid, which effectively we could buy in. That is something we are considering," he said.
Another hurdle the company faces is the issue of its outstanding convertible loan notes, which it has until August next year to sort out.
"Yes that's on the agenda, and yes we are in discussion with that. The likelihood is that there will probably be some sort of reconstruction that will actually help all parties," he said.
Sorbic said revenues for the year fell to GBP14.6 million, down from GBP16.8 million last year.
"We've gone through quite a turmoil in China, going through the in-elasticity of demand and supply... it has been quite challenging," said McLean.
Shares in Sorbic International were down 11.1% Tuesday afternoon, at 8.00 pence per share.
By Rowena Harris-Doughty; rowenaharrisdoughty@alliancenews.com; @rharrisdoughty
Copyright © 2013 Alliance News Limited. All Rights Reserved.
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