Committee Reports > List of Committees > Joint > 1979 > Committee on Commercial State-Sponsored Bodies > Report No. 05 - Ceimicí Teoranta

APPENDIX 2

MEMORANDUM FROM CEIMICÍ TEORANTA

1.BACKGROUND AND HISTORICAL DEVELOPMENT

1. The Company was incorporated in November, 1938 as Monarcana Alcóil na h-Éireann Teo., in accordance with the Industrial Alcohol Act, 1938, to manufacture and sell industrial alcohol. The nominal share capital was set at £500,000. The Act also empowered the Company to raise money by means of debentures, provided that the amount so raised would not exceed the paid up share capital. Issue of debentures and other Company borrowings were to be subject to the consent of the Minister for Finance. The paid up share capital, unchanged from 1938, stands at £495,767; the shares are held by the Minister for Finance.

2. The Industrial Alcohol (Amendment) Act, 1947, altered the Company’s structures as follows:

(a) the name was changed to Ceimicí Teo.

(b) the principal objects of the Company were revised to include the manufacture and sale of chemicals, subject to certain licensing procedures.

The nominal share capital remained unchanged. The revised articles and new company name were registered in January, 1947.

3. The Articles of Association of the Company were so drafted as to allow for the participation of private individuals as shareholders. Provided the Minister for Finance holds at least 10% of the shares or as long as he guarantees any borrowings, he has the right to appoint a majority of directors and to nominate the chairman. The other directors are to be elected by the members of the Company so that the current board membership is made up as follows:

4. Initially five factories were set up to produce industrial alcohol at:

Carndonagh, Co. Donegal

Labbadish, Co. Donegal

Corroy, Co. Mayo

Carrickmacross, Co. Monaghan

Cooley, Co. Louth

The original production capacity (total) was approximately 1,300,000 gallons/year using potatoes and molasses as raw materials.

5. Following the 1947 Act, various diversification studies were carried out which led to the replacement in 1954/55 of the alcohol production facilities at Labbadish — by potato starch production, and at Corroy — by glucose production based on Labbadish potato starch. The glucose plant installed in Corroy in 1955 was based on second-hand equipment already over 20 years old. The Carrickmacross alcohol factory was closed and plant and buildings sold.

6. Initial production of glucose was 6,000 tons/year, increasing to a current level of 14/16,000 tons/year by means of a number of modest expansions, financed by the Company out of its own resources. The age of the factory equipment and the increased load imposed on it has made the factory difficult to maintain and to operate at an acceptable level of efficiency. The Labbadish plant, designed for an intake of 200 tons potatoes/day was finally closed in 1971 because of a lack of raw material and glucose production at Corroy was continued using maize starch imported mainly through Ballina Harbour which is now virtually totally dependent on this traffic.

7. Potable alcohol production began in 1971-1972 and the capacity was increased with the commissioning of a new unit at the Cooley distillery in 1977, financed by the Company out of its own resources. Present alcohol production levels (total) are approximately:

The output of industrial alcohol is supplemented by refining imported crude alcohol, this year because of a buoyant market situation.

8. Employment in Ceimici now stands at 141, mostly men, with a breakdown as follows:

The company is the major employer in the Cooley and Carndonagh areas, and almost the sole user of Ballina Port.

II FINANCIAL DETAILS AND PROJECTIONS

1. Financial results for the five years to date are summarised in the following table:

2. A major factor in the erratic financial results of recent years has been the operation of price control, which prevented price increases meeting increased costs of imported raw materials as they arose and of rising labour costs over which the Company has very little control.

The system of an annual price contract for glucose based on both budgeted forecasts and previous years performance, results in a delay of a few months, at the start of the year, before an application can be made and a further procedural delay before an increase can be given. This in effect means operating for several months each year below our budget price. In addition, in a period of rapid inflation such as is being experienced since 1973/1974 it is impossible to pass on substantial cost increases of raw materials until the following annual contract commences.

Also if production falls below budget, due to plant breakdowns etc. the Company not only do not recover the overhead allocated to the lost production, but the non-incurred raw material costs are expected to be credited against the following years production.

The Company has now made a formal application through the Prices Commission for revision of price control procedures in relation to glucose manufacture.

3. A further cause lies in the lower margins of profitability generated by ageing production plant and the inability of the Company to keep abreast of technological advances, due in large part to the lack of a firm and progressive investment policy over the years. It will be noted that the share capital has remained unchanged since 1938 and that there are no long-term borrowings. The piece-meal expansion of potable alcohol capacity in 1977 was paid for by the Company out of its own earnings, and the lack of investment resources over the years has meant that a comprehensive modernisation programme is now required.

4. Because of increased competition in traditional areas of business, and current and anticipated difficulties due to world wide trends, Ceimicí Teo. must now seek therefore, not only to improve its performance in the traditional areas, but also to develop profitable new manufactures which will provide a sound basis for growth, and spread the various risks in a commercially prudent manner.

5. Because the Company is unable to finance these developments from its current resources, and because the capital requirements over the next 5 years may be considerable, the Company must have its share capital increased and greater equity capital must be provided by the Government. The Board has already carried out an examination of the situation in the glucose sector and submitted a detailed proposal in 1978 to the Department of Industry Commerce & Energy and Industrial Development. This has now received Ministerial approval.

The Board is currently preparing a proposal for development of the alcohol sector.

A programme investigating possible opportunities for diversification into chemicals is also under way.

III GLUCOSE

1. Historical Data

NOTES:

A. Up to 1978 imports from the U.K. would have to be adjusted for Duty.

B. At present the operation of M.C.A’s is such that British glucose manufacturers in effect get a subsidy of £30/ton which reflects on their glucose selling price and gives the final users an equivalent subsidy. The apparent large difference between UK glucose price and Irish glucose price is very much artificial and should not be a reflection on Ceimici Teo. Again, U.K. imports to Ireland would have to be adjusted for Duty (up to 1977). In 1978 the U.K. price plus M.C.A. + freight = £ 197 + 30 + 20 = £ 247 p.t. less whatever fixed cost adjustment the manufacturer would make to be competitive in Ireland.

C. U.K. Sales in Ireland, without competition from an Irish manufacturer, would result in a general price increase as, being imports, the Prices Commission would have no control on the situation.

D. Other than 1977, (which had a low volume of manufacture due to Plant and labour problems) a price increase of 4/5% could have seen the business out of the red. This could have been attained if raw material cost increases could have been recovered promptly through price adjustment as in the fertiliser industry.

The increased amounts of imports in 1977 and 1978 can be explained as follows:

(a)1977 — we had an industrial action in the Company from February to April causing lower production and sales.

(b)In 1978—a major plant unit failed in February and was out of action for some months.

2. GOVERNMENT DIRECTIVE FOR INVESTIGATION OF JOINT VENTURE ON GLUCOSE

2.1 The Company was directed by the Department in September, 1976 and again in a letter of 5th July, 1977, by the Department, inter alia, “to study urgently the feasability of establishing an integrated maize starch/glucose plant (perhaps in association with a major foreign producer.)”

2.2 One Company was quite eager and did a study which was presented to their parent in January, 1977.

This was a two phase proposal. Phase one being Production of Glucose, Royal and Caramel; Phase two being Maize Grinding and was non viable.

The parent strung discussions out for a considerable period and we came to the conclusion that they were not prepared to pursue the project, because of concern about the entry of a major U.S. Company into the E.E.C. glucose industry and because of a concerted attack by the E.E.C. Sugar Lobby.

2.3 A second Company prepared a proposal based on Maize milling (250 tpd) the economics of which were unattractive.

A further study was done on behalf of the Company based on glucose to be made from imported maize starch only. Various plant capacities and locations were reviewed. None were sufficiently attractive because of the high capital cost involved in the construction of a completely new plant.

3. FUTURE GROWTH AND DEVELOPMENT IN GLUCOSE

3.1 The growth of the glucose market has been steady over the years and is expected to continue at about 8/11% per annum. The present market size is approx. 20,000 tons per year. Some traditional users (sweet biscuits) are facing severe competition from imports mainly U.K., who have an advantage of subsidised glucose in their products. New industries (chewing gum) tend to be the major source of growth.

3.2 Glucose is currently manufactured from imported starch; the most economical source being from maize milling. Since starch cost comprises 75% of the sales value, anything which affects starch cost has a major impact on sales price.

3.3 A study has been made for a maize milling project providing not only feed stock for glucose but other derivatives as well.

Unfortunately the scale of the Irish market for both glucose and the other derivatives is such as the optimum sized milling plant would not be practical because to recover the large capital cost (£20 million), a very large surplus capacity would have to be exported at a time of European over production. A milling plant sized to the Irish market only is not an economical size.

Wheat starch extraction is now being developed as a competitor to maize starch. The Company is keeping the position under review in particular with a view to the use of wheat unsuitable for flour milling. A maize milling plant installed now would prejudice the prospects for a wheat starch extraction plant in due course.

3.4 The optimum size glucose plant for Irish conditions with capacity to meet potential market growth for glucose and derivatives is about 45,000 tons per year. Construction of such a factory on the East Coast was fully investigated as such location would have economies in shipping and distribution as well as being close to the main market, Dublin. It would have cost approx. £7m. and would not have been viable. A similar plant in the existing redundant distillation building at Corroy was also investigated. Because of savings in infrastructure, it could be built for £2m. less but at the expense of higher shipping and distribution costs. This project was also found not to be viable.

3.5 As new projects could not be viable, the Board investigated the possibility of refurbishing the factory at Corroy to increase its capacity to a reliable annual production of 17,500 tons per year. Such refurbished plant would also have the potential of expanding to 22,500 tons per year on seven days four shift working with minimum additional manning and possibly to 25,000 t.p.y. The seven day/four shift proposal is currently being negotiated with the Unions.

The cost involved in the rehabilitation of Corroy would be £1,288m. A Submission has been made to the Government for the finance required for this project. The Minister for Industry Commerce and Energy, having consulted the Minister for Finance, has conveyed his agreement to re-equipping the Glucose Plant at Corroy at a total cost of £1.3m. of which the Industrial Development Authority will provide a grant of £455,000, the balance being borrowed by Ceimici from commercial sources, until legislation permits an increase in the Company’s equity base.

IV ANALYSIS OF THE ALCOHOL SECTOR OF THE COMPANY’S BUSINESS

1. Budgeted sales of alcohol for 1979 are as follows in gallons 100% alcohol:

These figures include refined imported crude alcohol as noted earlier. The potable alcohol is sold to producers of vodka, gin, liqueurs, spirit vinegar and pharmaceutical preparations. It is also used in the production of flavours and essences, fortified wines and perfumery and toilet products. Ceimici is the only independent producer of ‘neutral’ potable alcohol in Ireland (i.e. not tied to an organisation with its own retail interests). The largest outlet for industrial alcohol is as P.M.S (Power Methylated Spirits) with sales to the oil companies currently at 840,000 gallons. The amount of alcohol blended in this way accounts for about 0.3% of the total quantity of petrol sold in Ireland.

2. In accordance with Government directives of 1976 and 1977, efforts were made by the Company to involve suitable Irish partners in a joint venture on potable alcohol in an effort to lessen the Company’s dependence on P.M.S. sales. Although insufficient interest was shown by the other parties approached at the time, Ceimici will continue to examine worthwhile opportunities for expansion in this field, including cooperation with overseas partners where this may be feasible. In the short-term the Company is concerned to retain its share of the home market for neutral potable spirit, which has grown dramatically in recent years. Sales of potable alcohol by Ceimici Teo., have increased from 40,000 gallons in 1971 to 570,000 gallons in 1979 (projected). Recent sales expansion is due in large part to the enormous success of a liqueur produced for the export trade by one of our customers. To maintain credibility with this particular customer a concerted modernisation programme will be required and more and more stringent quality controls must be introduced. We intend as a necessary part of our development plans to carry out detailed market research as a basis for future projections.

3. In the short term, no major difficulty is foreseen in continuing to supply the current allocation of P.M.S. to the oil companies. In the long term, the addition to petrol of ethyl alcohol, derived by fermentation from native raw materials, on a somewhat larger scale, would appear to have real advantages for Ireland, in extending petrol supplies for industrial, tourism and domestic purposes and in lessening foreign exchange requirements. Bearing in mind the various pressures in the Middle East and the so far unsuccessful attempts to find oil in commercial quantities in the national territory, an ethyl alcohol programme based on native resources could be extremely important as a part of our national energy strategy.

Experience abroad has indicated that ethyl alcohol/petrol mixtures containing up to 10% ethyl alcohol are perfectly compatible with ordinary commercial petrol engines. It would be our aim initially to aim at a much more modest 1-2% target and to carry out a more detailed long term study in full cooperation with the National Board of Science and Technology (Department of Economic Planning and Development).

As far as other outlets for industrial alcohol are concerned, we believe that the changing economies in the petrochemical industry may well make fermentation ethyl alcohol competitive with synthetically derived material for solvent and certain other uses in the next few years.

4. A plan to modernise and re-equip the distilleries has been discussed in principle with the I.D.A. and it is our intention to submit a detailed proposal to the Department of Industry Commerce and Energy in the current year.

It is expected that this proposal would involve a substantial investment. In parallel, the pattern of operations would be changed to 4-shift working and extra controls introduced to improve efficiency and provide a small increase in output. This will also provide a modest increase in the number of jobs.

As a necessary basis for a programme of modernisation, an R & D plan incorporating a number of projects designed to improve the Company’s alcohol technology and yield improved margins has already been approved by the I.D.A.

It is anticipated that the detailed analysis of our alcohol operations as well as providing the basis for our re-equipment or modernisation programme will also indicate desirable ancillary projects and serve as the framework for an on-going development plan. In this way the Company will move to a situation where investment opportunities in this area are continuously appraised, and various investment proposals will be made to the Department at the appropriate time. For this reason, we have recommended that the nominal share capital of the Company be increased considerably, so that each new project would be examined on its own merits.

V. DIVERSIFICATION

1. The Act of 1947 and the consequent changes in the Articles allowed the Company to develop chemical manufactures, and at times in the intervening years various projects were examined. The move to produce starch and glucose resulted from early diversification strategy.

In the late 1960’s the Company discussed feasability studies on several projects with the I.D.A. On closer examination the economics were not sufficiently interesting to warrant I.D.A. or Department of Industry & Commerce support. In retrospect, it would appear that the scale of the projects was probably too large for Ceimici’s management and financial resources.

2. The Company is currently investigating possible opportunities for manufacturing fine chemicals in Ireland, particularly in terms of co-operation or joint ventures with suitable overseas partners. The framework provided by the growth of the foreign-owned chemical industry in Ireland, our membership of the E.E.C. and the attractive package of I.D.A. Grant Incentives encourages us to believe that this is a worthwhile programme and one which is thoroughly in accord with the Government directive of July, 1977. We acknowledge at this point the valuable advice and assistance of the appropriate I.D.A. sections in our efforts.

This area of manufacture involves a high level of technology and relatively modest investments by chemical industry standards.

3. While working within the framework described, the Company will also examine reasonable possibilities of developing new ventures based on native resources, requirements or technology, where this appears feasible. In this context the Company has begun work on a 2 year R & D plan, which relies to a large extent on cooperative work with Irish universities and consultants.

VI. OUTLOOK AND RECOMMENDATIONS

We believe that the strategy and plans outlined in this report are capable of building a solid and rational basis for the future, and are confident that with the support of the Departments of Industry Commerce & Energy and Finance, Ceimici Teoranta can play a vital part in the development of the economy in line with the Programme of National Development 1978 to 1981.

We summarise our plans and list our recommendations as follows:

A. GLUCOSE

1. Maintain our position as supplier of the glucose market by refurbishing Corroy at a cost of £1.3 million.

2. Develop a project to produce glucose and other derivatives from a native resource (viz. wheat starch or potato starch) or from a more basic raw material than starch (viz. maize).

B. ALCOHOL

3. Modernise distilleries by means of a re-equipment programme with the aim of utilising alternative raw materials and of improving product quality and providing sufficient extra capacity to maintain our position and market segment.

4. Investigate possibilities for diversifying and expanding production for both industrial and potable alcohol using native raw materials.

C. FINE CHEMICALS

5. Examine possibilities of developing fine chemical projects in association with suitable foreign companies, or otherwise, with the aim of setting up a small multi-purpose production plant.

D. LEGISLATIVE PROPOSALS

6. The Company’s share capital has remained unchanged since 1938. To improve the Company’s financial structure and establish a framework for a coherent investment strategy, it will be necessary to introduce legislation to increase the nominal share capital to say, £10 million. This process will allow for other developments and present a serious image to banks and potential joint venture partners. It would be desirable also to incorporate a provision whereby the Minister would guarantee borrowings up to a similar limit.

7. The defining section of the 1938 Act could reasonably be updated to incorporate present day practice and norms.

8. The restrictive provisions of Clauses 5 to 7 of the 1947 Act must be amended to restore the Company’s commercial freedom of action. Clause 8 of the same Act may also be repealed.

9. Amendments to the Articles of Association will also be required as follows:

(1) Amend Clause 3(1) to read:

“To manufacture, refine and sell alcohols and products and derivatives thereof; to make, aid or subsidise experiments, investigations, researches and tests in relation to the possibilities of the manufacture of any substance, all or any portion of which is produced or obtained by chemical process, and to manufacture and sell any substance, all or any portion which is produced or obtained by chemical process”.

(2) Amend Clause 3(2) to read:

“To acquire, erect and operate factories for the manufacture of alcohols of any kind, and of any or all derivatives, blends and mixtures thereof; to acquire erect and operate factories for the manufacture of any substance, any or all of which is produced or obtained by chemical process”.

These alterations are merely a “tidying-up” in line with the development plan.

May 1979