Although demand for cement in the East African region is expected to
rise in coming months, profit margins don’t look so promising.
Photo/FILE
By Peterson Thiong’o The EastAfrican
In Summary
- New data shows that production is expected to rise sharply with the setting up of new production plants and enhanced efficiency, growing faster than current consumption levels and creating more supply in a market that already has a surplus.
East Africa’s cement industry could see
realignments in coming months, as a combination of increased production
capacity, management changes and new government policies fuel the battle
for market share.
New data shows that production is expected to rise
sharply with the setting up of new production plants and enhanced
efficiency, growing faster than current consumption levels and creating
more supply in a market that already has a surplus.
While regional production capacity has shot up 78
per cent over the past five years — and is still growing with several
cement firms lining up new plants in the next two years — demand for
cement has lagged behind.
Data from the East Africa Cement Producers
Association shows that last year, consumption in Kenya, Uganda and
Tanzania grew at the slowest pace in a decade — 3.5 per cent against an
annual average of eight per cent.
Kenyan firms are expected to account for more than
half of the region’s capacity, an analysis by Standard Investment Bank
(SIB), released on Wednesday, shows.
In Tanzania, two firms — Dangote Cement and Kenya’s Athi River Mining — are expected to double the country’s capacity by the end of next year through production at their new plants.
Cimerwa, Rwanda’s largest cement manufacturer, is
growing its production capacity six fold, from the current 100,000
tonnes to 600,000 tonnes.
With a total grinding capacity of 3.15 metric
tonnes per annum (mtpa) — including Hima’s 0.9mtpa — Bamburi is expected
to remain the largest listed firm, said SIB.
Amongst the non-listed players, Uganda’s Tororo
Cement (trading as Mombasa Cement in Kenya) is set to be a bigger player
(estimated grinding capacity of 3.1mtpa). Upon completion of its Tanga
line, ARM will command 24.3 per cent of the regional clinker capacity.
Although demand for cement is expected to rise in
the coming months, profit margins don’t look so promising. Last year,
the average profit margins for Kenya’s cement firms hit an all-time low
of 22.1 per cent.
Analysts at SIB project a continued pressure on
margins as cost of production rises, while pricing power remains low due
to overcapacity. Already in 2012 the industry registered its weakest
year in over a decade, hit by reduced mortgage uptake in the region as
well as cheap imports from Asia.
Industry players said cement imports from Asian
countries — which surged by 40 per cent last year — could worsen the
prospects of the sector.
Housing boom
Improved access to credit, especially in Kenya
and Uganda, is expected to create new demand for housing — a key driver
of cement consumption.
While governments in East Africa and surrounding
countries have increased their budgetary allocations to infrastructure,
cement consumption within the region is still mainly driven by private
sector-led projects, which account for at least 70 per cent of the
region’s cement demand.
“In 2012, East African economies experienced high
inflation, hike in bank lending rates to over 20 per cent and weak local
currencies. Since consumption in the region is still predominantly
driven by individual home builders this ‘perfect storm’ environment
negatively impacted consumption,” said SIB.
Lending rates in Kenya, Uganda and Tanzania have been edging downwards over the past year, raising hopes of a mortgage rebound.
The growing imports from Asian countries however
continue to pose the biggest challenge for the industry — particularly
in Tanzania —where producers estimate that 300,000 tonnes of cheap
cement could be finding its way into the local market every year.
In November 2012, Kuwait-based company Dao Group
launched the construction of a $150 million cement plant in Budaka
District, eastern Uganda. The new plant is expected to produce 5,000
tonnes of cement a day, increasing competition in a sector that has been
dominated by Hima Cement and Tororo Cement companies.
Meanwhile, Eastern Miners Ltd, a subsidiary of
Ndovu Investments Ltd and a member of RAI Group, is yet to start the
construction of its $120 million cement plant in Tororo due to land
wrangles.
Construction of the new plant was supposed to start last December, but residents blocked it, citing land grabbing.
High cost of energy
Electricity, which on average makes up 40 per cent
of the direct cost of cement manufacturers, is four times cheaper in
Asian countries than Tanzania. This means that despite the Tanzanian
government charging 35 per cent duty on cement imports from non-EAC
countries, the imports are still cheaper than locally produced cement.
Industry sources say the figure could be higher as
some importers may be under-declaring the size of their imports from
these markets. The Tanzanian government has now formed a committee to
investigate the importation claims, with a preliminary report due at the
end of this month.
“Preliminary information shows export figures from
source countries are higher than what is reported as the official
cement imported from these states,” said Hussein Kamote, a policy and
advocacy director at the Confederation of Tanzania Industries.
“We are looking at the import statistics with a
view to verifying whether what the exporting countries show in their
books is actually what is being received here,” he added.
The two listed cement producers in the country say the imports partly fuelled the fall in their full year earnings.
The report by the committee — which includes representatives
from the government and private sector — is expected to inform changes
in the country’s policy towards cement imports.
In March, Pascal Lesoinne, the CEO of Twiga
Cement, said the problem boils down to the country’s failure to
effectively apply the necessary taxes.
“The main reason for this particular situation in
Tanzania is the failure to properly implement the common external tariff
(CET), and having cement imported under duty and taxes exemption. Most
of this importation is happening in Zanzibar, bringing into question the
application of CET there,” Mr Lesoinne said.
Meanwhile, in Rwanda, last December, PPC Ltd spent
$69.4 million to acquire a 51 per cent state in Cimerwa. The remaining
49 per cent is shared by the government of Rwanda through the Finance
Ministry, Rwanda Investment Group, Rwanda Social Security Fund and
Sonarwa, a leading insurance company.
Cimerwa currently produces some 100,000 tonnes of
cement annually, and is building a plant that will produce 600,000
tonnes. The added capacity is expected to change the cement industry in
Rwanda as the country imports 80 per cent of its cement.
Analysts say the expansion plans could push down
the company’s per unit cost, enabling it to compete with regional
players. Currently, the company uses wet processing technology, which
will be replaced by dry processing, which is more energy efficient.
This partly explains why cement manufactured in
Rwanda is more expensive. A 50kg bag of cement imported from Uganda
costs $13 while locally manufactured cement costs $14-$18 per bag,
depending on the quality.
The realignments in Rwanda could go further if, as
analysts expect, Kenya’s Athi River Mining (ARM) decides to expand
Kigali cement, a company that it has a 35 per cent stake and in which it
controls 53 per cent of all voting rights.
Additional reporting by Joseph Mwamunyange, Isaac Khisa and Kabona Esiara
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