The cement maker EAPCC. A number of cement producers have increased capacity to address the gap in supply. Photo/FILE
Nation Media Group
By JOINT REPORT The EastAfrican
In Summary
- The published results show that some have started benefiting from new plants as revenues are boosted by the increased production, which is slowly closing the gap caused by high demand and low supply.
- However, expansion comes at a price and the increase in capacity does not augur well for the producers with analysts now looking at the real prospects of dwindling profit margins, as competition intensifies
Listed cement manufacturers operating in East
Africa have started reporting last year’s results, providing a glimpse
into how a recent expansion drive is affecting their performance — their
revenues are growing but margins shrinking due to fierce competition in
the sector.
The published results show that some have started
benefiting from new plants as revenues are boosted by the increased
production, which is slowly closing the gap caused by high demand and
low supply.
However, expansion comes at a price and the
increase in capacity does not augur well for the producers with analysts
now looking at the real prospects of dwindling profit margins, as
competition intensifies.
The pressure on margins is expected to come from financing costs, operating expenses and heightened competition.
“Over the next three to four years, unless
consumption really spikes, we will enter a phase where a majority of the
players will be under pressure,” said Francis Mwangi, a research
analyst at Standard Investment Bank (SIB).
The region is currently undergoing a massive
infrastructure upgrade, which has pushed up demand for cement, as
governments invest in the construction of roads, ports and bridges,
railways and energy projects.
Multinationals, which dominated production over
the past seven years, are now being slowly displaced by local firms,
which are progressively increasing their capacity. Cement prices are
expected to start falling or stagnate with more supply in the market,
analysts and players said.
In Tanzania, a 50kg bag of imported cement retails
at Tsh12,500 ($7.8) while locally produced brands are selling at
between Tsh13,000 ($8) and Tsh15,000 ($9.3). In Kenya, current prices
range between Ksh700 ($8) and Ksh750 ($8.5) per 50kg bag while in
Uganda, the average price is Ush32,000 ($12) as at December 2012.
The regional firms that are increasing capacity
are ARM Cement, which has operations in Kenya and Tanzania; Bamburi
Cement, which has production facilities in Uganda and Kenya and Tanzania
Portland Cement (TPCC), which operates mainly in Tanzania.
In Kenya, new private entrants National Cement,
Savannah Cement and Mombasa Cement are expected to continue putting
pressure on more established producers.
In Tanzania, Dangote Cement and Lake Cement are to
set up factories while in Rwanda, Cimerwa is expanding its capacity.
Dangote is looking at spending $600 million to put up a plant with a
capacity to produce three million tonnes annually, which, going by
estimates from Old Mutual, is more than Tanzania’s total cement
consumption in 2011.
Data from the Kenya National Bureau of Statistics
shows that cement production and consumption doubled to 4.63 million
metric tonnes and 3.97 million metric tonnes respectively at the end of
2012 from 2.12 million metric tonnes and 1.57 million metric tonnes
respectively seven years ago.
However, an analysis of three out of the region’s five listed cement producers shows a significant drop in profit margins
ARM Cement, for example, made Ksh11 ($0.13) in net profits for
every Ksh100 ($1.16) it received in revenue, compared with the Ksh14
($0.17) it made a year ago. For Bamburi Cement, the net earnings were at
Ksh13 ($0.15) for every Ksh100 ($1.16) it generated in revenue last
year, compared with Ksh16 ($0.19) the previous year, in the wake of a
steep jump in operating expenses.
The cement maker, whose majority shareholder is
French transnational Lafarge, which also owns a 14 per cent stake in
Mbeya Cement in Tanzania, was hit by increased electricity costs in
Uganda after the government removed power subsidies, resulting in energy
costs jumping by 70 per cent, materially eating into its profits.
“I think there are quite a number of cost items
that the cement manufacturers will find hard to hedge against, with the
increased production, I would say management will really be put to the
test,” said Mr Mwangi.
Bamburi saw its revenues grow by a marginal 4.48
per cent to Ksh37.49 billion ($434.74 million) in 2012 from Ksh35.88
billion ($433.63 million) in 2011, as political instability in some of
its African markets served from Uganda resulted in lower exports in the
second half of the year.
In Kenya, the country’s power distributor has
already made an application to regulators seeking to raise power tariffs
by 10-40 per cent, while in neighbouring Tanzania, the power
distributor had made a similar application but has since withdrawn the
request.
ARM Cement owns a 35 per cent equity interest in
Kigali Cement Company, which buys raw materials and produces finished
cement for the Rwandan and export markets.
It had invested Ksh3.3 billion ($38.3 million) in
its Tanzania cement plants in 2011. ARM Cement, which is listed on the
Nairobi Securities Exchange saw its revenue jump 39.35 per cent for the
full year ended December 2012, to Ksh11.4 billion ($132.62 million) from
Ksh8.18 billion ($96.17 million) over the previous year, though profits
only rose by 8.27 per cent, to Ksh1.24 billion ($14.49 million) from
Ksh1.15 billion ($13.52 million).
The company said that cement sales increased by 64
per cent from increased market share in Kenya and Rwanda, and the
contribution of three months sales from the Dar es Salaam plant, which
became operational in October 2012.
TPCC, which is listed on the Dar es Salaam Stock
Exchange, reported a 14.7 per cent increase in revenues, to Tsh249.11
billion ($154.05 million) as at December 2012, compared with Tsh217.25
billion ($134.35 million) for the period ended December 2011.
Jean-Marc Junon, TPCC’s chairman, said after
completing the upgrade of one of the old kilns, the firm will set up a
new cement mill.
Cimerwa of Rwanda, which sold 51 per cent of its
equity to PPC Ltd of South Africa for $69.4 million and whose current
capacity is 100,000 tonnes of cement per annum, is constructing a
600,000 tonnes per annum plant that will be commissioned next year.
The cement company has already disclosed that it
is in the process of finalising a $104 million loan to complete the
expansion project.
Cimerwa estimates that current demand in Rwanda is
at 350,000 tonnes per annum and based on Rwanda and the Great Lakes
region’s positive economic outlook, regional cement demand is projected
to increase to one million tonnes in the next decade.
ALSO READ: Local cement firms lament high costs, old machines
Cement manufacturers in Tanzania are facing
their own unique challenges because, according to Mr Junon, they are
exposed to cheap cement imports as EAC governments decided, for the
fourth time, not to re-instate suspended duties on cement in the Common
External Tariff.
Pascal Lesoinne, the managing director of TPCC,
said the cost of the expansion for the Wazo Hill Plant is estimated at
Tsh50 billion ($35 million). He said that Tanzania is the only country
in the East African Community affected by importation of non-EAC cement,
adding that last year the country imported 300,000 tonnes from
Pakistan.
“This is an increase of 40 per cent compared with
2011 and represents volumes equivalent to the annual production of a
plant like Mbeya Cement, thus denying the country employment and
domestic revenues,” said Mr Lesoinne.
He said that the main reason for this particular
situation in Tanzania is the failure of the government to implement
properly the Common External Tariff, with cement imported under duty and
tax exemption. Most of this importation is happening in Zanzibar,
bringing into question the application of the CET in Zanzibar.
“The cement industry is not asking for specific
protection but mainly for the existing rules to be implemented and
followed,” Mr Lesoinne said.
By Peterson Thiongo and David Mugwe
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