Will construction bounce back and save cement sales in East Africa?

A building under construction in Kigali, Rwanda. Over the past six years, cement prices in East Africa have dropped from an average of $140 per tonne to an average of $80 per tonne today. FILE PHOTO | NATION 

In Summary

• Cement manufacturers have been struggling as oversupply of the commodity declining prices, competition and high operating costs impact earnings.
• A decline in clinker prices on the international market has translated into a surge of imports of the raw material.
• Analysts contend that prices could further decline as imports continue to flood the region due to the lack of a common external tariff on imports.

By NJIRAINI MUCHIRA
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Cement manufacturers are betting on the anticipated rebound of the real estate sector and government investments in infrastructure projects to regain sales and boost their performance.

In Kenya, where affordable housing is one of the government’s Big Four agenda (others being universal healthcare, food security and manufacturing), cement makers anticipate recovery after the 2017 prolonged electioneering that saw consumption nosedive by double digits.

The government has committed to providing at least 500,000 affordable new houses to Kenyans by 2022.

Savannah Cement managing director Ronald Ndegwa, told The EastAfrican that they are angling for big business when the projects begin.

Vicious price wars

Across the region, cement manufacturers have been struggling as oversupply of the commodity — both from internal producers and imports — declining prices, competition and high operating costs impact earnings.

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The situation has been worsened by the slowdown of the real estate sector last year, particularly in Kenya.

A decline in clinker prices on the international market has translated into a surge of imports of the raw material, with companies that have invested in local clinker production feeling the pain of increased operational costs and inability to sell their excess capacity to regional cement makers.

Majority of cement manufacturers are opting to import clinker, with bulk clinker imports dominating cargo at Mombasa port at an average of 60,000 tonnes per week.

Nairobi Securities Exchange-listed cement manufacturers are facing tough times. Regional market leader Bamburi Cement posted lower profitability, East Africa Portland Cement Company (EAPCC) has sunk deeper into loss and Athi River Mining has announced a profit warning.

While Bamburi posted a $26.4 million profit before tax, from $42 million for the half year ending June 2017, EAPCC’s half-year losses widened to $9.4 million from $2.4 million in 2016.

ARM saw its half-year to June 2017 loss increase from $2.6 million in 2016 to $13.7 million. And last week, it sent out a profit warning.

“Cement companies must rethink their strategies due to the changing industry dynamics and take into consideration that new entrants are disrupting the status quo,” said Eric Musau, head of corporate banking at Standard Investment Bank.

Slowdown in the construction

Cement makers in Kenya have been battered by the decline in the construction sector which posted a 4.9 per cent growth in the last quarter of 2017, compared with 7.8 per cent in a similar quarter in 2016.

Cement consumption decreased by 13.1 per cent to 1.4 million tonnes from 1.6 million tonnes in the third quarter of 2016. While the slowdown in the construction sector has greatly impacted cement manufacturers, the situation has been compounded by oversupply as companies invest to increase their capacity, something that has ignited vicious price wars.

Over the past six years, cement prices in East Africa have dropped from an average of $140 per tonne to an average of $80 per tonne today.

Analysts contend that prices could further decline as imports continue to flood the region due to the lack of a common external tariff on imports and considering that East Africa is seen as cement frontier market by international cement companies looking to offset the slow growth in other countries.

While Tanzania last year imposed an additional 10 per cent excise duty on imports from non-EAC countries to 35 per cent to protect local

manufacturers, other East African countries charge 25 per cent, which was passed in 2015 under the Common External Tariff agreement.

Cement could reach 20 million tonnes by 2020 as new entrants like Dangote Cement invest in plants and existing manufacturers increase their capacity, against a current demand of 12 million tonnes per annum.

“This signals increased competition in the regional cement market which is grappling with price wars brought about by the entry of new players and expansion of established firms,” said a market analysis by AIB Capital.

Apart from price wars, cement manufacturers are grappling with the challenge of high operating costs and a credit squeeze, which has forced some makers like ARM to seek for equity investors to shore up their capital base.