22 June 2014

Uganda: Cement Market Jitters

In Uganda, a construction customer buys cement at about $124 per tonne. That is higher than the average global price for gray cement - which hovered between $76 - $77 per tonne in 2013 - and higher than the $100 average in Sub-Saharan Africa. In fact, Kenyans and Tanzanians buy cement more cheaply than Ugandans who buy a 50-Kg bag of cement at an average price of about Shs 28,000 in local retail shops around the country - quite high for a product whose main raw material - lime stone - is abundant locally. That explains why the per capita cement consumption of cement in Uganda stands at a miserable 35 kg way below the global average of 500 kg.

Cement producers in Uganda say it is inevitable that Ugandan cement should be expensive. Alok Kala, the Tororo Cement general manager, says Ugandan cement is comparatively more expensive because of a couple of factors. He says Ugandan cement is charged Excise duty tax, which for instance the Kenyan cement producers don't pay, and Ugandan power tariffs are also higher than the Kenyan tariffs. Also, Uganda imports clinker, a major raw material, from Kenya, and coupled with infrastructure bottlenecks, the high cost of business must translate into more expensive products.

Part of the problem has been attributed to the high demand, which outstripped supply several years ago - thanks to the booming construction and real estate sector and the lucrative markets in South Sudan and DR Congo. Uganda has two main cement manufacturers - Hima Cement - owned by Lafarge Group - and Tororo Cement - both of which have a combined capacity to produce 3.6 million tonnes - way below the rising Ugandan market demand. Consequently, Uganda does import a substantial amount of cement from countries such as Kenya, Egypt and Pakistan among others.

Two new companies; the Kuwait-based DAO Group, and China National Machinery Import & Export Corporation , are investing in new cement manufacturing plants worth $400 million with a combined production capacity of 1.6-million tons a year. The two new factories are being set up in Budaka District in eastern Uganda, and in Karamoja in the north-east. Those could offer a respite in the medium-long term but not in the short term when the demand is expected to spike thanks to the several large scale projects including dams, highways, bridges and buildings that are expected to kick off in the next few months. That means cement prices are expected to rise even higher in the short-term.

Enter Dangote:

There could be mixed signs of hope and unease among cement consumers and producers that a cement price storm is brewing following the move by West African cement giant Dangote to set up a $500 million cement factory at the port city of Mtwara in Southern Tanzania, which is projected to produce three million metric tons of cement a year. The Dangote plant, unlike its peers across the region, will have its own power plant - a 30MW gas-powered facility.

Dangote's entry into the EAC and Southern Africa cement market was premised on a supply gap identified during a market survey conducted by Kenyan based Sterling Investment Bank in 2010 that showed that all the cement companies in East Africa have a capacity of about 5.2 million metric tonnes annually while forecasts indicated that the whole region would require 11 million tons to meet demand that is growing at an annual rate of 6% per annum.

As the Dangote plant nears completion and gets set for commissioning by the last quarter of this year, it is already triggering panic buttons in the market. When the French company Lafarge Group caught wind of the move, it sought to reposition itself in the Eastern and Southern Africa cement market by planning a merger with South Africa-based Swiss cement group Holcim with an aim of creating a dominant supplier of cement to Africa's growing construction industry.

Lafarge already operates several plants in East and Southern Africa including Hima in Uganda. Apparently, the Dangote Vs Lafarge cement war now seems to have been extended to the Eastern and Southern African frontier where Lafarge currently operates several production sites spread in Uganda, Kenya, Tanzania, Malawi, Zambia, Zimbabwe and South Africa. But with a net worth of $25 billion, Alhajj Aliko Dangote, the president of the Dangote Group, is ranked by Forbes Magazine as the 23rd richest person in the world (and the richest man in Africa); Lafarge, with its 25 year experience, should be bracing for a giants' battle for regional market share.

To make it even more interesting, Dangote Cement recently caused an industry stir when it launched its 52.5 grade quality product on the Nigerian market in March. The new grade product is over 60% stronger than the existing types and is the first of its kind in sub-Sahara Africa thanks to new ground-breaking technology. The introduction of 52.5 grades cement means that the company could push the existing 32.5 and 42.5 grades, most of which are dominant on the Ugandan and regional markets, off the shelves. The brewing price war is likely to cause ripples on the market and could potentially cause smiles by lowering prices in the EAC market.

Cement is a critical product for infrastructure and real estate development, which means that its price and supply have wider impacts for investment. Indeed, thanks to the tremendous development in the construction sector in recent years, prices have taken an upward trend as a consequence of growth in demand both within the region and in emerging markets such as S. Sudan and DR Congo - without a commensurate growth in supply. This means that prices could be expected to stabilize or fall when Dangote Cement comes on stream.

Most importantly, the Dangote Cement plant is strategically located at a limestone-rich area and close to Indian Ocean, which will allow for very low transportation costs hence making its price relatively more competitive. Also, its products will easily reach Rwanda, Burundi, Uganda and DR Congo, Malawi, Mozambique and Zambia. With the wealthy 'Big Boy' just next door, local producers should be casting a wary eye over their shoulders and more so as the regional Common Market makes it easy for goods manufactured in a partner state to move freely within the region. That means that the 140 million people regional market is available for Dangote Cement. But most worryingly, at least from its rivals' perspective, Dangote also plans to establish a $600 million production plant in Kenya in the near future.

Kigozi Sebaggala, the executive director of the Uganda Manufacturers Association (UMA), is optimistic. "The coming of Dangote Cement will be a welcome development because cement is not enough in Uganda and demand is still very high," he said.

However, Alok Kala, the Tororo Cement boss appeared not to be worried about the competition being presented by the entry of Dangote. "I don't think the Dangote new plant at Mtwara will have any impact on the Uganda cement market because Ugandan cement manufacturer's have enough capacity to produce up to 1.8 million metric tons a year though they are producing far less than 80% of that."

Daniel Pettersson, the Hima Cement general manager, shared a similar view. He said the Dangote Mtwara plant is very far away from the Ugandan and Rwandan markets, which will pose a challenge in terms of transportation costs. He suggested that it will probably have an impact on the Tanzanian market. "In Africa we are the only people with a production capacity of 10 million tons a year at our Lafarge Egypt plant and the Dangote Mtwara plant has a much lower capacity," he said. "However, we are ready for the competition and we are working on measures to ensure that we continuously serve our market."

Indeed, in Dangote, regional cement producers have the ultimate competition. Dangote told reporters recently that they aim to take advantage of the abundance of limestone in the region to make it self -sufficient in cement production. That definitely has implications for Uganda's exports in the region and on prices in the local market. With its 10.25 metric tonne capacity Obajana plant in Kogi, Nigeria, Dangote Cement has eliminated Nigeria's dependence on imported cement and will soon transform the nation into a net exporter serving other African states.

Whether or not the 'Battle of the Giants' for market share would translate into cheaper prices for the final consumer is what remains to be seen. But one thing is for sure - it will mean leaner bottom lines for both Hima and Tororo Cement.


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