10 May 2017

East Africa: Cement Firms Plan Massive Expansion Amid Slim Profits

Photo: The New Times
Cimerwa factory (file photo).

These are turbulent times for cement manufacturers in the region as stiff competition from cheap imports continues with slower demand in the housing and construction sector to keep profits stagnant.

On Wednesday, ARM Cement posted a net loss of $28 million for the year ended December 2016. The firm, is ranked East Africa's second-biggest cement producer and has operations in Tanzania, saw revenue drop to $127.9 million compared with $147.3 million the previous year. The dip was blamed on increased competition and lower cement prices in Tanzania.

"The Tanzania business environment continued to worsen during the year. While electricity supply normalised, the government ban on coal imports in favour of local procurement not only increased manufacturing costs but also impacted negatively on capacity utilisation of the 4,000 tonnes per day clinker plant at Tanga due to chronic undersupply," ARM said.

The Tanzania cement sector has seen massive disruption following the entry of Dangote Cement, whose discount pricing unsettled the large cement players, stiffening competition and cutting margins in the local and regional cement market.

The new entrant, owned by Africa's richest man, Aliko Dangote used his Ethiopian and Tanzania plants to gain a foothold in the regional cement industry. Dangote's targeting of consumers with cement that is 20 to 40 per cent cheaper than the locally produced product, began to drive retail prices downward in a market where they have remained static for close to a decade.

Dangote has since garnered a 23 per cent market share after the 2015 opening of its three million-tonne per annum plant in Mtwara.

The firm has seen revenue from its East and Southern African investment rise from $54.5 million in 2015 to $82.2 million in the last six months of 2016 supported by its Ethiopia and Tanzania operations, driving the combined regional profit to $3.43 million.

Its production capacity from 922,000 tonnes last year to 1.6 million tonnes in the six months ending June 2016.

Overcapacity

Other firms operating in Tanzania also saw their margins drop as a result of the price wars and overcapacity. Tanzania Portland Cement, that trades under the Twiga brand, saw its profits decline by 29 per cent to $17.62 million from $24.88 million due to revenue decline and assets impairment.

Tanga Cement Company Ltd, that sells the Simba brand, saw its net profit halved to $1.85 million from $3.63 million a year earlier. It put down its reduced fortunes to the extensive capital expansion of its new integrated production line last year.

Kenya proved to be ARM's saving grace, buoyed by a rise in construction and housing growth, that saw production and sales volumes go up 10 per cent even as prices remained stable.

Bamburi, the region's largest cement firm, and part of the Lafarge Group saw its margins for last year remain flat. It blamed falling demand in domestic and regional markets as well as rising competition.

The firm's net profit last year stood at $58.9 million, a 0.3 per cent rise over the profit recorded in 2015. Turnover dipped from $392 million the previous year to $380 million in 2016.

"The group turnover for the year was slightly below 2015 against the backdrop of a competitive operating environment in Kenya and Uganda. Overall, there was a marginal reduction in volumes of intra-Africa exports and intense competition, particularly in the individual home builder segment, impacting prices in some markets," Bamburi said in a statement.

Export potential

It added that mega infrastructure projects in Rwanda and Uganda lifted its sales.

Despite the bleak outlook, some of the firms are still pushing on with expansion plans even at the risk of having idle capacity as volumes decline. Currently, the estimated plant utilisation rate is 61.7 per cent. However, Dyer & Blair Investment Bank predicts that this will fall to 45.4 per cent by the end of next year.

This effectively casts doubt about the effectiveness of these expansions. Kenya accounts for 53.2 per cent of the 21.1 million-tonne installed capacity in East Africa.

Tanzania has an annual installed capacity of 8.3 million tonnes against the current annual demand of 4.3 million tonnes.

ARM said it is contemplating completion of its Athi River grinding plant expansion. It is expected to increase its Kenya capacity by 650,000 tonnes a year. Bamburi has also talked of plans to increase capacity in Uganda and Kenya in projects that will be completed next year.

It has already announced a $9.02 million expansion of its Nairobi plant that should see it double its capacity to 2.3 million tonnes annually.

Dangote Cement on the other hand has pushed back its entry into Kenya to 2021, while it reviews its manufacturing plan to build two plants in the country instead of one but with a capacity of three million tonnes of cement per annum.

"Kenya is high on our priority list and we plan to build two plants of 1.5 million tonnes per annum each, near Nairobi and Mombasa, to serve the local market. We hope to be operational in Kenya by 2020/21. We also believe there is potential to export cement from Ethiopia to Somalia and South Sudan, despite the distances involved," the company said in its financial report.

In a previous interview, Dangote Cement chief executive officer Onne Van der Weijde said that they were taking a more measured approach to the rollout of new capacity across the region.

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