Cement makers in the region are experiencing mixed results due to an oversupply of the product.
The entry of new firms, a proliferation of cheap imports from Asia and further capacity enhancement by existing cement firms has seen the market flooded with cement.
Old Mutual Kenya (an investment firm) had last year projected that East Africa will experience an oversupply of cement by 2015.
“This is expected to result in downward pressures on price which will benefit consumers in the East African Community, simultaneously raising concerns about the long-term profitability of the industry,” the firm said.
In Kenya, cement firms increased their production over the nine months to September this year by 15.2 per cent, to produce 4.24 million tonnes, compared with 3.68 million tonnes in September 2013.
Data from the Kenya National Bureau of Statistics shows that despite this increase, the consumption of the cement was at 3.69 million tonnes in this period.
In the past few years, National Cement, Savannah Cement and Mombasa Cement have set up plants in the country.
In Tanzania, the 2013 production capacity was at 3 million tonnes per annum, against a demand of 2.2 million per annum shared mainly among big producers Tanzania Portland Cement Company, Mbeya Cement Company Ltd, ARM Cement and Tanga Cement Company.
Uganda’s 2014 production capacity stands at 1.9 million tonnes, against a demand of 2.4 million tonnes.
In Rwanda, Cimerwa the country’s sole cement producer, plans to increase its production capacity to 600,000 tonnes a year once expansion works are completed early next year.
“When we complete this expansion, we expect our production capacity to increase from the current 100,000 tonnes of cement a year to 600,000 tonnes a year,” Mr Legodi said.
Rwanda’s market demand for cement currently stands at about 500,000 tonnes a year and the country depends mostly on imports from its regional neighbours to bridge the supply gap.
Bamburi Cement chief executive officer Bruno Pescheux said that the installed cement production capacity in Kenya increased from three million tonnes to 6.5 million tonnes between 2007 and 2014 whereas domestic demand grew from 2.1 million tonnes to 3.8 million tonnes.
“Despite the oversupply of cement in the region, Kenya is a very competitive and dynamic market,” Mr Pescheux said.
Cement consumption
The cement market in Kenya has strong links with Uganda and Tanzania, with several producers having production units in more than two countries so the actual geographic market of cement may be even wider than Kenya itself.
On average over the past decade, East African cement consumption has been growing at a rate of 14 per cent and is expected to continue growing in the near future at around 8 per cent per annum with total capacity expected to reach 14.4 million tonnes by 2017.
Imports from India, Pakistan and China have been blamed for flooding the market in East Africa. The growing imports from Asian countries 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.
Electricity, which on average makes up 40 per cent of the direct cost of cement manufacturing, is four times cheaper in the Asian countries than within the region. This means that despite duty on cement imports from non-EAC countries, the imports are still cheaper than locally produced cement.
“Power and energy supply are a critical issue facing most cement producers here. Energy comprises up to 40 per cent of the cost of manufacturing cement and in Kenya, rising energy tariffs coupled with erratic supplies have been our greatest challenge,” Mr Pescheux said.
The East Africa Cement Producers Association (EACPA) Tanzania chairperson Catherine Langreney said that the high cost of power especially in Tanzania was the main reason for the high cost of cement in the region.
“We strongly oppose any plans to increase the power tariff. We actually would like to see an improvement in the service provided. We are currently facing unfavourable competition from imports,” Ms Langreney, who is also the chief executive officer of Mbeya Cement, said.
Bipin Bhatia, ARM Cement commercial director said that the imports were hurting cement manufactures as they were not leaving a level playground for healthy competition.
“The demand for cement in the region has prompted imports. We have seen scenarios where cement imported “duty free” for infrastructural projects has found its way into the local market or onto sites directly. There are also cases of tax evasion by these importers, by way of under-valuation and under-declaration,” Mr Bhatia said.
Although demand for cement is expected to rise in the coming months due to the huge infrastructural developments in the region coupled with increased real estate activity, profit margins don’t look promising. Last year, the average profit margins for Kenya’s cement firms hit an all-time low of 24.7 per cent.
New entrants
Standard Investment Bank (SIB) in its 2013 outlook noted, “While new entrants have succeeded in using discount pricing as a tool to segment the market, it’s only a matter of time until intense rivalry cuts across the entire market. In anticipation of an outright market-wide price war, some of the players have diversified their product offering by producing different grades of cement, concrete blocks and ready mix concrete. Being a net importer of cement (imports commanding approximately 15.4 per cent of market share in 2012) and given expected below average utilisation rates, Tanzania is likely to face more pricing pressure,” SIB said.
In 2014, Kenyan firms are expected to account for more than half of the region’s capacity, while in Tanzania, Dangote Cement and Kenya’s ARM are expected to double the country’s capacity by the end of 2014 through production at their new plants.
Last month, Savannah Cement announced that it planned to pursue sales opportunities in all East African countries by the end of 2015.
Savannah Cement managing director Ronald Ndegwa said the company plans to appoint local dealers in Rwanda and Burundi after posting a good performance in the Kenya, Uganda, Tanzania and South Sudan markets.
“Our corporate development is anchored in a regional market coverage strategy and we are glad that we have made inroads into the respective East African markets. With our current installed production capacity of about 1.5 million tonnes, we are well placed to meet regional demand,” Mr Ndegwa said.
East Africa Portland Cement is also in the process of upgrading its main plant, a project that is expected to cost the cement maker approximately $10.9 million.
The East African
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