AIB Capital
East Africa
Eric Musau
Standard Investment Bank

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

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.

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.

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.

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.

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.

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.

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