Now Japan-backed Mombasa Cement rocks local industry

Mombasa Cement, an upstart in the Kenyan cement industry, has muddied the waters in what used to be a cosy co-existence with market giant Bamburi through its aggressive growth strategies.

Bamburi, a subsidiary of France Lafarge — which owns Hima Cement in Uganda — has long controlled over 50 per cent of the market.

With its 14 per cent shareholding in rival Athi River Mining and 41 per cent in East African Portland Cement, Lafarge has been the only game in town.

Faced with a market controlled by few producers on its entry into Kenya last year, Mombasa Cement, which is producing with the help of Taiheiyo Cement Corporation — the largest cement producer in Japan — waged a price war and capitalised on Bamburi’s shifting strategy to adapt to economic recession to build its market share.

It did not help that the economic recession forced consumers to be price conscious.

Bamburi cut costs aggressively and even disposed of its 10 per cent stake in the Athi River Mining on the Nairobi Stock Exchange for $15.5 million in October 2009 to a consortium of foreign investors.

This saw Bamburi post a 96 per cent surge in pretax profits in 2009 to $132 million.

“The group returned strong financial results mainly due to cost containment measures together with a major one-off divestment gain,” Bamburi said in a statement accompanying the results.

As much as one-off gains boosted profits last year, investors are now likely to turn the spotlight on the quality of Bamburi’s core earnings — without the extraordinary events — which define the ability of a business to maintain its momentum.

The year ahead looks tough with competitors focusing on price and value added services.

For instance, in the past Bamburi would deliver cement to customers but it does not do so any more.

Mombasa Cement took up this “weakness” and now delivers to customers while charging less per bag.

While Bamburi is selling the cement for about Ksh700 ($9.33) per bag, Mombasa is offering the same, under its Nyumba brand, for about Ksh690 ($9.20).

“We were losing by transporting to customers; people can come and pick up their own products at much better rates,” said Hussein Mansi, managing director of Bamburi Cement.

Mombasa Cement said distributors have to pick the goods from their factories but their entry advantage has been on the pricing.

Harish Patela director at Mombasa Cement said the biggest challenge has been the escalating electricity prices translating into higher costs of operation.

“The hard part is that this is not in our hands,” he said.

Other players such as ARM also took to measures to cut the transport bill by moving more of the loads overnight.

ARM introduced alternative sources of fuel such as coal and using husks, and recycling part of its packaging bags to keep a lead on the costs.

ARM further underlined the need to focus on its mineral division to diversify its product offering and sustain its growth momentum.

With the competition in the Kenyan market heating up, increasing market share in the region is becoming expensive.

Bamburi, for instance, seems to have opted to lose a bit of its share to save costs, and focus on export markets.

Bamburi attributed the growth in turnover by nine per cent to reach the $411 million on strong export sales to the African market. Uganda has particularly been a strong market.

“We will leverage on our regional presence as a competitive advantage for a chance to grow,” said Mr Mansi, “Uganda is a good strategic position to grow.”

Bamburi has been working on a capacity increase in its Kasese plant in Uganda to tap into the hinterland where there is an opportunity to grow.

Industry estimates point to a 10 per cent growth in 2009, which however was lower than the average 14 per cent since 2000.

Weak shilling

Export sales were also helped by the fact that the Kenya shilling remained weaker to the dollar.

For the better part of last year the shilling was trading above Ksh75 to the dollar compared with 2008 when it traded close to the Ksh70 mark.

A weaker shilling means that firms earn more when they convert the dollars to the local currency.

It is the growth in the region that analysts expect to drive the firm’s growth this year.

“Top-line growth is sustainable contingent on cement consumption remaining high,” says Alex Muiruri of Faida Investment Bank “All indications are that this will happen.”

East African Portland Cement is another firm that has been eyeing the export market after setting up shop in Southern Sudan last year.

Costing challenge

The intense competition in the Kenyan market, and an eye for regional expansion, has meant players have had to hold their prices constant without factoring in escalating input costs like electricity.

“In spite of our power costs being four times those of other countries, we are selling at lower prices than most African nations,” said ARM officials.

For example, industry players estimate that a tonne of cement produced in Kenya sells at $125, the same as that in South Africa where electricity is much cheaper.

The price caps have been compounded further by the fact that there is an overcapacity in the Far East nations.

This was attributed to the global economic slowdown which tightened financing and had a knock on effect on the construction industry across the world.

The severe recession that gripped the global economy meant major construction projects were shelved thus the cement manufacturers had to contend with holding more inventories.

Unfair competition

Imported cement lands in Mombasa or Dar es Salaam at $115 per tonne, according to industry players.

Cement of a similar weight leaves the gates of local manufacturers at $120 without considering other costs like transport and taxes.

“In our view it is dumping and the government should do something about it,” said ARM officials on the concerns of imported cement flooding the market.

A tough local market has made it even harder for other new players to set up operations in East Africa despite the interest showed in the recent past.

“It is not easy to set up a plant right now,” says Mr Mansi. “Things have changed from the past when it was easier to access funding costs.”