Portland Cement in trouble, banking on land sale payment

Sunday April 15 2018

East African Portland Cement Company stand at a housing expo in Nairobi. NMG

East African Portland Cement Company stand at a housing expo in Nairobi. The firm, once the region’s leading cement producer, is in trouble. PHOTO | NMG 

By ALLAN OLINGO
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East African Portland Cement Company (EAPCC), once the region’s leading cement producer, is in trouble.

In the past two months, the firm experienced operational challenges, which at some point saw its production halted, salaries delayed and cement stock almost run out.

It is now banking on receiving $100 million, in the short term, from the Kenya government through a land sale deal, to stay afloat.

Portland cement in February announced that its net loss for the six months to December had worsened nearly four times to $9.6 million on lower revenues. 

The firm’s full year results for the year ending June 2017 stood at a loss of $14.71 million from a profit of $41.45 million over a similar period in 2016.

The EastAfrica has learnt that in March, the firm halted production after it failed to receive key raw material. This led to a near-stockout, denying it the much needed revenue.

A source familiar with the situation told The EastAfrican that the firm’s output slowed down to 35,000 tonnes last year, from its break-even of more than 75,000 tonnes.

“In the stores, we have less than 2,000 tonnes of cement and this is now pointing to a serious problem in the company,” the source added.

Inaccessible

While chief executive officer Simon ole Nkeri admits to the production challenges, he blames inaccessibility of some of the quarries, where the raw material is found. 

“It is true that we didn’t have production running in some days in March because the accessibility to the limestone quarries were severely affected by the rains. This saw our production threshold drop significantly. This affected us on the cement stock end too but I am certain that our seven depots around the country had enough stocks,” Mr Ole Nkeri said, adding that the firm is also struggling to access clinker and coal, whose importation costs per tonne has risen to a high of $170.

The cement maker also said it has managed to sort out the issue of raw materials availability that will now see the factory run smoothly but admitted that it doesn’t have the financial muscle to mitigate this stock out through advanced warehousing of these key raw materials.

“We do not have the financial muscle to stock up these raw materials and mitigate against production hitches. However, as we speak, we have managed to sort out the challenges in accessing limestone. We have enough stock to help us run to the next two weeks. We also have stock for the other ingredients needed that could stretch for the next up to 45 days. The only challenge we still face is access to coal and the high cost of electricity,” said Mr Ole Nkeri.

However, The EastAfrican understands that the firm is yet to meet the market weekly demand of its products as its production still falls below targets.

“The demand is higher than 4,000 tonnes a day yet we haven’t managed to sell 2, 000 tonnes a day because of stocks issue. The problem isn’t on sales but production,” The EastAfrican was told.

Portland also denies any delay or challenges in paying its staff salaries, despite the funds taking almost two weeks to get to employees accounts.

The firm said that the ‘two days’ delay in March was expected mostly as a result of the banks processing issues surrounding the Easter holidays. The firm’s staff costs has risen to $28.4 million annually last year from $27.35 million, the previous year.

“In my 20 months at the helm, we haven’t had any delay in the payment of salaries. This was something that used to happen in the past, mostly because the firm relied on debts and overdrafts facilities for its recurrent budget but we have since corrected that,” Mr Ole Nkeri said.

In the six months to December last year, Portland saw its revenue decline by 18 per cent, which it blamed on slow market uptake on account of prolonged election period.

It also said the knock on effects of interest rates capping had a negative impact on its revenues. The financially struggling cement maker saw its revenue drop by $6.5 million in the six months to December last year to $30.1 million, with management attributing this drop to politics during the elections last year.

Its cost of sales dropped by five per cent to $28.8 million, but management says these expenses would have been even less were it not for an increase in price of coal and electricity.

“Our outlook is positive as long as we are able to sort our legacy issues and mostly the debt. We believe that the government’s push for affordable housing and a revamped manufacturing sector under its Agenda Four initiative will benefit us.

In the short term we need around $100 million to steady the ship but for us to go back to our glory days and take back the leadership in the market, we will need around $450 million,” Mr Ole Nkeri said.

The EastAfrican understands that the cement firms is at an advanced stages over discussions to sell more than 14,000 acres of land to government, which will be transferred to the newly established Special Economy Zones Authority funds that will boost its bottom-line. The firm’s board is said to have received Cabinet approval last year for the sale.

“The valuation of the land has been done and the firm will be meeting with its parent ministry and the National Treasury in the coming weeks as it seeks to unlock these funds,” The EastAfrican was told.

Mr Ole Nkeri declined to discuss this transaction, instead saying that the injection of funds from its shareholder, the Kenyan government and Lafarge, could be the way to go to sort out its short term needs.

“If these funds do not come, then the shareholders and the board will determine where they want the firm to go,” he said, adding that if they receive the short term funding, then they’ll be deployed to repay debt and invest in new plants and upgrade the existing factory,” said Mr Ole Nkeri

“As it is we have an outdated kiln, whose refurbishment or modernisation will cost around $20 million.”

The firm is currently bedevilled by debt with finance cost for the year to June 2017 rising to $6.17 million, with interest charged on its overdrafts and loans taking a bulk of this at $5.01 million.

Its total debt for 2017 stood at $26.34 million, with $8.9 million of this expected to be paid before the end of June. Out of its total loans, $10.54 million is owed to the Overseas Economic Co-operation Fund of Japan.

This is guaranteed by Kenya and is repayable in 41 half yearly instalments by 20 March 2020 with interest accruing at 2.5 per cent annually. 

In its full year report for 2017, Portland said that the fund injection from its shareholders would support capitalisation of the business, modernisation of the ageing plant and enhancement of the current working capital facilities for importation of bulk raw materials to enable optimisation of the current installed cement milling and packing capacity.