Cement manufacturers who were hoping to capitalise on massive infrastructure projects in East Africa now face a bleak future as competition takes its toll on earnings.
The industry has witnessed a downturn in recent times owing to significant investments by manufacturers to increase their capacity and the entry of new players in the region. This has ignited price wars for control of the market.
According to AIB Capital, cement prices in East Africa dropped from an average of $140 per tonne in 2011 to $100 per tonne in 2015, and have now plummeted to an average of $80 per tonne, driven by Dongote Cement’s entry into the region.
Over the past two weeks, Kenya’s Bamburi Cement and East African Portland Cement Company (EAPCC) have released financial results that show a drop in revenue.
Bamburi, the biggest cement maker in the region, posted a slight decline in revenues for the financial year that ended December 2016, to $363 million from $374.6 million the previous year. The company’s profitability remained largely flat, declining marginally to $78.3 million from $80.2 million.
EAPCC remained in the red, with revenues for the half-year period to December 2016 declining to $43.9 million from $53.3 million in 2015. The company posted a loss of $5.2 million, an improvement from the $7.1 million loss it reported a year ago.
“Bamburi Group is cognisant of the increased competitive environment and the upward trend in global commodity prices across the region,” said the company in a statement.
EAPCC admitted that the outlook in the medium term remains bleak with cement supply continuing to outstrip demand, as market prices are expected to remain subdued.
Athi River Cement, which has been on a loss-making streak over the past few years, is yet to release its full-year results for the period ending December 2016.
According to analysts, the entry of Nigeria’s Dangote Cement into the East African region with a strategy of low prices has forced existing manufacturers to adjust their prices in order to compete.
The cutthroat competition has been worsened by that fact that all manufacturers in the region have been investing in increasing their capacity even as cheap imports continue to flood the region following the lowering of duty on cement imports from non-EAC countries from 35 per cent to 25 per cent.
East Africa’s installed cement capacity is currently estimated at 15.6 million tonnes against an annual demand of 12 million tonnes.
“Long existing cement makers in East Africa are losing market share to Dangote Cement, whose strategy to capture the market is based on low prices. This trend will continue in the medium term,” said Stella Wambugu, Research Analyst at Standard Investment Bank.
Dangote Cement, which has invested in plants in Tanzania and Ethiopia with a total production capacity of 5.5 million tonnes per annum, has ignited price wars by lowering prices by as much as 40 per cent. The company plans to invest in two plants in Kenya with a total capacity of three million in the next five years.
Existing manufacturers are also revamping their operations with companies like EAPCC, Athi River Mining, National Cement, Mbeya Cement and Savanna Cement increasing their capacity.
Due to the increasing competition, profit margins in the sector remain under pressure. In the Kenyan cement industry, for example, the net profit margin has been declining, averaging 10 per cent in 2015 from an average of 15 per cent in 2011. Projections are that prices will continue to decline by one to three per cent as competition intensifies.