East Africa’s cement industry could see realignments in coming months, as a combination of increased production capacity, management changes and new government policies fuel the battle for market share.

New data shows that production is expected to rise sharply with the setting up of new production plants and enhanced efficiency, growing faster than current consumption levels and creating more supply in a market that already has a surplus. 

While regional production capacity has shot up 78 per cent over the past five years — and is still growing with several cement firms lining up new plants in the next two years — demand for cement has lagged behind.

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Data from the East Africa Cement Producers Association shows that last year, consumption in Kenya, Uganda and Tanzania grew at the slowest pace in a decade — 3.5 per cent against an annual average of eight per cent.

Kenyan firms are expected to account for more than half of the region’s capacity, an analysis by Standard Investment Bank (SIB), released on Wednesday, shows.

In Tanzania, two firms — Dangote Cement and Kenya’s Athi River Mining — are expected to double the country’s capacity by the end of next year through production at their new plants. 

Cimerwa, Rwanda’s largest cement manufacturer, is growing its production capacity six fold, from the current 100,000 tonnes to 600,000 tonnes.

With a total grinding capacity of 3.15 metric tonnes per annum (mtpa) — including Hima’s 0.9mtpa — Bamburi is expected to remain the largest listed firm, said SIB.

Amongst the non-listed players, Uganda’s Tororo Cement (trading as Mombasa Cement in Kenya) is set to be a bigger player (estimated grinding capacity of 3.1mtpa). Upon completion of its Tanga line, ARM will command 24.3 per cent of the regional clinker capacity.

Although demand for cement is expected to rise in the coming months, profit margins don’t look so promising.  Last year, the average profit margins for Kenya’s cement firms hit an all-time low of 22.1 per cent.

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Analysts at SIB project a continued pressure on margins as cost of production rises, while pricing power remains low due to overcapacity.  Already in 2012 the industry registered its weakest year in over a decade, hit by reduced mortgage uptake in the region as well as cheap imports from Asia.

Industry players said cement imports from Asian countries — which surged by 40 per cent last year — could worsen the prospects of the sector.

Housing boom

Improved access to credit, especially in Kenya and Uganda, is expected to create new demand for housing — a key driver of cement consumption.

While governments in East Africa and surrounding countries have increased their budgetary allocations to infrastructure, cement consumption within the region is still mainly driven by private sector-led projects, which account for at least 70 per cent of the region’s cement demand. 

“In 2012, East African economies experienced high inflation, hike in bank lending rates to over 20 per cent and weak local currencies. Since consumption in the region is still predominantly driven by individual home builders this ‘perfect storm’ environment negatively impacted consumption,” said SIB.

Lending rates in Kenya, Uganda and Tanzania have been edging downwards over the past year, raising hopes of a mortgage rebound.

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The growing imports from Asian countries however 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. 

In November 2012, Kuwait-based company Dao Group launched the construction of a $150 million cement plant in Budaka District, eastern Uganda. The new plant is expected to produce 5,000 tonnes of cement a day, increasing competition in a sector that has been dominated by Hima Cement and Tororo Cement companies.

Meanwhile, Eastern Miners Ltd, a subsidiary of Ndovu Investments Ltd and a member of RAI Group, is yet to start the construction of its $120 million cement plant in Tororo due to land wrangles.

Construction of the new plant was supposed to start last December, but residents blocked it, citing land grabbing.

High cost of energy

Electricity, which on average makes up 40 per cent of the direct cost of cement manufacturers, is four times cheaper in Asian countries than Tanzania. This means that despite the Tanzanian government charging 35 per cent duty on cement imports from non-EAC countries, the imports are still cheaper than locally produced cement.

Industry sources say the figure could be higher as some importers may be under-declaring the size of their imports from these markets. The Tanzanian government has now formed a committee to investigate the importation claims, with a preliminary report due at the end of this month.

“Preliminary information shows export figures from source countries are higher than what is reported as the official cement imported from these states,” said Hussein Kamote, a policy and advocacy director at the Confederation of Tanzania Industries.

“We are looking at the import statistics with a view to verifying whether what the exporting countries show in their books is actually what is being received here,” he added.

The two listed cement producers in the country say the imports partly fuelled the fall in their full year earnings.

The report by the committee — which includes representatives from the government and private sector — is expected to inform changes in the country’s policy towards cement imports.

In March, Pascal Lesoinne, the CEO of Twiga Cement, said the problem boils down to the country’s failure to effectively apply the necessary taxes.

“The main reason for this particular situation in Tanzania is the failure to properly implement the common external tariff (CET), and having cement imported under duty and taxes exemption. Most of this importation is happening in Zanzibar, bringing into question the application of CET there,” Mr Lesoinne said.

Meanwhile, in Rwanda, last December, PPC Ltd spent $69.4 million to acquire a 51 per cent state in Cimerwa. The remaining 49 per cent is shared by the government of Rwanda through the Finance Ministry, Rwanda Investment Group, Rwanda Social Security Fund and Sonarwa, a leading insurance company.

Cimerwa currently produces some 100,000 tonnes of cement annually, and is building a plant that will produce 600,000 tonnes. The added capacity is expected to change the cement industry in Rwanda as the country imports 80 per cent of its cement.

Analysts say the expansion plans could push down the company’s per unit cost, enabling it to compete with regional players. Currently, the company uses wet processing technology, which will be replaced by dry processing, which is more energy efficient.

This partly explains why cement manufactured in Rwanda is more expensive. A 50kg bag of cement imported from Uganda costs $13 while locally manufactured cement costs $14-$18 per bag, depending on the quality.

The realignments in Rwanda could go further if, as analysts expect, Kenya’s Athi River Mining (ARM) decides to expand Kigali cement, a company that it has a 35 per cent stake and in which it controls 53 per cent of all voting rights.

Additional reporting by Joseph Mwamunyange, Isaac Khisa and Kabona Esiara.