Listed cement manufacturers operating in East Africa have started reporting last year’s results, providing a glimpse into how a recent expansion drive is affecting their performance — their revenues are growing but margins shrinking due to fierce competition in the sector.

The published results show that some have started benefiting from new plants as revenues are boosted by the increased production, which is slowly closing the gap caused by high demand and low supply.

However, expansion comes at a price and the increase in capacity does not augur well for the producers with analysts now looking at the real prospects of dwindling profit margins, as competition intensifies.

The pressure on margins is expected to come from financing costs, operating expenses and heightened competition.

“Over the next three to four years, unless consumption really spikes, we will enter a phase where a majority of the players will be under pressure,” said Francis Mwangi, a research analyst at Standard Investment Bank (SIB).

The region is currently undergoing a massive infrastructure upgrade, which has pushed up demand for cement, as governments invest in the construction of roads, ports and bridges, railways and energy projects.

Multinationals, which dominated production over the past seven years, are now being slowly displaced by local firms, which are progressively increasing their capacity. Cement prices are expected to start falling or stagnate with more supply in the market, analysts and players said.

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In Tanzania, a 50kg bag of imported cement retails at Tsh12,500 ($7.8) while locally produced brands are selling at between Tsh13,000 ($8) and Tsh15,000 ($9.3). In Kenya, current prices range between Ksh700 ($8) and Ksh750 ($8.5) per 50kg bag while in Uganda, the average price is Ush32,000 ($12) as at December 2012.

The regional firms that are increasing capacity are ARM Cement, which has operations in Kenya and Tanzania; Bamburi Cement, which has production facilities in Uganda and Kenya and Tanzania Portland Cement (TPCC), which operates mainly in Tanzania.

In Kenya, new private entrants National Cement, Savannah Cement and Mombasa Cement are expected to continue putting pressure on more established producers.

In Tanzania, Dangote Cement and Lake Cement are to set up factories while in Rwanda, Cimerwa is expanding its capacity. Dangote is looking at spending $600 million to put up a plant with a capacity to produce three million tonnes annually, which, going by estimates from Old Mutual, is more than Tanzania’s total cement consumption in 2011.

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Data from the Kenya National Bureau of Statistics shows that cement production and consumption doubled to 4.63 million metric tonnes and 3.97 million metric tonnes respectively at the end of 2012 from 2.12 million metric tonnes and 1.57 million metric tonnes respectively seven years ago.

However, an analysis of three out of the region’s five listed cement producers shows a significant drop in profit margins.

ARM Cement, for example, made Ksh11 ($0.13) in net profits for every Ksh100 ($1.16) it received in revenue, compared with the Ksh14 ($0.17) it made a year ago. For Bamburi Cement, the net earnings were at Ksh13 ($0.15) for every Ksh100 ($1.16) it generated in revenue last year, compared with Ksh16 ($0.19) the previous year, in the wake of a steep jump in operating expenses.

The cement maker, whose majority shareholder is French transnational Lafarge, which also owns a 14 per cent stake in Mbeya Cement in Tanzania, was hit by increased electricity costs in Uganda after the government removed power subsidies, resulting in energy costs jumping by 70 per cent, materially eating into its profits.

“I think there are quite a number of cost items that the cement manufacturers will find hard to hedge against, with the increased production, I would say management will really be put to the test,” said Mr Mwangi.

Bamburi saw its revenues grow by a marginal 4.48 per cent to Ksh37.49 billion ($434.74 million) in 2012 from Ksh35.88 billion ($433.63 million) in 2011, as political instability in some of its African markets served from Uganda resulted in lower exports in the second half of the year.

In Kenya, the country’s power distributor has already made an application to regulators seeking to raise power tariffs by 10-40 per cent, while in neighbouring Tanzania, the power distributor had made a similar application but has since withdrawn the request.

ARM Cement owns a 35 per cent equity interest in Kigali Cement Company, which buys raw materials and produces finished cement for the Rwandan and export markets.

It had invested Ksh3.3 billion ($38.3 million) in its Tanzania cement plants in 2011. ARM Cement, which is listed on the Nairobi Securities Exchange saw its revenue jump 39.35 per cent for the full year ended December 2012, to Ksh11.4 billion ($132.62 million) from Ksh8.18 billion ($96.17 million) over the previous year, though profits only rose by 8.27 per cent, to Ksh1.24 billion ($14.49 million) from Ksh1.15 billion ($13.52 million).

The company said that cement sales increased by 64 per cent from increased market share in Kenya and Rwanda, and the contribution of three months sales from the Dar es Salaam plant, which became operational in October 2012.

TPCC, which is listed on the Dar es Salaam Stock Exchange, reported a 14.7 per cent increase in revenues, to Tsh249.11 billion ($154.05 million) as at December 2012, compared with Tsh217.25 billion ($134.35 million) for the period ended December 2011.

Jean-Marc Junon, TPCC’s chairman, said after completing the upgrade of one of the old kilns, the firm will set up a new cement mill.

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Cimerwa of Rwanda, which sold 51 per cent of its equity to PPC Ltd of South Africa for $69.4 million and whose current capacity is 100,000 tonnes of cement per annum, is constructing a 600,000 tonnes per annum plant that will be commissioned next year.

The cement company has already disclosed that it is in the process of finalising a $104 million loan to complete the expansion project.

Cimerwa estimates that current demand in Rwanda is at 350,000 tonnes per annum and based on Rwanda and the Great Lakes region’s positive economic outlook, regional cement demand is projected to increase to one million tonnes in the next decade.

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Cement manufacturers in Tanzania are facing their own unique challenges because, according to Mr Junon, they are exposed to cheap cement imports as EAC governments decided, for the fourth time, not to re-instate suspended duties on cement in the Common External Tariff.

Pascal Lesoinne, the managing director of TPCC, said the cost of the expansion for the Wazo Hill Plant is estimated at Tsh50 billion ($35 million). He said that Tanzania is the only country in the East African Community affected by importation of non-EAC cement, adding that last year the country imported 300,000 tonnes from Pakistan.

“This is an increase of 40 per cent compared with 2011 and represents volumes equivalent to the annual production of a plant like Mbeya Cement, thus denying the country employment and domestic revenues,” said Mr Lesoinne.

He said that the main reason for this particular situation in Tanzania is the failure of the government to implement properly the Common External Tariff, with cement imported under duty and tax exemption. Most of this importation is happening in Zanzibar, bringing into question the application of the CET in Zanzibar.

“The cement industry is not asking for specific protection but mainly for the existing rules to be implemented and followed,” Mr Lesoinne said.

By Peterson Thiongo and David Mugwe