Cement wars heat up in East Africa as Dangote plans entry

13 February 2014

Competition is heating up in Kenya’s cement market as new players enter the market and existing companies expand their operations amidst growing consumption fuelled by a construction boom. 

CEO of Dangote Group, Aliko Dangote
Kenya’s cement per capita consumption will for the first time surpass 100 kgs per person in 2014 according to last year’s CW Group Kenya market update report.
Listed cement manufacturer East African Portland Cement Company is conducting feasibility studies in some parts of Kenya with a view of setting up a plant by 2016 that will manufacture clinker.
Another listed manufacturer, ARM Cement, is seeking US$300m to finance a project in Kitui town – about 180 km east of Nairobi – which will produce 8,000 tons of cement per day making it the single largest cement factory in the country. ARM is hoping to double its annual production capacity to 5 m tons in six years.
Recent entrants such as National Cement, Mombasa Cement and Savannah Cement are also pumping millions of dollars into new projects. Savannah Cement, a consortium of Chinese and Kenyan investors, has set up a $114.3m plant with capacity of 1.5m tons a year and is planning to invest another $172m in a clinker plant in the second phase of the project.
Cemtech Kenya, a subsidiary of Sanghi Group of India, is also putting up a $137.2-m cement factory in Kenya.
The 2013 CW Group report predicted that these combined efforts will increase Kenya’s annual cement capacity to over 11.1 m tons by the end of 2017. As at the end of 2012, Kenya’s cement production was 4.63 m tons, according to the Kenya National Bureau of Statistics.
Kenya’s growing cement consumption is fuelled by an upsurge in private sector funded housing developments, foreign funded commercial projects and mega infrastructure projects ranging from ports, rail and roads financed by government and donors.
Pradeep Paunrana, managing director of ARM Cement, is optimistic that even with more production and competition, demand for cement in Kenya and East Africa will only increase.
“In Kenya and East Africa generally, our cement consumption per capita has been very low. As our economies are improving, as our aspirations of development are changing with more educated young people, we want more housing, more roads, more infrastructure… all these ultimately require a lot more cement.”
Dangote’s entry
This potential seems to have captured the attention of Africa’s richest man. Aliko Dangote is planning to build a $400-m plant in Kenya that will have a daily capacity of about 5,500 tons.
Analysts have warned that the entry of Dangote Cement is likely to shake up the market.
“Going by Dangote Cement’s financial muscle and aggressiveness, an unprecedented battle could be in the offing,” said investment analysts at Old Mutual Securities in a research report last year.
Paunrana says ARM cement is not “concerned” about the entry of Dangote Cement and other players in the market.
“Aliko Dangote is a man to be admired. He has got an extremely successful cement business in Nigeria and in several other countries already. We are aware of his intentions and ambitions for starting a cement business in Kenya. Like all other [companies] Dangote Cement will also have to compete in the market.”
However, he warns new entrants that cement pricing in East Africa is “probably the lowest in Africa in spite of our high cost of power, transport and all other costs associated with manufacturing”. The margins are “tiny” compared to what companies in Nigeria make.
He explains that cement manufacturers in Nigeria make a margin of $90 per ton while in Kenya a ton sells for $120 leaving a margin of less than $25.
“We are not concerned about competition. We believe we are able to build our plants very economically [and] we are able to produce high quality cement. We think our business will be very successful based on the economic growth the country and the whole continent is experiencing.”
But it’s not only in Kenya that Dangote will be facing off with the likes of ARM Cement. Dangote Cement is currently building a plant in southern Tanzania which will increase the country’s cement capacity by 1.5m tons by mid-2015.
ARM Cement is also building a $150-m clinker plant in Tanga, Tanzania. This plant is expected to be fully operational by the end of July and will have an annual production of 1.2 m tons of clinker.
As more investors tussle for a share of the growing market analysts have warned that Kenyan companies will be exposed by oversupply. Tanzania, a key market for Kenyan cement exports will have doubled production capacity after ARM Cement and Dangote Cement begin production.
Kenyan companies have for many years dominated exports of cement into the East Africa region. According to industry data, Kenya’s production has recorded an annual oversupply of 500,000 tons of cement in the last five years.
While Paunrana saw opportunity in the cement market many years ago he reckons ARM should have invested more in its cement business earlier on. “In hindsight, I would say that one of my career mistakes was not to see the pace of growth. We could have done more and better. We could have focused more and put more investment earlier in our cement business.”
Manufacturing clinker
In the face of growing competition, Paunrana explains that the firm’s strategy is to manufacture clinker which is then converted into cement. Most companies import semi-finished cement or clinker from China and the Middle East which is then grinded into cement.
“A clinker plant is really where the wealth is created because you are transforming raw materials from the ground all the way into cement finished product,” he says. “Our strategy is to manufacture clinker and capture the entire value chain. That gives us a clear advantage in our costing and an advantage in a market that is growing.”
The 2013 CW Group report noted that Kenya is still dependent on large clinker imports, with over 1.2m tons imported in 2012, mostly from China.
Citing Egypt’s consumption of 554 kg/capita as of 2012, Paunrana notes that Kenya and other East African states have a long way to go and “cement consumption will keep growing for a long time to come”.
By Dinfin Mulupi

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