AFRICA: Cement makers brace themselves for turf wars

Cement companies are bracing themselves for increased competition as new firms boost supply, a move that is likely to eat into their market shares.

An outlook report by African Alliance shows that Athi River Mining (ARM), Bamburi Cement and East African Portland Cement will feel the pressure of intense competition which will have a bearing on returns to shareholders.

“Although the outlook for cement demand is positive with an estimated annual growth of 12 per cent, we believe the commissioning of new production capacities of an additional 1.7 million tonnes per year to the current production levels of 6.9 million tonnes per annum in the next two years will result in a significant industry production surplus,” said African Alliance in its industry report.

The analysis notes while all the three quoted cement producers Athi River Mining (ARM), Bamburi Cement and East African Portland (EAPC) will be under pressure, each player will face different levels of exposure denting their earnings.

Bamburi’s challenge lies in the sizeable market share it has lost to competition especially new entrants such as Mombasa Cement which is estimated to have snatched 10 per cent of its initial market share.

Currently, Bamburi is estimated to account for 48 per cent of the local cement market.

In the first half of this year, its turnover declined by 17 per cent pulling its operating profit down by 23 per cent compared to a similar period last year.

Its disposal of its stake in ARM eliminated its other source of income.

In addition, due to the higher power charges it experienced cost inflation.

However, with the commissioning of its Uganda plant, African Alliance predicts an improved performance for the remainder of the year.

ARM is expected to continue performing well due to improvement in internal efficiencies and growth in all its business lines with the cement segment accounting for more than half of the group turnover.

“Turnover increased by 19 per cent on a year-to-year basis with the cement volumes growing by 28 per cent and high margins from the other segments.”

However, ARM bottom line f aces fresh challenges of higher depreciation and interest costs on its capital expenditure which is expected to dilute the earnings.

ARM capex for the capacity expansion in its clinker plant in Kaloleni and Athi River cement production plant and the greenfield plant in Maweni Dar es Salaam is estimated at Sh12 billion.

“Given its current high gearing levels-which is the ratio of debt to shareholder’s equity- of 125 per cent the company is at high risk if its Tanzanian project should face prolonged delays or run ahead of budget,” says African Alliance.