With infrastructure and urban growth accelerating across Africa, the usefulness of a humble building material like cement cannot be underestimated.
A recent $300 million investment by sovereign fund Investment Corporation of Dubai (ICD) into Nigeria’s largest publicly-traded company, Dangote Cement, underscores the sector’s growing importance on the continent.
“The average cement consumption in most of the region is currently low, and the process of catching up to international averages will facilitate future industry growth,” said Tom Harris, industrial automation and process control research analyst with Frost & Sullivan Africa, in an email.
Between population growth, urbanization, housing development, and rising political stability, the firm expects cement consumption “to grow at a multiple of GDP over the next five to ten years.”
“The new stakes that have been taken up [in Dangote]… we see it as a good vote of confidence generally for infrastructure in Africa and particularly Sub-Saharan Africa,” says Thabo Ncalo, portfolio manager of the STANLIB Africa Equity Fund. The fund holds shares Dangote.
According to a July Ecobank report, Dangote’s strategy is “to establish itself in Africa’s underdeveloped markets before its multinational rivals… in order to capture high cement prices before a potential glut sets in.”
The company already has a 62 percent market share in Nigeria, with plans to aggressively expand capacity across the continent. The firm’s aim, according to the report, is to add “55 million metric tons per year of integrated grinding and import capacity in 14 countries.”
“The incredible thing about Dangote, certainly when it comes to cement, is that they’re incredibly bullish,” says Edward George, head of group research at Ecobank. The firm has been investing heavily in expanding capacity. “It’s very much a leap of faith that they’ve taken… but so far they’ve been very successful.”
Part of the reason is the immense need for building materials across the continent. “All across Sub-Saharan Africa you’ve got massive shortages of infrastructure, all the way from roads and bridges to airports, ports, and what have you that governments need to build. In addition to that you’ve got a massive housing deficiency as well,” says Ncalo.
Dangote is certainly a force in meeting that demand.
“It’s a state within a state,” says George. Between heavy investments in infrastructure, like power generation and roads, and the company’s sheer size (it is larger than the next five biggest Nigerian companies combined), Dangote is gearing up to take on established giants in other regions, like French/Swiss firm Lafarge/Holcim, dominant in Eastern and Southern Africa, and the German Heidelberg, which has greater presence in Western and Central Africa.
These ambitions reflect the growing competitiveness in the industry. With an immense amount of potential demand and the importance of scale in meeting it, consolidation is accelerating and the pressures to outmaneuver rivals are rising.
Growing Demand
“We recently conducted an analysis of the East African cement industry and found this market to be characterized by significant increases in competition,” Harris says. It’s not just in East Africa. Ncalo says that other major firms “have to pool resources or go out and invest across the continent to match what they’re seeing happening with Dangote Cement.”
“You’ll see a lot more consolidation because [other manufacturers] are realizing they need to have that scale to be able to compete.” In other words, companies must aggressively take advantage of economies of scale in order to reduce costs and maximize their distribution capabilities.
This makes Dangote’s heavy investments in what can essentially be described as its own infrastructure and distribution more notable. It also reflects some of the major challenges facing the industry.
“There is one big issue,” says George, “And it’s energy.”
With energy infrastructure insufficient and unreliable in many areas, Dangote is an example of a company that has taken matters into its own hands. “Most of the cement sector currently operates using gas, because it is (or should be) the cheapest form of power. But the distribution of gas in Nigeria is poor… They’re building their own pipelines from different gas fields so that they can be sure to get their own gas. They’re also converting their facilities to also use coal.”
“It’s a state within a state emerging: their own reserves, their own power generation,” George says.
The strategy could be a source not only of stability but of competitive advantage. Ncalo notes that Dangote’s plants will, as a result of their investments, become “dual power,” meaning the firm can switch between sources “depending on supply and depending on the price of each commodity, which will make them more competitive going forward.”
Another important issue hinges on transport.
“Distribution within Africa is still challenging and expensive,” says Harris. “There is a distinct lack of the critical transport infrastructure required to facilitate economic expansion.”
Cement is cheap, but it is heavy, and “the more you move [it] around the higher the price to the end user,” says Ncalo. “Getting product across borders in Africa takes a lot longer and is probably more expensive than most places in the world.” And the problem doesn’t just lie across borders, but even within nations.
That means that locating plants and minimizing transport costs are a critical part of the equation for any firm wishing to compete. “Our preference would be for cement companies to roll out as close as possible to markets” to reduce costs, Ncalo says. “We believe the key strategy is to find the limestone deposits and produce nearby, which is cheaper, and to sell to the market nearby.”
After all, he says, “the bottlenecks across the borders in Africa will still be a problem for a while.”
Finally, there is the issue of imports.
Many countries continue to import cement from producers in Asia, such as Pakistan. But Nigeria has seen a sea change in its cement industry after banning cement imports. “If you look back four years [Nigeria] was the largest importer of cement in Africa, and it’s now a net exporter. They’ve been very successful at promoting export in the country,” according to George.
African-produced cement
Will other nations favor African-produced cement or will the industry continue to face competition from abroad?
“A lot more countries across Africa want to allow the local cement industry to flourish,” says Ncalo. “You’ll probably see a lot more protectionist policies across Africa.” Regional production and more convenient transport could also improve local competitiveness. “As you see more cement production in Africa you’ll see that limits importation,” he says.
After all, he notes, production costs drop once ready access to limestone (the key raw material in cement) is established and transportation costs are reduced.
On top of the analytics, the big picture statistics loom large. Quite simply, Africa needs to build, and to build it needs cement. Ecobank points out that even in Nigeria, the continent’s largest cement consumer, demand currently sits at 278 pounds per capita, compared to a world average of 1,102 pounds per capita.
Headwinds notwithstanding, for the continent’s major cement producers, including rising star Dangote, numbers like these can only herald opportunity.
