Cement makers stare at hard times

By John Njiraini

For many years, two towering mammoths resembling some relic piece of architecture were the landmarks of Athi River town.

Bamburi Cement and East Africa Portland Cement Company (EAPCC) factories, standing at close proximity to each other, were conspicuously intimidating for besides representing the face of Athi River, they were also the fascia of the cement industry in the country.

Today, the exclusive rights the two enjoyed have long gone after two new firms, Mombasa Cement and National Cement, invaded the territory and built new factories.

In the midst of increasing competition, a report by Renaissance Capital states that the market share of the two leading manufacturers — Bamburi and EAPCC — has significantly plummeted with Bamburi’s market share dropping from 68 per cent in 2007 to about 49 per cent last and is expected to drop further to 36 per cent by 2013.

"The entry of National Cement and other players has increased competition in the cement industry and has led to better quality products and price reduction," said President Kibaki when he presided over the opening of National Cement last month.

In many ways, the changing face of Athi River illuminates the changing face of the cement industry.

For years, the industry was controlled by three companies: the Lafarge owned Bamburi, EAPCC and Athi River Mining (ARM) which shared the market like a piece of cake based on their inexplicable ownership structure.

But over the past decade, new entrants like Mombasa Cement, National Cement and Sanghi Cemtech Cement have altered the dynamics of the industry.

"We see prices falling in the region and most companies should see declining profitability except for those that can save on energy and raw materials," states a recent industry review by Renaissance Capital.

According to industry statistics compiled by East Africa Cement Producers Association, the entrant of new players in the industry coupled by capacity expansion among existing manufacturers has pushed regional installed capacity to 9.5 million tonnes in 2009 from 5.8 million tonnes in 2008.

Capacity Expansion

Annual production has increased from 4.3 million tonnes to 6.61 million tonnes within the same period, representing a 70 per cent capacity utilisation.

In Kenya, cement consumption surged by 16 per cent to 3.1 million tonnes last year compared to 2.7 million tonnes in 2009.

In a country where demand for cement is anticipated to increase at a double digit average of 12 per cent per annum due to colossal investment in infrastructure projects, analysts contend the cement manufacturers will continue to enjoy good harvest.

But there is a rider that is sending shivers among long established producers. New entrants in the market like Mombasa Cement and National Cement have introduced bitter price wars as they seek to infiltrate a market long dominated by brands like Bamburi’s Nguvu Cement, EAPCC’s Blue Triangle and ARM’s Rhino Cement.

While Bamburi’s Nguvu Cement is selling at Sh700 per 50-kg bag, Mombasa Cement’s Nyumba Cement is trading at Sh685 per bag.

The effects of the price wars are already being felt.

Last year, Bamburi’s full-year profit plunged by 24 per cent to Sh5.3 billion from Sh7 billion the previous year, while EAPCC is also going through a turbulent period with earning dropping by Sh339 million for the first half of last year.

ARM, however, managed to shrug off competition and grow its profits by 23 per cent to Sh792 million last year.

"We forecast flat volume growth and a decline in earnings before interest and taxation (EBIT) in Kenya due to competition and energy cost increases," observes the report.

On its part, EAPCC has seen its market share drop from 37 per cent in 2007 to 30 per cent last year and is further expected to decline to 26 per cent by 2013.

By all accounts, the prospects of long existing manufacturers dominating the market look gloomy.

First, new entrants like Sanghi Cemtech Cement are yet to commence production, something that means the market is yet to witness the last of price wars.

Besides, giant manufacturer Dangote Cement of Nigeria is eyeing the East Africa region. Going by its financial muscle and aggressiveness, an unprecedented battle could be on the offing.

Worse still, the East Africa region has also become a ripe market for cheap imports from China, Pakistan and Egypt due to modest tariffs imposed on importations at 25 per cent per tonne.

The invasion could aggravate if a group of businessmen succeed to push for further duty reduction to 10 per cent.

Turbulent market

Under East African Community (EAC) customs union protocol launched in 2005, cement imports are designated as sensitive products attracting a higher common external tariff (CET) at 55 per cent.

Although that tariff rate was supposed to decline by five per cent every year to cap at 35 per cent.

A severe shortage in 2008 saw the tariff stand at 25 per cent and was never reversed back to 35 per cent despite incessant push by regional producers.

Yet the cheap imports have become like malignant tumor.

Manufacturers in Pakistan and China enjoy low production costs and government patronage like subsidy on inland transportation expenses to the sea.