Concrete surge: Despite high demand, profit margins in the cement industry are under pressure as competition ramps up

Growth in the Kenyan construction sector – driven by major infrastructure projects such as the Nairobi-Mombasa railway and a push to expand housing supply – reached 13.1% year-on-year (y-o-y) in 2014, more than double the 2013 figures. Construction accounted for 4.8% of GDP in 2014, according to the “Economic Survey 2015” from the Kenya National Bureau of Statistics (KNBS). Rising activity has led to cement demand increasing at a rate of 21. ( 8% in 2014 to a total 5.2m tonnes, according to government figures, just under half the total volume for East Africa.

Excess Capacity

Construction activity growth has been a boon for producers, but the scope for further increases in the near term is sizeable, given that Kenya’s per capita consumption remains well below that of other major African economies. Annual per-capita demand for cement averages 100 kg, according to sector players, compared with 506 kg in Egypt and 230 kg in South Africa.

However, the rise in domestic demand has not necessarily translated to a healthier balance sheet for the country’s producers. The average net profit margins for Kenya’s cement firms hit an all-time low of 11% in 2014, according to ARM Cement. This is in part a result of cheaper imports from China, India and Pakistan, where production costs are significantly lower. Electricity costs, which make up some 40% of the total cost in cement production, remain quite a bit higher in Kenya than those in some Asian countries, putting pressure on local producers.

Tax Changes

Competition may increase following a recent decision by the East African Council of Ministers to lower the duty on cement imports from non-EAC countries from 35% to 25%. The council has also removed cement from the list of sensitive industries that require protection until domestic industries can compete. “This will only create unnecessary competition from manufacturers outside the region, leading to an influx of cheap cement imports,” Ronald Ndegwa, CEO of Savannah Cement, told local media. “It is likely to put the ongoing industry expansion plans in jeopardy.” A 2013 decision by the Ministry of Mining to put a KSh7 ($0.08) levy on every 50-kg bag of cement produced has also impacted sector competitiveness. However, the government has defended its position, saying that the proceeds would go on to be used to support the economy.

Regional Growth

With production on the rise, excess capacity is set to grow. According to projections from investment firm African Alliance, excess supply in Kenya will amount to 23% of production in 2015. The country will produce about 6.8m tonnes and will consume 5.2m, translating into an excess of 1.6m tonnes. Meanwhile, demand for cement in the broader EAC – which includes Kenya, Tanzania, Uganda, Rwanda and Burundi – is also booming, leading Kenyan cement companies to pursue growth outside the domestic market. National Cement, owned by Nairobi-based Devki Group, is planning to expand capacity at its 2m-tonne-per-annum Lukenya plant by 20%, as well as investing KSh14.6bn ($160.6m) in a new facility in Uganda, which will be operational by the end of 2016 with a capacity of 1m tonnes. This follows the construction of a clinker plant by ARM Cement in Tanga, Tanzania in late 2014 that boasts an annual capacity of 1.2m tonnes, and a planned 750,000-tonne-capacity cement plant expected to come on-line in early 2016. These projects will bring ARM Cement’s total investment to around $150m.

Capacity Expansion

Plans are afoot to expand local capacity to address rising domestic demand and encourage economies of scale. ARM Cement announced plans in 2014 for a KSh34.4bn ($378.4m) integrated clinker and cement plant in Kitui County with a capacity of 2.5m tonnes per year. Originally to open in 2018-19, the project is now delayed. Nigeria’s Dangote Cement is also intending to build a plant in Kitui County with an annual capacity of 3m tonnes.