Cement wars hot up ahead of Nigeria’s ‘game changing’ entry into sector

By Jevans Nyabiage and Emmanuel Were

Kenya: There have been a lot of undercurrents in Kenya’s cement sector the last three months.

Boardroom wrangles at East African Portland Cement, and Athi River Mining Cement having to defend itself against allegations of polluting the environment brought by a lobby group, and an injection of capital by one of the players, National Cement, that will boost its capacity.

All this has been happening at a time when industry players are complaining that a fierce rivalry among them is boiling over into sabotage.

This happens to be the malice afflicting the boardroom of the oldest cement firms in the country — East African Portland Cement.

Then there is the issue of overcapacity in the local market because players have been investing heavily to put up the cement factories.

Now they have to find out how to sell their products especially in light of the increasing competition.

And finally there is the issue of Dangote Cement making an entry into the Kenyan market. 

These factors are leading a rush for cement, which is being referred to as the “next black gold,” a reference to the race for coffee in the 70s.

“The industry is coming of age and there are a lot of new entrants in the market. That is why everybody may be clamoring for a niche in the cement industry,” said Mr Samuel Gichohi of NIC Capital. 

“The East African region is being seen as the new growth area, that is why we are seeing the likes of Dangote and other players eyeing the region.”

Kenya’s consumption per person is at 85kgs of cement, compared with South Africa’s at 300kgs and Egypt’s 500kgs of cement per person. 

This leaves a lot of room for growth in consumption of cement in the country, especially given that the country still has need for the product.

“For starters, despite a 78 per cent increase in regional capacity in the last five years to 11.51 million tonnes per annum (mtpa), there have been no price wars because consumption is growing,” said Standard Investment Bank analysts in a report on the sector that they released in the last quarter of 2013.

The analysts noted that the entry of international contractors, private equity firms and real estate-focused asset managers has ushered in a new era of mega shopping malls, with gated communities among the large real estate projects driving up the need for cement.

This huge potential demand puts into context what has been happening over the last three months in the cement sector.

The boardroom wrangles at Portland pitted the National Social Security Fund and the Government on one side, and French industrial company Lafarge on the other.

NSSF and the Government hold a 52.3 per cent share in Portland. Lafarge has a 41.7 per cent stake, leaving the minority shareholders with 6 per cent. 

Lafarge has been jostling for a greater say on the board, possibly to influence the performance of Portland Cement.

 This is because Portland has so far lagged behind Bamburi and ARM Cement, yet it has been in the Kenyan market the longest.

The performance

Bamburi Cement, a subsidiary of France Lafarge, has for long dominated the cement market in the region. A position no other company has managed to hold.

The cement maker had a firm grip on the industry in 2009, controlling 62 per cent of market share.

Market share for East Africa Portland Cement is at 20 per cent, and ARM’s stands at 18 per cent.

Portland Cement has also struggled to play catch up in sales and market valuation at the Nairobi Securities Exchange.

Although it is the oldest cement firm, Portland is valued at Sh6.3 billion at the stock market, trailing ARM Cement and Bamburi whose market values are Sh43 billion and Sh74 billion, respectively, as of last week.

“For Portland, which is the oldest cement factory, to be struggling is a shocking indictment of its leadership,” said a source in the industry who requested not to be quoted because of sensitivity of the matter.

Some analysts are of the opinion that the boardroom wrangles at Portland are driven by the need to control some of the vast resources the cement manufacturer sits on.

One example is the land. Portland sits on about 14,000 acres, which the market values at about Sh3 million an acre. 

This means Portland sits on Sh42 billion, which is seven times the value of its shares trading at the NSE. 

Buying Portland and selling off all its assets, especially land, might be a more valuable play. This is a trend fast emerging among other companies at the NSE that sit on vast assets like land. The proposed takeover of Rea Vipingo is a case in point.

With the entry of new players such as Savannah, National Cement and Mombasa Cement, Bamburi has been losing market share — from 62 per cent in 2009 to an estimated 39 per cent in 2012, according to Standard Investment Bank.

The analysts estimate that by 2015 — when Dangote is expected to set up shop — Bamburi will have a market share of 32 per cent. Portland will be at 20 per cent, and ARM will drop from 18 per cent recorded in 2012 to 16 per cent.

They base these predictions on existing players increasing capacity and the entry of new competitions, especially the “game changer” Dangote.

New entrants

New entrants Mombasa Cement’s share will remain at 15 per cent by 2015, National Cement will increase from 8 per cent to 10 per cent, while Savannah Cement will see its share of the cement market rise to 7 per cent.

Location has also been a very contentious issue. This is because the cement players are racing to get the best deposits of limestone, a key raw material in the manufacture of cement.

At the end of January, ARM dismissed allegations that it is polluting the environment as false and malicious.

Human Rights Agenda (Huria), a Mombasa-based lobby, had released a report detailing various allegations of environmental pollution by the company.

But meeting Parliament’s Committee on Natural Resources and Environment at the plant in Bondora, Kaloleni County, ARM Chief Executive Pradeep Paunrana dismissed the report as unfounded and its contents as designed to hurt his business.

Mr Paurana came out stating that the evidence presented by Huria “against ARM touching on noise, water, dust, air pollution is non-existent”.

He added: “The data and methodology used raises a lot of questions as to how they [Huria] arrived at the figures.”

In industry circles, this has fuelled speculation that the woes facing ARM have been sponsored by dubious characters looking to stop some of the firm’s factory operations.

But despite this rivalry and expansion, the Sh6.4 billion invested into National Cement a week ago by the International Finance Corporation, indicated the race to build and control capacity among the players in the sector is still very much on course.

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