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Will Africa’s cement sector regain its appetite?

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The African cement market face a number of challenges in the future. Image credit: Moneyweb

Before Covid-19, Sub-Saharan Africa was a lucrative market for the cement sector. The question is whether Africa’s cement sector will regain its appetite in the future?

More than one billion people inhabit sub-Saharan Africa and with the age demographic weighted towards its youth, the region has attracted a host of cement producers. The gradual urbanisation in most African countries has created a great need for infrastructure development and housing. Two years ago, the per capita consumption of cement in sub-Saharan Africa was sitting 40kg. That figure has gradually grown and sat at about 112kg late last year. In 2019, cement sales grew at between five and six percent in Central, East and West Africa. On the other hand, demand fell by three percent in North Africa’s at the end of 2019.

In cement terms, the continent can be split into two main regions. The North African region stretching from Egypt to Morocco, which has a cement capacity of about 104 million tonnes per annum (Mta), and sub-Saharan Africa, which has an estimated cement capacity of 110Mta. But, despite figures that indicate good growth, the cement industry had experienced severe constraints even before the onset of Covid-19. According to Hadley, of consultancy firm THAA, the region’s rich potential had attracted too many new entrants, which, combined with poor local leadership, had thrown it into turmoil.

Hadley spoke at a Cemtech webinar in early June 2020.  He added that Africa has historically generated strong profits for cement players in the past. “Pre-COVID-19 cement producers made a lot of money. The banks were generous with loans. The turmoil we experienced was self-made. There was a lack of performance management, no due diligence and poor leadership,” said Hadley.

After Covid-19 the markets have clearly changed. “There is a flattening of some African markets and average growth across the continent as capacity comes on-stream. This has led to a subdued interest from investors,” said Hadley.

Although the pandemic’s impact has been severe, the cement and construction sectors have continued to operate with limited restrictions in most African countries. However, demand has plummeted, and the outlook does not look great.

Hadley said Kenya especially, faced many challenges. “During the pandemic, it has seen a hard and fast lockdown as well as disciplined movement restrictions, placing inevitable limitations on demand. Going forward, this will exacerbate the underlying structural issues: there is high grinding capacity, growing local clinker capacity and struggling independent grinding stations. Two large players dominate and blend their clinker with imports. This has had a big impact on prices which have fallen to as low as USD32.4/t.”

Tanzania had some plant shutdowns due to COVID-19, but no official lockdown and little testing. The cement sector stood up well in the first quarter of 2020 with a seven percent rise year on year. This was mostly as the result of government spending on its new capital city.

Cement demand dropped in the second quarter of 2020, but prices have remained flat at USD80/t. “The real challenge is the dollar shortage for businesses, while there is some apprehension of what the Huaxin Cement acquisition of ARM will mean for the cement sector,” said Hadley.

The cement sector in Nigeria, meanwhile, had a poor second quarter in 2020 and cross-state travel has been a challenge for cement producers. Cement prices have also been trending downwards in dollar terms and Dangote has been leaking market share against the aggressive growth strategy of BUA Cement.

Hadley said he expects weaker markets and accelerated turmoil in the future. “There will be greater protectionism, a rise in mergers and acquisitions and closures of smaller, uneconomic plants as we see the entry of mega-plants to meet the ultimate growth on the continent,” Hadley added.

According to Erkam Kocakerim, CEO of Limak Afrika, Côte d’Ivoire is a complex market, made up of seven players and 10 grinding plants, with an overall cement capacity of 11.7Mta. “Overcapacity has made the market extremely competitive and consumption is only at 4.5Mta, while cement prices have dropped by almost 36% in the last four years. Existing producers will soon face further competition from four new players with 6Mta of cement capacity to come on-stream, which could cause utilisation rates to fall lower. Per capita consumption is predicted to reach 255kg by 2025, according to Limak Cement.

Mozambique’s cement market is smaller with a cement capacity of 5.2Mta and 14 factories operated by 10 cement producers. Cement capacity is rising with an ongoing Chinese project to add 1.8Mta in Maputo. Cement consumption per capita is currently at around 63.9kg, but by 2025 it is expected to surge to 107.9kg when cement consumption is predicted to reach 3.3Mt. However, much of this will come with the needs of the expanding LNG industry, which is forecast to see infrastructure delays. Moreover, the projects will mainly be concentrated in the north and central part of the country.

Hadley concluded and said that the turmoil we have seen in East Africa and South Africa is headed for West Africa as well. This will be reflected in cement prices and will lead to some major winners and many losers. “There are opportunities for acquisitions and consolidation at the lowest-ever multiples. The COVID-19 pandemic may well have simply accelerated these trends,” he said.

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