Infrastructure Investment Drives Cement Demand in East Africa


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An analyst briefing about infrastructure investment in East Africa.

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Infrastructure Investment Drives Cement Demand in East Africa

  1. 1. Infrastructure Investment Drives Cement Demand in East Africa Charles Shonayi, Research Analyst Mining & IPC 15 February 2012© 2012 Frost & Sullivan. All rights reserved. This document contains highly confidential information and is the sole property ofFrost & Sullivan. No part of it may be circulated, quoted, copied or otherwise reproduced without the written approval of Frost & Sullivan.
  2. 2. Today’s Presenter: Charles Shonayi Functional Expertise Experience in market research and growth strategy consulting projects. Particular expertise in: - Qualitative and quantitative market analysis - Opportunity analysis Industry Expertise Experience base covering broad range of sectors, leveraging long-standing working relationships with leading industry participants’ Senior Executives - Research on South African Automation and Control Solutions Market and the South African Heat Exchangers Market - Research on Cement Industry in Egypt and East Africa - Sub-Saharan Africa Mining Industry Trends - South African Gold, Platinum and Coal MiningCharles ShonayiResearch Analyst What I bring to the TeamIndustrial Automation & - Strong research and analytical skillsMining - Ability to focus and prioritize on project deliverablesFrost & Sullivan Career HighlightsSouth Africa Started professional career with Frost and Sullivan in 2010Cape Town Economist with Reserve Bank of Zimbabwe in the Economic Research Division from 2002 to 2007 Education Master in Business Administration with Edinburgh Business School (UK) (In Progress) Post Graduate Certificate in Business Administration from Edinburgh Business School (UK) Bachelor of Science Honors in Economics from the University of Zimbabwe (UZ). 2
  3. 3. Agenda 1 Current and Future Key Trends 2 Key Challenges explained 3 What are the factors expected to drive growth? 4 What are the risks? 5 Conclusions 3
  4. 4. Current and Future Key TrendsMarket Overview: East African Cement Industry, 2010 - 2017 Cement Demand at Production Capacity Production Forecast Market Market Stage End of Forecast at End of Forecast Capacity Period Growth Rate Period 10.7 million tons 12.0 million 17.0 million tons Growth p.a. tons p.a. 7.3% p.a. (2010) (2017) (2010 – 2017 CAGR) (2017) Cement Customer Price Cement Market Number of Consumption per Sensitivity Consumption Concentration Competitors Capita 8.2 million tons 9 p.a. 56% 60.0 kgs 12 (% of market share held by (Active market competitors in (Scale:1 [low] to 10 [High]) 2010 top 3 companies) base year) Kenya, Tanzania and Uganda Decreasing Stable Increasing Note: All figures are rounded. The base year is 2010. Source: Frost & Sullivan analysis. 4
  5. 5. East Africa Cement Industry: Cement Statistics Kenya TanzaniaCement 2010 Cement 2010Imports 25 000 tons Imports 500 000 tonsExports 620 000 tons Exports 50 000 tonsProduction (Actual) 3, 659 million tons Production (Actual) 1.980 million tonsConsumption 3, 054 million tons Consumption 2,770 million tonsProduction Capacity 5.3 million tons Production Capacity 3.0 million tons UgandaCement 2010Imports 420 000 tons `Exports 320 000 tonsProduction (Actual) 1,170 million tonsConsumption 1,640 million tonsProduction Capacity 1.5 million tons Source: East African Community, Frost & Sullivan Kenya is the largest market for cement in East Africa with an annual production representing 53.0 % of the region’s total capacity. Tanzania and Uganda contribute 30% and 15 % respectively of the region ‘s total production capacity. Rwanda and Burundi’s annual cement production capacity was approximately 100 ,000 tons and cement consumption in the two countries was approximately 350, 000 tons in 2010. 5
  6. 6. Key Challenges Market Challenges & Impact Impact Scenario for Risk Aversion • EAC Cement manufacturers are faced with irregular supply of• High energy cost: The quality and reliability upon electricity power electricity and raw materials, which are key production inputs. in East Africa is generally not guaranteed and cement producers are Cement manufacturers should consider investing in newer and more forced in some instances to use expensive thermal and coal power. energy-efficient manufacturing technologies.• Excess capacity: This is expected to result in downward pricing • Cut throat competition especially in the Kenyan market is expected to pressures more likely to benefit consumers in EAC at the sametime result in falling prices of cement. raising concerns about the long term profitability of the industry.• High distribution costs: High fuel costs coupled with the poor state • Strategically aligning their market strategies with the location of of road and rail networks in East Africa connecting domestic production facilities. This can be done by region focused strategies or customer groups and key markets in the region is pushing upwards increasing their production capacities in regions where they have a the cost of moving cement. larger market share or easy access to raw material.• Influx of cheap Asian imports: Global oversupply combined with • Tariff ratification by the EACPA is crucial in eliminating the risk of collapsed freight rates have resulted in increased levels of imports increased competition from imported cement EACPA must lobby their reaching the East Africa markets at a substantial lower cost governments to reinstate protectionism to compete favorably with compared to local production. cement imports from Middle East and Asia. None Low Medium Medium-High High Source: Frost & Sullivan 6
  7. 7. What factors are expected to drive growth in the EAC cement industry? Growing urbanisation and housing demand • The need for infrastructure development and new housing is still very significant in East Africa due to growing urbanisation. Furthermore, the under developed mortgage markets in EAC indicates that demand for new housing construction, although relatively high, is likely to accelerate in coming years as a result of rising disposable income and improved access to credit which would have more people moving to better and larger housing. Rising Infrastructure Development • In East Africa, planned public sector infrastructure spends between 2011 and 2015 are centered on developing the region’s electricity generation industry, constructing new and upgrading existing airport, port, road and rail infrastructure, and expanding and rehabilitating water collection and reticulation infrastructure. Rapid economic growth • The EAC achieved the highest GDP growth with an average of more than 5 percent in 2010 and 2011. The sustained economic growth in light of the global financial crisis is anticipated to drive investment in the construction sectors of the economy. Reconstruction in DRC, Sudan and South Sudan • Export markets in the high-growth segment of countries such as Sudan, DRC, which are characterized by very low cement consumption per capita are expected to continue to grow. Most countries from this group have or had political instability, which has curtailed the development of the infrastructure and construction sectors. Improving governance and political stability • Improved governance and political stability in new member states to the EAC, Burundi and Rwanda have opened up new markets with dynamic construction sectors. 7
  8. 8. What are the Risks to growth in the EAC cement industry? Pressure on margins • Cement manufacturers continue to face eroding margins forcing cement companies to reinvent current business models and adopt strategies to cut costs. This follows rising electricity and fuel prices and raw material costs. There is pressure to keep prices down to gain market share. Impact of the Global Financial Crisis • The lack of funding aggravated by the financial crisis led to delays or cancellation of certain projects which will negatively affect demand for cement. • The repatriation of foreign currency by nationals resident in the diaspora is also affected due to job losses leading to a slowdown in the residential housing construction sector. Inadequate contractor capacity • Shortage of qualified ECPM personnel to implement large commercial construction and engineering projects is expected to yield reduced uptake of these projects thereby reducing demand for cement. 8
  9. 9. ConclusionEast Africa offers The low per‐capita consumption of cement offers scope for growth . large cement East Africa’s average per capita consumption is still low averaging about 60kgs and the market process of catching up with international averages will drive future growth. Cement demand in the region is anticipated to remain strong in the medium term supported by the resurgence in infrastructure and housing sectors which are boosting investments in new Government production lines, retrofit old plants and expansion of production capacity mainly driven by infrastructure government investments in infrastructure.spend expected Planned public sector infrastructure spends are centered on developing the region’s drive growth electricity generation industry, constructing new and upgrading existing airport, port, road and rail infrastructure, and expanding and rehabilitating water collection and reticulation infrastructure. Pursuing cost To remain competitive cement producers must implement sustainable cost optimization strategies focusing on alternate fuels, low cost technology and value adding models.control measures Modernisation at the plants, improvement of plant processes and absorbing the best to remain practices in mining and manufacturing is required if EAC producers are to compare competitive favourably to leading world cement producers in terms of profitability.
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  12. 12. For Additional Information Christie Cronje Stephane Gay Corporate Communications Account Manager Africa Environment & Building Technologies +27 21 680 3566 +27 21 680 3279 David Winter Research Manager Mining +27 21 680 3275 12