Infrastructure Gains And Buoyant Demand Sustains Cement Boom


BMI View: Huge investment into output capacity has seen cement production increase dramatically across Sub-Saharan Africa (SSA) over H112. We expect this trend to intensify over the medium term as market players continue to outlay capital expenditure (capex) and an increasing number of foreign investors look to capitalise from a strong demand for building materials. However, despite an increase in supply and increasing market integration , we continue to highlight the pertinent downside presented by the regions energy and infrastructure deficit and risky political environment.

Key Views:

  • Nigeria has leapfrogged South Africa as the region's largest producer and consumer of cement. The shifting dynamic reflects the buoyancy of the Nigerian construction sector vis-a-vis the muted performance of South Africa.

  • Due to significant investments in new lines at Ibese and Obajana, a n estimated output capacity of 27mn metric tons per annum now outstrips Nigeria's domestic demand ( see our online service, May 29, 'Dangote's Expansion - Promise and Pitfalls Ahead), which we put at just under 20mn metric tonnes per annum (mtpa). Despite this, we expect macroeconomic fundamentals to support robust consumption growth, with new capacity needed unless demand is to once again outstrip supply.

  • Dangote Cement ' s expansionary strategy will continue to benefit African countries across the board. We are witnessing a mounting demand for cement from East African countries, particularly from Uganda and Burundi. Over H112, Tanz ania experienced a y ear -o n -y ear increase in demand of 10%, with the country ' s output deficit standing at 1mn mega tons. Tanzania Portland Cement Company Limited (TPCC) is particularly well placed to benefit from this boom, and posted impressive H112 results. As a result of investment from Sino Zimbabwe Cement, PPC Cement and Lafarge, output in Zimbabwe has temporarily outpaced demand - 1.5mtpa, compared to consumption of 1mtpa. Despite this, an uptick in mass infrastructure projects is encouraging firms to increase capex outlays.

  • The East African building materials sector will continue to flourish as inflation tumbles and governments slash interest rates across the region. Kenya and Tanzania are proving increasingly popular for cement firms looking to benefit from significant deficits in output as improved macroeconomic performance drives demand.

  • Dangote has announced that they are planning a US$35bn initial public offering ( IPO ) in London next year, suggesting that it is gearing up to achieve dominance of the African cement space . The medium-term will see an increase in intra-African investment, with large players such as Pretoria Portland Cement Company (PPC), Lafarge a nd Dangote seeking to increase regional market share.

  • Aside from ongoing investment in growth markets Cameroon, Ethiopia, Tanzania, Mozambique, Angola, Zambia and Zimbabwe, we believe that the market will increasingly move towards frontier plays such as Mozambique, Angola, DR Congo, Benin and Togo.

  • In the long run, a combination of high growth levels, large populations, and the coming on-stream of untapped energy reserves may prove attractive to large companies looking to gain first mover advantage. Recently, Pakistan ' s Lucky Cement began construction of a 1mn mega ton ne plant in DR Congo. Also, Chinese firm Sinoma Tianjin opened a clinker production line in Benin, where major HeidelbergCement also operate a grinding plant. However, progress in these regions will be constrained by poor infrastructure, and investment flows will be limited until improvements are made - this year production of cement in Benin fell an estimated 44% following on from a string of electricity cuts.

  • Off the back of a large projected uptick in domestic production and a concomitant rise in demand, we also note the potential for Ghana to benefit significantly from the import/export of building materials through its burgeoning port system.

Nigeria Rockets Ahead
Nigeria, South Africa - Cement Production / Consumption (mtpa) / % y-o-y Increase
  • Despite an uptick in output, prices for raw materials remain high and in many cases are inflating. It is our view that the situation will gradually improve in Nigeria, as Goodluck Jonathan's regime remain committed to infrastructure reform. A drive to increase total grid capacity to 5,400MW is likely to be completed by December, with increasing stability of the power supply boding well for the energy intensive processes of cement and steel production.

  • F urthermore, Dangote Cement, which now produces 70% of Nigeria ' s cement , have doubled national production capacity over the year and, in August, increased access to the raw material by opening a larger number of the distribution outlets and signing on new distributors. It is our view that these moves will stabilise the price over the medium term.

  • As evidenced by our construction industry forecast ( see our online service, December 5, 'Politics Puts Lid On Opportunities'), and by the performance of South African building material firms, we believe that South Africa's cement consumption will continue to grow over 2012. We see a slight drop in growth when compared to 2011, yet see more positive signs for the industry over 2013 and 2014.

  • Increasing competition and a move towards liberalisation in a number of SSA markets bodes well for the sector's foreign direct investment (FDI) prospects. Firms from across the globe have begun looking to Africa as the next big growth market and we expect an uptick in investment from highly liquid Gulf-based funds, Chinese ventures looking to diversify and South Asian companies wanting to establish domestic African plants to capitalise on existing linkages.

Risks:

  • Although we expect the price of materials to drop over the long-run, we note that poor transport and energy infrastructure will continue to inflate costs in the region. Even with good quality infrastructure, the radius within which a standard cement plant is competitive is no more than 300km. Although companies such as Dangote, Lafarge and PPC are increasingly look to develop new transport linkages and deepen market integration, fragmented, localised markets will continue to limit the potential for scalability for major producers.

  • Producers will continue to face competition from low cost, often low quality imports from South Asia. As t he value of Pakistan's exports to Tanzania rose to US$15mn per annum, a number of Pakistani firms announced that they are interested in starting production within the region. Reflecting what may become a future trend, Shree Cement of India mooted plans to acquire Lafarge's South African operations, yet later labelled the idea as too ambitious.

  • This pattern could cause countries to impose restrictive import quotas - the Namibian government is currently attempting to push through a 60% quota, whilst The East Africa Cement Producers Association have called for tougher regulations and standards for the industry.

  • Saying this, an uptick in domestic production - especially through an increasing investment in clinker production in the DR Congo and East Africa - has seen imports of clinker drop slightly. From January to May, Chinese exports to Africa of the vital limestone input dropped 20.5%.

  • Huge downside potential is presented by SSA's underdeveloped project finance environment. Conglomerate Dangote is capable of mobilizing the type of capital necessary to expand its operations, yet most producers will experience significant long-term financing difficulties that will inhibit overall capex spending across the industry.

  • A slowdown in China threatens to curtail demand for African commodities. Although we do not see this as a significant threat to the industry as it stands, we highlight that countries whose export sectors are especially exposed to a contraction in Chinese activity may experience notable slumps in demand for raw materials.

Cementing Gains
Dangote Cement, Lafarge WAPCO, Pretoria Portland, Yearly Share Price Performance, % gains (Rebased September 2011)

Steel - South African Slump Over Q212

  • Desp ite a decent Q112 performance which saw ArcelorMittal restart production at its Newcastle plant , a slow Q2 has sent South Africa's steel industry into a relative slump over recent month s . We expect the industry to pick up over the first half of 2013, as a small increase in construction activity pulls up demand, and the mining sector rebounds following the Lonmin saga.

  • Despite Africa ' s considerable resource wealth, the continent ' s iron ore reserves and large quantities of steel alloying materials remain largely underdeveloped. The cost of shipping and producing iron ore has collapsed over H112, and we note that there is little chance of Africa's domestic industry developing for the foreseeable future. South Africa ' s industry will continue to account for around 50% of the region ' s total crude steel production, with only Nigeria, Kenya and Zimbabwe possessing any steel industry to speak of.

Steel Sector Muted
Africa - Major Steel Producers - Production output (Thousand tonnes) / Percentage gain H111 - H112