explosive growth

Middle Africa Insight Series | Commodities | Cement Middle Africa’s cement sector: explosive growth Highlights 

Middle Africa’s cement sector is undergoing the strongest period of sustained growth in its history, with multiple investments across the region to boost production capacity .

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The region produced 116mn MT of cement in 2013, led by Nigeria, South Africa & Ethiopia, while Angola is emerging as Centra l Africa’s cement production hub.

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Cement demand has risen at a rate of 5% per year over the past decade, with the four largest economies, Nigeria, South Africa, Angola & Ethiopia, consuming a combined 68mn MT in 2013.

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Rising capacity has driven a sharp drop in cement imports, notably in the largest consumers, Nigeria & Ethiopia, which are poised to become major exporters in their own right.

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Nigeria’s Dangote Cement is at the forefront of transforming Africa’s cement sector, with an aggressive expansion plan aimed at boosting capacity in Nigeria and across Middle Africa.

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Its closest competitors are Lafarge/Holcim, which have a strong presence in West, Southern & East Africa, and Heidelberg, whose operations are concentrated in West and Centra l Africa .

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The outlook for Middle Africa’s cement sector is promising, given the strong economic outlook, long-term demographic growth and rising urbanisa tion, all of which will boost demand.

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But the sector remains vulnerable to overcapacity and rising production costs resulting from the dependence of producers on imported fuel to power their plants.

Middle Africa’s cement output is surging Middle Africa’s cement sector is undergoing the strongest period of susta ined growth in its history, with multiple investments across the region to boost production capacity. On a global scale, Sub-Saharan Africa is a marginal cement producer, with output estimated at 116mn MT in 2013, just 2.9% of the world total. This reflects years of underinvestment and unused capacity, reflecting high production costs which made the sector uncompetitive with cheap imports from the global market. But this situation is changing as the cement sector is undergoing a transforma tion which will dramatically expand its capacity over the next decade. Sub-Saharan Africa’s cement sector is highly fragmented, reflecting the fact that limestone deposits—the key ingredient in cement—are common across Africa. Countr ies lacking deposits must import clinker (semi-processed cement) and grind it locally into cement in order to reduce costs. Given cement’ s bulkiness and weight, it is costly to transport, particula rly across Africa where road networks are poorly developed. As a result, most cement plants sell their output within a 300km radius and have an operational capacity of no more than 1mn MT per year. Cement production in Sub-Saharan Africa therefore tends to be concentra ted around the main economic hubs in West, East and Southern Africa. Within the last two years Nigeria has emerged as the continent’s indisputable giant, with total capacity of 28.3mn MT /year, around one quarter of SSA’s cement production capacity (Table 1 & Chart 1, next page). This has enabled Nigeria to eclipse the region’s historical leader, South Africa, which produces 19mn MT /year. Elsewhere in West Africa, Ghana and Senegal are important cement producers, with capacities of 6.7mn MT/year and 6.5mn MT/year, respectively. Given the high level of cement consumption in the region, Senegal and Togo are West Africa’s only significant exporters, with combined exports of 3.9mn MT in 2012. In East Africa, Ethiopia dominates regional output (12.6mn MT/year), having overtaken the historical leader, Kenya (7.4mn MT /year), while Uganda and Kenya are export hubs, exporting a total of 1.4mn MT in 2012. Central Africa has until recently been a marginal producer, with a capacity of 1.6mn MT/year, but this is changing with the emergence of Angola as a major producer, with a capacity of 8mn MT/year, all of which it consumes.

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Middle Africa Insight Series | Commodities | Cement

24 July 2014

Table 1 & Chart 1: Sub-Saharan Africa’s leading cement producers (million MT) & market share (%), 2013

14% 25% 2% 2% 2% 3% 6% 6%

16% 6% 7%

11%

Nigeria Ethiopia Kenya Senegal Uganda Benin

South Africa Angola Ghana Tanzania Côte d'Ivoire Others

Source: Ecobank Research estimates.

But demand is rising rapidly too In tandem with the growth in capacity, Sub-Saharan Africa has experienced sustained growth in cement demand, reflecting real GDP growth averaging 5% per year over the pa st decade. Strong growth in purchasing power and rising investment has fuelled a plethora of infrastructure and housing projects, driving up demand for cement which has been chronically undersupplied in high-growth markets. Cement consumption per capita is significantly below the world average of 500 kg, with the region’ s largest markets in Nigeria (126 kg), Ghana (187 kg), Ken ya (80 kg) and Ethiopia (61 kg) all showing huge potential for growth. This reflects high domestic prices, which have constrained demand. Currently Nigeria is Sub-Saharan Africa’s largest consumer, with an estimated 18.3mn MT consumed in 2013, followed by South Africa, with 12.2mn MT (Table 2 & Chart 2). Together these two countries account for half of SSA’s cement consumption . Angola, Ethiopia and Ghana all consume between 5mn and 6.5mn MT, while Kenya (3.7mn MT) and Tanzania (3mn MT) are East Africa’s leading cement consumers. Table 2 & Chart 2: Sub-Saharan Africa’s leading cement consumers (million MT) & market share (%), 2013

4%

3% 2%

5%

30%

6%

9%

10% 20% 11%

Nigeria

South Africa

Angola

Ethiopia

Ghana

Kenya

Tanzania

Senegal

Benin

Cameroon


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Demographic change is expected to drive up cement demand over the coming decades. Africa’s urban population is expected to rise to 865mn by 2050 and Nigeria, Africa’s most populous country and largest economy, is facing a critical housing shortage, with the need to build at least 18mn additional houses in order to meet current demand. Sub-Saharan Africa’s growing middle class is also driving a boom in the commercial real esta te sector, boosting the construction of shopping malls, hotels and other leisure and hospita lity projects. Given these factors, Nigeria’s cement demand is forecast to almost double to 35mn MT by 2020.

The region’s cement imports have slumped The rapid expansion of production capacity across Sub-Saharan Africa has led to a sharp drop in cement imports, reversing the deficit that has built up over the past decade . Nigeria, which as recently as 2010 was importing US$500mn worth of cement each year, has seen imports slump to US$139mn in 2012 (Chart 3), while Ethiopia’s imports have fallen by 75%, to just US$43mn over the same period. This reflects the steady tightening of both countries’ import regime s, where the governments are phasing out licences to import cement and encouraging investment in local production. As a result of these policies, both countries are on track to become net exporters of cement in the near future . Imports of cement to Angola and Mali have been broadly stable, at between US$150mn and US$200mn per year, but both Angola and Mozambique are planning to restrict imports as their own cement production rises. Despite the strength of Nigeria and Ethiopia’s cement sectors, several African countries remain dependent on imports, notably Ghana – whose imports rose by 112% between 2009 and 2012 to an estimated US$354mn – Cameroon, Congo-Brazzaville and Burkina Faso, reflecting their limited production capa city. Several large-scale importers – notably Uganda and Togo – act as re-export hubs, exporting their surplus to neighbouring countries. The majority of imports come from South and South-East Asia; in 2011 Kenya and Tanzania imported 1.9mn MT of cement, mostly from South Asia, while South Africa imported 1.1mn MT in 2013, mostly from Pakistan. Middle Africa’s exports of cement are on a smaller scale, with total exports of just US$700mn in 2012 (Chart 4). Senegal and Togo have historically been West Africa’s leading exporters, and in 2012 exported a combined tota l of US$360mn. In East Africa , Uganda, Kenya and Tanzania are the key suppliers to East and Centra l Africa – comprising both domestic production and re-exports – while Zambia is a major supplier to Central Africa (notably the DRC). However, the dominant exporters in both West and East Africa are set to face major competition from emerging production hubs in Nigeria and Ethiopia, respectively, which could flood the sub -regional market with cheap cement and potentially drive some of their competitors out of business. Chart 3 & 4: Leading African importers (left) & exporters (right) of cement, US$ millions 1,600 1,400 1,200

1,000 800 600 400 200

0 2008 Ghana Nigeria Congo

2009

2010 Angola Cameroon Burkina Faso

2011 2012 Mali Uganda Togo

Sources: Intracen, Ecobank Research.

Dangote Cement is leading expansion of cement production Nigeria’s Dangote Cement is a t the forefront of transforming Africa’s cement sector, with an aggressive expansion plan aimed at boosting production capacity in Nigeria and across Middle Ecobank Research | [email protected] | Twitter: @EcobankResearch

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Africa. Dangote’s strategy is to establish itself in Africa’s underdeveloped markets before its multinational rivals, drawing on its financial firepower and manageable debt levels, in order to capture high cement prices before a potential glut sets in. The company’s 20.7mn MT/year capacity has made it the giant of the Nigerian cement sector, commanding a 62% mark et share (Table 3). Moreover, the group is investing in two new 3mn MT /year lines at its Ibese factory, and a 3mn MT/year line at the Obajana factory , which will be commissioned the end of this year, bringing total capa city to 29mn MT /year. Dangote is also investing in export terminals in Nigeria which will ship clinker to regional grinding plants by Q4 2014. Using profits from its Nigerian operations—Dangote Cement declared a 40.6% rise in its 2013 pre-tax profit to US$1.21bn—the group has injected US$4.7bn into expanding its presence across Middle Africa, with the aim of adding 55mn MT/year of integrated grinding & import capacity in 14 countries. The group’s aggressive investment strategy underlines its ambition to become the leading pan-African cement company, operating in every region of the continent. In West Africa, Dangote is building an integra ted plant with 1.5mn MT /year capacity in Senegal that will be commissioned in 2014. This will challenge the current market leader, Sococim (the subsidiary of France’s Vicat), which has a 65% market share, and Ciments Du Sahel, with the remaining 35%. Dangote is also building a 1.5mn MT/year grinding plant in Côte d’Ivoire that will use imported clinker from Senegal and Nigeria, with a commissioning date of Q2 2015. In smaller markets, Dangote plans to build import terminals in Sierra Leone with a 700,000 MT /year capacity, starting in Q4 2014, and potentially in Liberia and Ghana, which will also have a grinding unit. Table 3: Sub-Saharan Africa’s leading cement producers, 2013 Company

Production capacity (millions MT) Countries of operation in Sub-Saharan Africa

Dangote Cement

20.7

Nigeria, Benin, Cameroon, Senegal, Côte d’Ivoire, Sierra Leone, Liberia, Ghana, Congo-Brazzaville, Ethiopia, Kenya, Tanzania, Zambia, South Africa.

Lafarge

19.5

Nigeria, Cameroon, Benin, Kenya, Uganda, Tanzania, Malawi, Mozambique, Zambia, Zimbabwe, Botswana, South Africa.

PPC

18.0

South Africa, Botswana, Zimbabwe.

Heidelberg

6.7

Sierra Leone, Liberia, Ghana, Togo, Benin, Gabon, Tanzania.

Afrisam

5.8

South Africa, Botswana, Lesotho, Swaziland, Tanzania.

ARM Cement

5.5

Kenya, Tanzania, Rwanda, South Africa.

Sococim

4.2

Senegal.

Holcim

3.0

Côte d'Ivoire, Guinea, Nigeria, Tanzania, South Africa.

Derba Midroc Cement

2.5

Ethiopia.

WACEM

2.0

Togo, Ghana.

Total

670

100%


Dangote’s strategy of satisfying Nigeria’s under-supplied market and exporting excess output to the sub-region is also driving its investment in Central and East Africa . In Cameroo n, which has a capacity of 1.6mn MT/year and consumption of 1.5mn MT/year, Dangote plans to commission a 1.5mn MT /year grinding plant in Q2 2014, which will export its surplus to Cameroon’s landlocked neighbours, Chad and the CAR, as well as to Gabon. In a ddition, a planned 1.5mn MT/year integrated plant in Congo-Brazzaville, which could be operational by Q2 2016, will target both the domestic market – where consumption stands 900,000 MT /year compared with production of just 200,000 MT – a s well as markets in A ngola and the DRC. In East Africa, Dangote is building a 1.5mn MT/year integra ted plant in Ethiopia, and a 3mn MT/year integrated plant in Tanzania, while it is considering a 1.5mn MT/year integrated facility for Kenya (provided it can source good Ecobank Research | [email protected] | Twitter: @EcobankResearch

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quality limestone deposits). And finally in Southern Africa Dangote is building a 1.5mn MT/year integrated plant in Zambia, and has commissioned an integrated 3.3mn MT/year plant in South Africa, which will challenge existing factories owing to its lower opera tional costs.

Lafarge and PPC are Dangote’s key competitors Dangote’s key competitor in Middle Africa is France’s Lafarge, which recently announced a tie -up with Switzerland’ s Holcim, giving the new company a combined global capacity of 427mn MT/year. The two companies compete in Nigeria—Lafarge has 7.5mn MT/year of capa city with its two subsidiaries, WAPCO and Ashaka Cement, and over 70% ownership of Unicem with Holcim—but Lafarge is more dominant in East and Southern Africa where it is among the top three producers. In Kenya, Lafarge owns 59% of the market leader, Bamburi Cement, and 42% of the third largest producer, East Africa Portland Cement (EAPCC). In Nigeria, Lafarge is expanding capacity at its 900,000 MT/year Ashaka Cement plant to 2.5mn MT /year, and it is doubling its 2.5mn MT /year Unicem plant to 5mn MT/year, bringing total capacity to 18mn MT/year by 2018. However, plans to expand capacity at EAPCC are unlikely to proceed owing to a dispute with the Kenyan government, EAPCC’s other major sha reholder, which is pressuring Lafa rge to reduce its stake in EAPCC, citing concerns over competition. Middle Africa’s other leading cement multina tiona l is Germany’s Heidelberg, whose operations are concentrated in West and Central Africa. Heidelberg’ s larges t market is Ghana, where it is the dominant player through its subsidia ry Ghacem, which ha s a 3.6mn MT/year production capacity. Heidelberg is adding 800,000 MT/year of capacity to its 1.4mn MT/year Takoradi plant, which should raise the compa ny’s total capa city to 4.4mn MT/year by the end of 2014. Heidelberg is also building a 1.5mn MT/year clinker plant in Togo, in addition to a 200,000 MT/year grinding plant, and it is entering Burkina Faso, which currently imports all of its cement, where it will build a 600,000 MT/year grinding plant. South Africa’s Portland Pretoria Cement (PPC), is the other significant African player in the sector, with a dominant position in its domestic market. Given the impending surge in cement production, fuelled by the entry of Sephaku (a JV between South Africa’s Sephaku Holding and Dangote Cement), PPC aims to increase its sales outside South Africa to 40% of its tota l earnings by 2017, up from the current 22%. In line with this strategy, PPC has acquired a 50% stake along with South Africa’s Industria l Development Corporation (SAIDC) in Ethiopia’s Habesha Cement, which will build a 1.4mn MT /year cement plant in Ethiopia. PPC has also acquired a 51% shareholding in Rwanda’s Cimerwa, and plans to raise the company’s production capacity from 100,000 MT/year to 600,000 MT/year. In Central Africa, PPC is investing US$230mn in a 1mn MT/year production plant in the DRC, where demand remains constrained at just 16kg per capita. In addition to the leading pan-African cement players, several smaller players have a significant share of certain regional markets. In East Africa, Kenya’s ARM Cement holds the second largest market share in the domestic market, with 1mn MT/year capa city, and it is looking to expand its grinding plant in Tanzania, which has a capacity of 750,000 MT/year, with a new 1.2mn MT/year clinker plant. Ciments de l’Afrique (CIMAF), the subsidiary of Morocco’s Addoha, is also an active player in Francophone West and Central Africa. The company aims to build cement plants w ith production capacities averaging 500,000-1mn MT/year to complement its investments in real estate and subsidised housing, which are its core businesses. In addition to projects launched in Guinea, Côte d’Ivoire, Cameroon and Gabon, the company also inte nds to enter Burkina Faso, Mali, Congo-Brazzaville and Ghana.

The outlook for the cement sector is promising, but with risks The outlook for Sub-Saharan Africa’s cement sector is promising, given the positive economic outlook, long-term demographic growth and rising urbanisa tion, all of which will boost demand. However, Africa’s cement producers could face serious challenges to their competitiveness and commercial viability. Perhaps the most significant is the risk of overcapacity following the wave of investment in new plants over the next five years. Nigeria’s production capacity is 10mn MT/year higher than the country’s consumption, and this surplus is likely to surge over the next two years in line with Dangote’s expansion plans. Although South African d emand for cement Ecobank Research | [email protected] | Twitter: @EcobankResearch

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rose 5.3% in 2013, to 12.2mn MT, this is significantly short of its current capacity of 19mn MT/year. Ethiopia is also facing a rising surplus, with production surging to 12.6mn MT for the year to June 2013, while consumption has lagged behind at just 5.4mn MT/year over the same period. Moreover, the government has set an ambitious production capacity target of 27mn MT/year by 2017, but it is unlikely tha t the country can generate the 52.5% growth in annual demand required to keep pace with output, despite plans to implement several large-scale infrastructure projects. Should all the expansions in production across Middle Africa go ahead, the market could quickly become satura ted, calling into question the viability of large-scale cement exports from Nigeria, Ethiopia and South Africa. SSA’s cement sector is also vulnerable to rising production costs, which are among the highest in the world. Given Africa’s poorly developed power networks, cement companies depend on costly fuel imports for power generation, exposing the sector to volatility in international energy prices. The situa tion is acute in Nigeria, where fuel and electricity typically account for 70% of production costs, compared with the globa l average of just 30%. High energy costs reduce the competitiveness of locally produced cement, especially when compared with cheaper imports from Asia . Such imports have already resulted in a 30-40% underutilization of cement production capacity in Angola. Despite the risks, it is clear tha t Sub-Saharan Africa’s cement sector is undergoing a dramatic transforma tion, led by Dangote Cement. The company’s strength comes from its lucrative Nigerian business, where margins exceed 25% thanks to the government’s ban on cement imports as pa rt of its successful backward integration programme. Once the company’s expansion plans are complete, Dangote Cement will boast production capacity of 55mn MT /year, far outpacing the current leader in Africa, Lafarge/Holcim, which is expected to undergo major restructuring as the new entity attempts to restructure Lafarge’s significant debt pile. Dangote’s strategy of scaling up production of clinker at integra ted plants served by plentiful limestone resources (for exa mple, in Nigeria and Senegal), exporting this to new g rinding facilities in under-served markets (for example, in Cameroon and Côte d’Ivoire) and then exporting surplus cement to landlocked countries, will allow the company to build a dominating market share in under-supplied markets, as well as help unleash latent demand in these countries.


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