Sub-Saharan Africa’s cement sector expands despite headwinds

Sub-Saharan Africa’s cement sector expands despite headwinds

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Sub-Saharan Africa’s cement sector is continuing to expand, despite the slowdown in economic growth in key African markets in response to weakening commodity prices. The wave of investment is being led by Dangote Cement, which continues to expand its footprint. Since 2012 the company has invested $5bn in existing and new African cement factories and terminals, increasing annual production from 40 million tonnes to a projected 62 million tonnes in 2016.

Dangote Cement’s latest project to come on stream is the $450mn cement plant in Ethiopia, with a capacity of 2.5million tonnes (which could be doubled in the short term). This factory is aimed at plugging a local supply gap as the Ethiopian government is investing heavily in roads, dams and other heavy infrastructure projects.

Dangote Cement is also moving into East Africa with a 3million tonne cement plant in Tanzania, worth $452 million, and a 1.5 million tonne factory in Kenya, worth $300 million. The company’s pan-African expansion will help offset slower growth in Nigeria, where it has a commanding market share, with 29 million tonnes of installed capacity, around two thirds of the country’s total. However, the company’s Nigerian operations are grappling with significant headwinds, following the collapse of the oil price and the slumping Naira, which have driven up the costs of gypsum, coal and diesel imports.

Dangote Cement’s key rival, Lafarge, plans to double its 8.5million tonnes of installed capacity to 17 million over the next five years. However, Lafarge’s plans to expand capacity at its Ashaka plant from 1 million to 4 million tonnes could be complicated by political instability in the north of the country. Security difficulties, coupled with lengthy rains, led to a drop in the company’s net income to $4.47million in in the first quarter of 2015, down 53.5 percent from the same period last year.

Despite the headwinds facing African countries that are dependent on commodity exports, investors remain bullish over African cement markets, attracted by ongoing strong real GDP growth, forecast to average 4.5 percent this year, rising purchasing power and the development of numerous infrastructure and housing projects. Cement consumption per capita remains significantly below the world average of 513kg, averaging just 187kg in Ghana, 126kg in Nigeria, 80kg in Kenya and 61kg in Ethiopia, which gives considerable scope to expand consumption.

‘This makes Sub-Saharan Africa immensely attractive to cement companies, who are seeking to establish first mover advantage in high potential markets, such as Ethiopia, or to build up capacity and squeeze out rivals in the region’s largest markets, notably Nigeria,’ Ecobank said in a research note.

As Dangote Cement consolidates its footprint across Africa, this will put more pressure on its rivals and is likely to drive consolidation of the sector. The company’s dominating position will be buoyed by its refinery project in Nigeria that is set to begin operations in 2017, which could drastically lower operational costs in its key high-growth market.

Analysts at Ecobank believe that Dangote Cement’s strategy of scaling up production of clinker at integrated plants served by plentiful limestone resources (notably, in Nigeria and Senegal), exporting this to new grinding 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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