African cement escapes the pandemic; structural issues remain
Cemtech's latest webinar discussed Africa's cement sector and the impact of COVID-19 on the continent. Tony Hadley of consultancy THAA, and Erkam Kocakerim, CEO of Limak Afrika SA, covered several areas of concern from the impact of the COVID-19 pandemic on economies and cement demand to overcapacity and competition issues, while also providing a long-term outlook for the continent.
Thomas Armstrong, Managing Editor of International Cement Review, opened the webinar with an overview of the latest COVID-19 data on Africa, which has seen a remarkably low number of confirmed cases of the coronavirus to date at just 111,486 by 3 June.
While COVID-19 has had an impact in Africa, it's been less severe than in many other parts of the world. It is possible that factors such as the young age of the population – amazingly, only three per cent of the population in sub-Saharan Africa is over 65 – has reduced the exposure to the pandemic in terms of health impact.
Cement in Africa
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 approximately 104Mta, and sub-Saharan Africa, which has an estimated cement capacity of 110Mta. In 2019, growth rates were recorded at between 5-6 per cent in central, east and west Africa, while north Africa's cement demand fell by three per cent in 2019.
Tony Hadley added that Africa has seen per capita consumption quickly rise from 40kg to 112kg in recent years. With a billion people in sub-Saharan Africa and an age demographic weighted towards youth, cement producers have been attracted to the region, which has great need for infrastructure and housing.
Mr Hadley argued, however, that the region's rich potential had attracted too many new entrants, which combined with poor local leadership, had thrown the industry into turmoil.
He pointed out that historically, Africa has generated strong profits for cement players. "Pre-COVID-19 cement producers made a lot of money in cement," he explained. "The banks lent money and the turmoil we have seen has largely been self-made, such as lack of performance management, no due diligence and poor leadership." Now the markets have 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."
The new normal
Despite the pandemic, cement and construction sectors have continued to operate with limited restrictions in most African countries. However, demand growth has been softened and the outlook for the region is very challenging.
Mr Hadley picked out Kenya as a market facing great short- and long-term 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 US$32.4/t."
Tanzania is also a market destined for change. It had some plant shutdowns due to COVID-19, but no official lockdown and little testing. The cement sector stood up well in the 1Q20 with a seven per cent rise YoY, supported by government spending on its new capital city. It has seen cement demand dropping in the 2Q20, but prices have remained flat at US$80/t. The real challenge is the dollar shortage for businesses, suggested Mr Hadley, while there is some apprehension of what the Huaxin Cement acquisition of ARM will mean for the cement sector.
In South Africa, the government acted agressively against COVID-19 and since 1 June the industry moved to a Phase 3 lockdown, allowing allowing cement operations to return to almost normal activity levels. Longer term, South Africa is one of the cement markets where serial strategic mistakes have been made by the cement sector. A wave of new entrants and a price war starting in 2013, has left the industry suffering from poor profitability. The cement sector now needs an equity injection, but investors are uninterested as there is no protection for local cement producers from increasing imports. The next challenge will be industry consolidation over the next three years, believes Mr Hadley.
Another large African market that was discussed was Nigeria. It learned lessons from the Ebola outbreak and shut down quickly when COVID-19 arrived in March 2020. The cement sector still had a poor 2Q20 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.
It is difficult to predict exactly what the new normal will be post-COVID-19 in Africa, but Mr Hadley expects "weaker markets and accelerated turmoil". He pointed towards greater protectionism, a rise in M&A activity, possibly with a role to be played by the Chinese, and closures of smaller, uneconomic plants as we see the entry of mega-plants to meet the ultimate growth on the continent.
The markets of Côte d'Ivoire and Mozambique were also outlined by Erkam Kocakerim, CEO of Limak Afrika. COVID-19 impacted these countries in March, resulting in border closures and local travel restrictions in April. From mid-May, Côte d'Ivoire started to lift restrictions on local travel, while Mozambique will continue its State of Emergency until 29 June 2020.
He described Côte d'Ivoire as 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 very competitive and consumption is only at 4.5Mta, while cement prices have dropped by almost 36 per cent 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.
Environmental social governance
The looming challenge for African cement producers is environmental social governance (ESG). Stakeholders, companies and investors are all aware of the commitments that will be needed to reduce CO2. "Those who drive change will be the winners," remarked Mr Hadley. Producers will need to close inefficient and outdated plants and look towards the new, cost-effective factories as well as CO2 reduction measures, such as alternative fuels, clinker substitution and calcined clays.
Turmoil around the corner
While consolidation and overcapacity will have to be addressed, Mr Hadley concluded that the turmoil we have seen in east Africa and south Africa is headed for west Africa. 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.
The next Cemtech Webinar is "Best practice: alternative fuel utilisation in cement plants" on 10 June 2020. Click here to register for this event.
