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Growth & opportunity in Africa – what does history tell us? Tony Hadley, Baobab Advisory (France)

Filmed at Cemtech MEA 2015, 8-11 February, Grand Hyatt Dubai, UAE

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Okay, good morning! So, we had Yuri looking a little bit of what the future looks like so I thought it might be interesting also to look back in the context of how we see Africa going, Yori told us it's going to increase by five fold between now and 2040. So there is sort of, the way I've chosen to look back is to have a look at how North Africa evolved over the last 40 years, and what that might mean to us.

So, I saw a couple of comments recently on Egypt. What it said, "Cement manufacturers hope cement demand will improve in Egypt." I think if you're in business, hope is probably not good enough as a lever for making your future profits, and the second point that, "Cement prices are largely affected by the lack of gas supply," I think that's also true, also affected by the crisis.

So I think, let's have a look, a little look at, should one invest in African cement? So in order to do that, we look at North Africa which is in a different position, a very much more mature position than Sub-Sahara. And if we look at the evolution of kilograms per capita over the last 20 or 30 years, we see we have had a phenomenal run-up.

It's not been smooth, there was a pair of stagnation in the 90s, and then an amazing run-up to where we're looking at 670 kilograms per capita average which is a very respectable amount, and if you compare that to Africa where it's probably around about a 100, it shows there's a great deal of potential. And Yuri earlier put up his famous slide on the evolution of markets.

I'm sorry, that's not very well focused, but each one of those dots represents a year in time and each one of the colors is the respective markets, and so if we look, there are two very distinct sets of markets. The emerging markets where you see all of those dots just going up almost vertically, and this is GDP per capita by kilograms per capita, and the developed markets where one sees a mess of dots going in all sorts of direction.

So, we need to take care when we get near the top there. So, if we just look a little bit more specifically, MENA while right up there, right at the top, almost 700 kilograms per capita. Eastern Europe had a good run up, Former Soviet Union, good perhaps not so smooth. South East Asia, amazing run up and right down here at the bottom, we see India and Sub-Sahara and Africa where barely on the off the starting grid, but doubling in the last 20 years, but barely off the starting grid at 100 and something kilograms per capita.

So this is what I call an insurance policy and maybe I should just sort of say that this presentation is rarely looking as a cement company, or as an investor in what should you be doing. Because ultimately, we are all here working for some business or other, aiming to make money, and a return on the shareholders investment which is sometimes forgotten in cement, I should add.

So, this is our insurance policy, growth becomes our fundamental insurance policy if we choose to invest in Africa. It's never going to make money, because as all insurance policies, it comes with some exclusions, some small prints. So, MENA has been a beautiful 30 year ride for most people and we're going to have a look at that what it means in terms of the context of Africa, and you still need to know when to get in there and when to get out, what markets to go in, what markets to void, and I think portfolio management is not a popular a thing.

Big companies don't like portfolio management, it's got a big HR issues, at the same time, it's very important and I think you can focus all you want on the micro and cement, but if you don't get the micro right, you'll never make money, and you only have to look at Cemex, Holcim, Lafarge, Heidelberg over the last few years, their big investment decisions have pretty much bankrupted their companies are brought in close to it.

So, let's have a look at some history. The way I chose, look at this, it says, through North Africa and let's look at the volume history, in this case Morocco, we look 1960 out to 2010. So you see growth from less than a million tons in 1960 in Morocco per year up to around about 14, 15 million tons at the moment and in fact, it's been coming off the top now. And I think the other interesting way that I looked at this was here, in each one of the 10 year periods, what has been the overall volume increase, what was the worst year, and what's the best year, and then what is the consumption per capita in the last year, and don't forget there's population increase, so the increase in volume is not the same as the percentage increase and per capita.

And, so if we look at Morocco, we see a couple of very, very good decades then a couple of decades were, let's say, it's largely platformed, and then the last decade, it took off again. We still have the per capita of less than that of the average Middle East by quite a low. Is it at its peak? We will look at that in a second.

The other important message as you see the next three or four slides is to look at this, in these great times, super, super growth, you look at the worst year and the best year. So, in the high growth periods you nearly always see negative years and some amazingly, they've got, look at that, almost 30%. So, let's look at just a couple of comments on Morocco. So, the market's certainly picked, it's been coming off, is that the end of Morocco's is a great market time will tell.

So, in fact in 2011, it was over 500 kilos per head, and it has now come down to about 420. And what happened, a new investor came in, built two new plants just a few years ago, so this over capacity pricing tension and in fact, the new investor has actually set up a network of a grinding stations along the West-African coast in order to get rid of the access clinker. Is that good economically?

Perhaps not, and I think if we look at the share price, all you can say is, as a share investors or shareholder it's a matter of timing of when you buy and when you choose to sell. So, Morocco, a slow build up. If we look at Algeria, same concept. We're looking at a 10 year period. Some amazing growth, 20 years of pretty much stagnation, the last decade very strong, and their forecasting, a reasonable, last few years and next few years, getting up to regain forecast for 2020 something like the Middle Eastern, North African average, but again, you look at the volatility in terms of positives and negatives.

So, is Algeria at its pick? One has the question. It is still importing. There's still some big capacity projects, but again as an investor, I'd probably be dancing fairly near the exit. So, Egypt, we're going to spend a little more time on Egypt, because I think it's perhaps the most interesting and it's been going through some difficult years as you're probably all aware.

But again, we look at Egypt, 1960, it was a million tons, today, we're at 50 million tons more or less. So, I'd say things started to get moving in the 70's. We've seen big ramp up, a plateau, big ramp up, a plateau, and now another big ramp up, and again the same trends, always negative years, and always some very strong gears, and we've arrived at a per capita of over 600.

So, I think Egypt is very interesting. Obviously, it's a market which probably many of you know quite a lot about. But I think it's also a very volatile market, it's been a profitable market throughout all those years. What I would challenge though is the time to have left Egypt was probably five, six, seven years ago, before the current turmoil. It's a market where the government has always had quite a lot of impacts and playing around with the markets, big exports, clinker, cement, drops off very rapidly, government put price caps in, increase export duties, add a export ban, remove the ban, allowed imports, and Egypt's prolonged like many governments here gave very, very cheap energy to their cement plants.

I personally think cheap energy or subsidized energy to cement industry is very, very bad strategy from the government, because it makes the false investment decisions, it makes for bad performance management, and I think strategically it's very wrong, and as investors in Egypt with this volatility, it makes life very difficult.

At the same time, the government very much a policy of trying to bring in new entrance. So, selling licences, sometimes those licences are quite expensive and playing politically, so either the military or government themselves building cement capacity in order to encourage some competition. And finally, the government got into increasing energy prices, they were suffering from gas shortages, fuel shortages, so they increased energy prices, reduced supply of energy, there's obviously been the Arab Spring which created a lot of turmoil, a lot of insecurity, and I think in reality, what we've seen is the recent government policies have created, the government policies plus the political situation have created a lot of turmoil, and that's actually what's saving the Egyptian cement producers at the moment, because one of the consequences of cheap energy is no one bothers to optimize their plans.

They don't optimize their fuel consumption, they also don't optimize their extension ratios, and Egypt has what I call latent cement capacity, in other words, it's got a lot of clinker but the extension ratios are not that high. So, if the clinker cost is much higher because of your energy cost, then you're going to push as hard as you can to increase your extension ratios.

And as an investor there, as a cement player there, the market structure is not great. You've got a whole bunch of internationals, you've got local players, local investors. So, there's still a government company there, there's a military plant. Even today, the government is talking of licenses and trying to look at new entrants, Asec recently commissioned a plant from there, I think there was a discussion going on somewhere the worst possible cement timing to open a cement plant.

So very, very big changes in Egypt, certainly those years of the last 30 years as an investor there, you had the insurance policy, growth was a new insurance policy. So when too much capacity came in, you might have a bit of tension in the market, some temporary price wars in the market, but it would pretty much, the growth would take that tension out as would exports, but clearly, a government exporting cement with subsidized energy is exporting a subsidy.

So again, strategically from a government's point of view, pretty stupid, very, very stupid. So I think we put these in the context of, sorry, wrong one, sorry, just to wrap up on Egypt, should you invest in Egyptian cement? I just took the share prices of a few listed Egyptian cement companies. Very, very different volatility, very, very different trends, but fundamentally as an investor, probably not been a very food time in the last 10 years despite the fact we've seen the market growing a lot.

So just take the macro picture of a country and take care. So if we look, Morocco gradual build up, very good market, beautiful profitability for many, many years, then as it's reaching the peak, new entrants coming in, market comes off, and clearly a less attractive place to be operating as a cement company.

Algeria, still on the way up, large imports, but relatively complex market to function in, and very, very cheap energy in Algeria as well, and in Egypt, it's been a very, very good run, but if you were a cement company with the portfolio management point of view, you probably would have been selling out of that towards the end of 2007.

So, that's the sort of context of history that we perhaps wanted to think about. We are going to have a quick look at Africa last year. Again, I think it's important to remember because it's mixed audience here, people with technical cement plants, consultancy, etc. So we are looking at this from investor point of view, from suppliers point of view, looking at how things, where the clients want to put their focus, what's important for them, and also clearly, from cement companies which may as an investor or maybe purely as a cement company.

So, we better start with the biggest place, Nigeria. So I think Nigeria has been a lot in the press recently, it's a lot in the press at the moment with the election, with Boko Harem, with the oil price, so hell of a lot happening last year in Nigeria, and going into this year. What are we seeing, Wapco which was just a standalone company in Nigeria, Lafarge subsidiary with basically two plants has integrated the South African aspects of Lafarge and it's integrated only Nigerian assets.

So I think that's very interesting. It's obviously got some challenges, at the same time I think it's finally one of the benefits of the merged Lafarge and Holcim is now fraying up, that means they can start to spend some money, so we've seen Ashaka announces significant increase, 3 million tons,

you've seen Unicem announce the doubling to 5 million tons. So, finally some action coming out of the Lafarge camp during the last year. There's been probably follow that some changes in the standards in Nigeria where they kind of banned 32.5 except for plastering. So I think the standards organization in honesty has lost the plot of it. There's clearly some strategic positioning behind this decision, but it's raising a lot of questions and as a player in Nigeria, it's obviously causing some real challenges, if suddenly you're told you need to produce 42.5 for most of your sales.

I thought maybe just a flash from the Nigerian government, they issued their budget for next year, for this year sorry, and it's looking very rough, capital spending is going to drop dramatically, obviously the oil price is continued to come down, so the government is progressively reduced their budget expenditure or budget forecast, so I think it's going to be very tough, and the government announced increase in taxes, aggressive tax collection, and so I think we're going to see two very, very rough years in Nigeria. It's going to be very, very tough and I think, if you think it's going to be very tough, the end of 2014, so last year the market was about 21 million tons. The capacity, the end of 2015 is going to be round about 38 million tons. So you can probably work that out, that's 60% capacity utilization more or less, and is as always other projects in the pipeline more capacity in the pipeline.

So I think you're going to see Africa's largest market have quite an interesting time. There was also last year some very volatile pricing, there was a price drop announced in November that obviously hit the market like an Exocet, big, big noise, share prices collapsed. A few weeks later, the price was put back and in fact increased, but that major share price crash, you can see that the evolution of the share prices over the year, pretty significant drop.

Now the overall Nigerian markets dropped but the crash in prices, you can speak, in November, boom, boom, boom, coming off by round about at that point in time 40%, 50% share price, sorry 30-40% share price drop at that time, and clearly, it is not recovered despite the fact immediately after that the price went up higher, so in reality the profits is going to be better, the investor confidence has been lost, ends with the general weakness in Nigeria things are negative, so I think it is going to be very interesting to watch Nigeria over the next year or two. And maybe sorry, just to dwell on Nigeria to go back to the sort of Egyptian story, I think Nigeria long term is going to be a great market for cement, it's got a very good market structure, but with that massive over capacity, the insurance policy is not going to kick in for a little while, maybe three, four, five years out.

We look at a few other markets, I think Senegal is interesting just because there is again a new entrant coming in with extra 1 million ton, it's Dangote. A 3 million ton market where we have already got 6 million tons of capacity, so this clearly, there has been price tension even before the market entry, and so what's going to happen with another million tons coming into a three million ton market? So I think Senegal is going to be a market to watch, and it's got two major players and now that Dangote coming in there.

People talk about exports providing a safety net but I think one thing which is common in most of Africa, is there are imports where imports aren't necessary, but exports be it clinker or cement are exceedingly tough because the logistics is difficult and the African cost base is very, very high from an energy point of view and from a general service and support point of view.

So I think Senegal is going to be quite a tough market over the next year. Cameroon, another one which I think is interesting to look at. Cameroon has been long dominated by Cimencam which is the Lafarge subsidiary, but following the Ashaka gone up acquisition, Lafarge obviously had no capital to invest, so we saw the Cameroon market continue to grow very dramatically and imports take over, so it got to a position where 50% of the market almost was on the imported bags.

So, two new entrants have come in or are coming in. CIMAF, the Moroccan we talked about earlier, it opened the grand extension last year, ran about half million tons, and Dangote's commissioning a running station in Douala in early 15. So, we're seeing a situation with very crowded Douala, so everything coming in there into grinding stations, there's no integrated capacity, and a tiny plant in the North, but I think one has to look here, this is actually Ashaka in North East Nigeria where they're increasing their integrated plant to 1.2 Million tons and building three million tons, it's been confirmed.

So I think the Cameroon market has shown that, as an investor if you don't follow the market and get ahead of the game, you are going to get a lot of new capacity coming in, but again, I think fundamentally, if one looks at what the growth potential, I think here very interesting, and I think the market will be good, and I think the other point which is quite interesting, in most of Africa we are seeing this, governments banning imports. So as soon as it gets to a self sufficiency point of view, the government will ban imports because imports in cement are always dumping, they're are always marginal capacity. So, the governments have every right and they've right to ban imports in the case of over supply locally. South Africa, so I think South Africa has been again 2014 was a very interesting year, highlighted by PPC, there was a very messy departure of the CEO, a lot of news in the press, very uncommon for a big listed South African company. It leaves some doubts that we've been very aggressively moving into sub Saharan Africa with project Zimbabwe, DRC, Rwanda, Ethiopia, Algeria, and so a lot happening there and again, we've had of a merger we'd never would have dreamed of Afrisam proposing a merger with PPC, and this fundamentally, this Sephaku, again a new Dangote company coming into the market with an integrated plant, and all of the with that, big changes in the industry dynamics.

The Sephaku plant will have more or less half the energy consumption of the PPC plant, and we are not going to see much growth. So I think South Africa is going to be an interesting the market this year, Sephaku coming in. You don't have that insurance policy of growth and the investors are not stupid, so if you look at PPC share price over the last year, it's off by almost 40%, sorry, that's a long that's 2009.

So I have to speed up. Really one message on East Africa, if you look at that slide, it's a very crowded slide. That is East Africa, it's very crowded with grinding stations less so with clinker, so I think the real big question is who is going to provide clinker, first sufficient clinker, but again I believe long term, the insurance policy will kick in here, and East Africa some will be great market for some mine companies.

So, I felt also we should just touch on Ethiopia. Again, everybody say it's different, is it different? It's a great potential but the governments, and again we must always remember that insurance policy comes with small prints, and the government is always in the small print. The government can be our friend and it can be your enemy.

In Ethiopia, I think they were clearly the enemy and they got everybody to invest this, we need 25 million tons capacity, everybody built, we've seen the price come down dramatically when mid drop commissioned, it dropped to this, and I was talking today to someone who's saying, it's now $85 per ton. As an investor, pretty horrible times and that's the spike of market having grown from 800,000 to, different people will give you different figures, but say 4 million tons in period of 10 years. But again, what do you see? A hell of a crowded environment.

Those are all, more or less companies cement companies in Ethiopia. So there, maybe your insurance policy will kick in but you want to really look carefully small frame. So I think to wrap up, history tells us that if you are in a market where you are on the start of a growth period, you've got a great insurance policy.

That will forgive an awful lot of strategic mistakes by investors even by governments, but you do need to be careful. Get your strategic positioning right, understand governments and how they are likely to behave, because there're some markets you just don't want to go into. Who are going to be your competitors?

What is the competitor? What is the mindset of the investor, the cement company? Are they going to behave like you want them to behave? Because again, in certain countries, certain markets, it can be very difficult to make money because of the mind set, what I call eagle investors, be very careful, but above all, be the best. So if you want up there, you must make sure you are the best, so for the technical people here, I think you are going to see a change in Africa over the next 5-10 of companies rarely focusing on being the best.

There's a lot of mediocre companies out there with very mediocre performance and still doing fine. I think we're in the period now where that's going to become tougher. And what it means is, as an investor if you focus just purely on investment portfolio management, it's no longer the case of go, buy into a market and sit there. If you want to make real money, go in there, be in there for a decent period of time, but be ready to exit. So I think that's my last slide.

Thank you.

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