Cement prices in Kenya have dropped nearly 10 per cent on increased competition threatening the profitability of local manufacturers as property developers face relief from construction costs.
The price of the 50kg bag of cement has dropped to a low of KES660 (US$8) compared to KES730 in December in Nairobi, driven down by increased production arising from new entrants and expansion by existing players.
While easing costs for developers, the move looks set to hurt the margins of the players at a time when they are faced by key rising raw materials including coal and fuel oil, which drive the manufacturer’s machines.
“With the new entrants and additional increase in capacities by existing players, supply outstripped demand leading to market forces to determine the market prices,” said Peter Korir, head of strategy at East African Portland Cement Company (EAPCC). “Pressure is still building on prices as more capacities come on board within the next two years.”
The fresh capacity has come from new entrants such as CATIC of China, Mombasa Cement and Devki Steel while production enhancement by existing players including Athi River Mining (ARM) Company and Bamburi Cement has left the market with excess capacity despite vibrancy of the construction sector.
The East Africa Cement Association estimates that surplus in the market will grow to more than 2Mt in 2012 from 200,000t in 2008.
Prices dropped 10 per cent in the first half of 2009, but the entry of Mombasa Cement in September with a price tag of KES660 appears to have nudged other players to follow suit with EAPCC brands now selling at KES660, Bamburi (KES 700) and ARM (KES 670).
The price drops comes at a time when the players are faced with rising energy costs which accounts for between 35 and 45 per cent of their production costs. This cost outlook look set to squeeze the players’ margins and increase the importance of efficiencies as profit and market share driver.
“Coal prices have increased by more than 45 per cent this year, but increasing prices of cement might take longer due to the multiplicity of players,” said Shah Miti, the managing director of Mombasa Cement.
This will complicate the players’ earnings outlook at a time when they are struggling to maintain their profitability, especially EAPCC and Bamburi.
Portland Cement company made a KES292m loss in the year to June, compared to a profit of KES1.8bn in the same period a year earlier despite growing its revenues by KES1.3bn to KES9.4bn. This was attributed to rising production costs and the price war that saw EAPCC grow sales on the reduced prices, but sacrificed margins unlike Bamburi, which lost market share and revenues as it was reluctant to cut prices by huge margins.