Lafarge refutes Zambian claim

Lafarge refutes Zambian claim
Published: 24 November 2004

The decision to deport Ian Coulter Managing Director of Chilanga Cement is probably motivated by concerns related to the trading arrangements currently in place for the distribution of cement both for the local and export markets. It is probably fair to conclude, therefore, that although state security concerns have been cited  the likely source of the problem stems from competition issues relating to cement shortages experienced in the early part of the year and steps taken by Chilanga to normalise distribution of cement in the domestic market and supply of cement to the export market.

The following is Chilanga Cement’s response to the allegations (see Cemnet story published 23/11/04)

As a general rule, Chilanga sells cement to any purchaser seeking to procure loads in excess of 30 tonnes from its plant at Chilanga and Ndola. Chilanga has no official agents or distributors for the sale of its cement in either the domestic or the export markets.

At the time that the country was experiencing cement shortages in early 2004 and retail prices of the commodity began to rise (even though the Chilanga ex-factory prices remained the same), a cement sales strategy was developed by Chilanga working in conjunction with Zambia Competition Commission (ZCC) whereby a list of retailers that undertook to sell cement at the recommended retail price of K32,000 were jointly selected.

Although every effort was made by Chilanga to meet the local demand, shortages were nevertheless experienced in the market and these shortages
were due to:

(i) the growth in local market demand for cement by over 60 per cent over a period of 3 years.
(ii) production disruptions caused primarily by:
- the breakdown of the cement mill in Ndola in November 2003;
- coal shortages;
- unplanned plant shutdowns; and
- rail transport logistics constraints experienced by Railway Systems of Zambia.

Notwithstanding the above constraints, Chilanga was able to increase its cement production from 309,000 tonnes per annum in 2001 to a projected 510,000 tonnes per annum in 2004 (actual figure for 10 months to October 2004 is 418,000 tonnes) which was primarily supplied to the domestic market.

To meet the increased demand in the Lusaka market, Kiln 3 at Chilanga works was kept operational and has remained operational since 2001. Kiln No 2 (which was inactive at the time of acquisition of Chilanga by Lafarge) was recommissioned in 2002 increasing cement production capacity ahead of the deadline agreed with ZCC. This was made possible by an investment of over US$15 million since 2001 in carrying out major refurbishment programmes for the production facilities at both the Ndola and Lusaka plants.

Generally, cement prices are determined, amongst other things, by volume of sales and the logistics associated with getting the product to market (i.e. the further away from the production facilities, the higher the cost of the product).

However, cement as a commodity, is not immune to external competition and prices in all parts of the country will therefore also reflect the price of competitive products from across the border that do not have similar distance constraints. Prices for the sale of commodities may be lower in one
part of the country than in another to avoid an unnecessary loss of national market share. Such import parity pricing is normal in any country and helps to ensure national competition.

A project committee has been established by Lafarge to carry out the feasibility study of a new cement plant in Zambia with the capacity of over 600,000tpa. This project is expected to bring an investment of over US$1OOminto Zambia.

All sales of cement by Chilanga are ex-works or ex-warehouse and the transportation of product from works or warehouse is arranged or paid for by the retailer/customer.

The bulk of cement production takes place at the Ndola plant although 60 per cent of the total market demand is in Lusaka, necessitating a movement of approximately 150,000t of cement into Lusaka by both road and rail. Both the railway rate per tonne and the road rate per tonne are fixed. In the case of road haulage, however, the rate is fixed on a back-haul basis. The fixed rate takes into account the use of the transporter’s load to take goods in both directions.

Chilanga moves the bulk of the cement that has to be delivered to the Lusaka warehouse by rail because it is cheaper than road transport and transportation by rail enables a much higher single load to be delivered, saving Chilanga costs and providing greater efficiency.

Lafarge as majority shareholder in Chilanga is bound by its undertakings to the Zambia Competition Commission ("ZCC"), to prioritise the domestic market in the supply of cement. Since Lafarge acquired Chilanga, total production of cement has increased from 309,000 tonnes per annum in 2001 to 418,000 tonnes for the first to months of 2004 (with a projected total annual production for 2004 of over 500,000 tonnes representing an increase in production of over 65 per cent since the Lafarge acquisition). During this period the total exports to the Great Lakes Region have actually increased (rather than decreased) from 13,000 tonnes per annum in 2001 to 27,000 tonnes for the first 10 months alone of 2004.

As can be expected, the increased demand in the Zambian market over the years has had an effect on the quantities (in percentage terms) of cement available for export from Chilanga. Chilanga’s policy is to prioritise supply to the domestic market.

As a result of its efforts to create a more competitive and less exploitative environment, Chilanga has had to fight several battles with traders in its years under Lafarge management and these have largely centred on perceptions about anti-competitive behaviour. In order to ascertain whether the source of the current problem might be linked to competition issues, it was considered necessary to meet with the senior management at ZCC.

ZCC also advise that: Chilanga had committed no breach of the Competition and Fair Trading Act. Lafarge had complied with the undertakings made at the time of acquisition of the company even though there had been several attempts in the past to challenge non-compliance.

Lafarge, as the world’s leading producer of cement and building materials has, since the acquisition of Chilanga, been proactive in setting itself up as a world-class Zambian operation. Chilanga has been a catalyst for the development of industries that support the production of cement as well as a major contributor to the economic well-being of Zambia. Corporate tax paid to the Zambia Revenue Authority has also increased from K4 billion in 2001 to K25 billion in 2003. Cement business was a major source of collection of VAT in the country and in 2003 alone, approximately K29 billion was collected as compared to approximately K18 billion in 2001. These figures do not include downstream VAT.

There are currently over 3500 Zambian shareholders and the high demand for Chilanga shares is driving the current market price of KI,500 per share which stood at K200 at the time of acquisition. Although Chilanga has increased dividend payments significantly and in line with increased earnings per share, capital was retained by the company to meet future investment needs. This constitutes a major sign of confidence in the future of Chilanga by Lafarge.
Original report taken from The Post (Zambia).