Kenya: cement makers gamble on growing demand

Kenya: cement makers gamble on growing demand

Cement makers in Kenya are hoping demand from the housing sector, infrastructure and exports will sustain steady growth in consumption of the commodity in the local market.

Despite reports of a slowing real estate sector, manufacturers say consumption of the cement increased in the 1Q12, driven by the other two segments. "This is driven mainly by three sectors: housing, infrastructure and exports. Overall consumption from these three sectors did increase in the first quarter," said Surendra Bhatia, deputy managing director of Athi River Mining (ARM).

Cement producers are now eyeing to tap the wider East Africa region where per capita consumption of the construction commodity is still low at 60kg.

Consumption in the East Africa region grew by an estimated 14.4% to 7Mt in 2010 mainly due to increased expenditure by governments on development projects and donor-funded projects.

Kenya’s cement production currently stands at 2.2Mta. Analysts expect competition for market share to pace up as cement firms increase capacity to tap demand and as new entrants debut in the market. It is estimated that Bamburi Cement, ARM and East Africa Portland Cement (EAPC) control a 40, 20 and 10 per cent market share, respectively.

However, Alterior Research in an independent equity research report says Bamburi's market leadership is likely to decline as other competitors have announced capacity expansion to respond to demand. ARM is expected to continue its regional expansion with a total capacity target of 2.6Mta in Kenya, 1.5Mta in Tanzania and 100,000tpa in Rwanda. EAPC is also expected to finance expansion with its boosted cash reserves after limiting its 2011 dividend payout to 8%.

Demand in East African economies is expected to grow by a compound annual growth rate of 8% by 2017, according to Frost & Sullivan. "We believe infrastructure development projects and real estate would be the primary driver of this growth propelled by rising urbanisation and increasing demand for housing," said Fabrice Yanou, head of equities at Alterior Research, in the report.

Data from the Kenya National Bureau of Statistics shows cement consumption in Kenya surged 12% in the nine months to September 2011, reaching 254,000t from 226,000 t in 2010. Consumption in Kenya however slipped in the 4Q11, attributed to a slowdown in housing construction as economic pressures weighed down on builders.

KNBs data showed consumption fell by 3.6 per cent to 280,071t in December from 290,413t in November. The value of building plans approved by the City Council of Nairobi for residential construction also fell to KES12.5bn in December.

Prices of the commodity are nevertheless expected to remain stable as competition increases from new players, increased imports and as existing players boost capacity. Macroeconomic stability will however affect pricing. "Prices are a function of two things: production and distribution costs. If energy prices remain stable, our costs will be predictable and vice versa. Nonetheless, pricing is now competitive in Kenya – it's probably cheapest in the region," said Mr Bhatia.

Alterior Research said: "In our view, higher power prices, inflationary pressures and distribution costs will continue to hinder performance and future prospects in the Kenyan market."