Dangote Cement could tip the balance to oversupply in East Africa

Plans by Dangote Cement to set up a manufacturing plant in Tanzania have complicated expansion plans for Kenyan firms that have dominated exports of the commodity into the East Africa region in recent years.

The planned cement plant, owned by Africa’s richest man Aliko Dangote, is expected to put an additional 1.5Mt of capacity by 2015, which will plug Tanzania’s cement deficit. Dangote’s cement factory in Southern Tanzania will be commissioned within one year of the launch of ARM’s factory in Tanga, expected in August 2013.

“Going by Dangote Cement’s financial muscle and aggressiveness, an unprecedented battle could be in the offing,” said investment analysts at Old Mutual Securities in a research report.

Dangote Cement’s market capitalisation is about US$13bn or KES1.1trn.

The analysts are predicting that the entry of Dangote Cement will set off fierce competition in the region, considering the financial muscle and aggressiveness of its parent company which is listed on the Nigeria Stock Exchange.

Investors in the cement manufacturing sector are rushing in to benefit from the soaring demand presented by the swelling infrastructure projects by governments and steady growth of housing development by the private sector.

Lake Cement, another manufacturer, is also constructing a plant in Tanzania which is expected to be completed next year with a production capacity of 0.5Mta.

Kenyan cement makers emerge as the most exposed in the changing market, since the country’s production capacity has been running ahead of consumption for over a decade with the excess supply sold in the regional markets.

Old Mutual projects that the East African region will face a situation of excess supply by 2015, with the entry of new players and further capacity enhancement by existing producers, leading to downward pricing pressures.

“This is expected to result in downward pricing pressures more likely to benefit consumers in the East African community, simultaneously raising concerns about the long-term profitability of the industry.”

Industry data shows that the annual oversupply exceeds 500,000tpa over the last five years, but the figures look set to rise sharply with the commissioning of the Savanna Cement’s 1.5Mta capacity plant in Kitengela in August 2012.

Pradeep Paunrana, the managing director of ARM Cement, says that Kenya’s export markets were likely to shrink owing to fresh capacities in the regional markets forestalling pricing wars among the local firms.

“Yes, Kenyan market is heading for over supply with many new plants which import semi finished cement (clinker) and grinding and packing locally,” said Mr Paunrana, whose firm has operations in Tanzania.

“The new supply of cement will be matched with the increasing demand for Tanzania where cement consumption is growing by about 10 per cent annually,” he added.

Mr Paunrana said that Dangote Cement’s plant would take between four to five years to complete, based on his experience, meaning that ARM’s plants in Dar es Salaam and Tanga would be cushioned from excess supply.