South Africa’s cement industry is shaping up

The South African construction industry is a major player in the Southern African Development Community (SADC) region, contributing between 80 and 90% of total infrastructure spending. It is the major job creator in the economy, and employed over 1 million people at various skills levels during 2009. Between 2006 and 2009, approximately US$ 128 billion was spent on infrastructure, including associated mechanical and engineering equipment and services associated with power generation. This is more than double compared to what was spent over the previous four years.

The effects of growth

Robust growth in the construction industry has had many implications for the local cement industry. By 2009, the rapidly growing demand for cement put pressure on supply, and this resulted in all players increasing production capacity. By 2009, production capacity increased by 24% to 17.5 million t. The implications of a cement shortage were severe and unexpected. Considering the time and financial commitments required to increase capacity, it is not surprising that there are several plans well underway to increase production by a further 25% in the next three to four years.

The first worth mentioning is the new cement plant in Namibia - the Ohorongo cement project. The roof wetting for this project was held in February 2010 and production is expected as soon as next year. Total production capacity (700 000 t) is expected to fully cater for domestic demand, with sufficient spare capacity to export - at this stage primarily to the southern parts of Angola.

Plans are underway to build the first new complete cement production plant since 1934, by Sephaku Holdings – a listed company on the Johannesburg Stock Exchange (JSE) with a current market capitalisation of R413 million.  Announcements were made of a second new cement plant, also expected to be in operation by 2012, following the signing of a memorandum of understanding between Women Investment Portfolio Holdings group (Wiphold) and limestone miner Continental Cement (Conticem) with Jidong Development Group, China, and the China-Africa Development Fund (CADFund) in May this year.

Market movement

The market shares of the four players (as of 2009) based on production capacity are as follows: PPC cement leads the pack at 43%, followed by Afrisam at 24% and Lafarge at 23%. Cimpor accounts for 10% of total production capacity.

When, or if, all the new pipeline capacity is in production (estimated at 21.7 million t), PPC’s production market share is expected to fall to 41%, Afrisam to 19%, Lafarge to 18%, while Sephaku will account for 10% of total production capacity, and Conticem an estimated 3%.

Market shares, however, are not based on production capacity abilities, but on sales of cementitious products, and the players will now more than ever protect market shares aggressively.

Domestic suppliers are keeping a close watch on these new market entrants, and are mostly of the opinion that competition is good for the country, but also believe that cement demand will continue to grow in the medium to longer term, creating a healthy environment for suppliers to meet consumer needs in the future.

Internationally, South Africa’s prices are competitive, averaging US$8 - 10/50 kg, well below prices in the US, France, Brazil and the UK, and in line with countries such as Kenya, Mozambique, Chile and Spain. This data, extracted from PPC’s annual report, unfortunately does not include the prices of cement trading partners, including Malaysia, Korea, China and Japan. According to this report, South Africa’s prices are roughly 65% more expensive than Egypt.

In terms of product composition, there has been a clear shift in the last two years from 42.5 MPa to 32.5 MPa, now contributing almost 60% of cementitious sales.

Looking to the future

South Africa is in the process of reshaping its future. Structural improvements are taking place in its economy, infrastructure improvements have increased the nation’s economic capacity and will support, not hinder, future economic growth. A few other fundamental changes are also taking place:

a major move towards opening the construction industry to growing opportunities is the Department of Housing’s invitation in March 2010, to invite suppliers of alternative building methods to collaborate later this year. One particular building method - lightweight steel construction - is gaining particular momentum and this will have a future impact on cement.

The growing demand for greener buildings and the use of environmentally friendly materials is taking shape in South Africa and is moulding future demand. While South Africa may be lagging in this department globally, the impact on the local industry will be rapid.

Large industry players, which have a profound impact on the industry, are the targets for the commission and this will affect pricing and price strategies

According to the 2010 budget released in February, there will be a shift from economic infrastructure to social infrastructure over the next three years. The focus therefore will be on ‘smaller’ projects, increasing local competition amongst suppliers.

The outlook for cementitious demand is directly affected by the government’s R846 billion (US$ 112 billion) infrastructure plan, which has been increased by 7% from R787 billion, in a rapidly changing economic environment. A large portion of these allocations is geared towards Eskom’s new power generation and includes non-construction expenses, in terms of machinery and equipment that will not directly benefit the construction industry or downstream suppliers.

A more realistic view of the outlook for the next three years is trying to isolate the construction expenditure from these programmes, and also include an outlook for private sector construction in housing and commercial developments.

Author: Elsie Snyman, Industry Insight, South Africa

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