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A Growth Story: Part One

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Potential investors into Sub-Saharan Africa faced the fear of the unknown, often causing them to hesitate and look upon the continent as a potentially high risk investment location. Political decisions that can alter drastically overnight with a change in government did not help matters. However, the improved focus on enterprise risk management in most developed countries created an environment where the risks could be analysed in a professional and realistic manner, helping companies to make educated decisions rather than shying away from the region based on perceptions alone.

Improving investment climate

Over the past few years, the region has witnessed a surge in economic growth as a result of improved political stability and more focused economic policies. GDP growth has been clocking an average rate of close to 5%, much higher than in many other regions around the globe. Foreign direct investment has been pouring into the region, and now investment in Sub-Saharan Africa seems to be the ‘in thing’ or the mantra for investments with attractive returns. An improved investment climate created by more economically enlightened governments, better legal structures, greater protection for patent rights, etc., have all helped to pave the way for various investment projects, generating employment and increasing the cash available for spending, thereby creating a multiplier effect.

The rush to invest was also aided by a determined thrust from Asia, led by China and India. Indeed, Indian companies are hoping to quadruple their revenue from Africa to US$160 billion by 2025. Last year, China-Africa trade touched US$211 billion – the continent’s biggest trade relationship with a single country – while trade with India came in at US$93 billion. The fact that these countries were not blinkered by political ideologies and were willing to invest in infrastructure in lieu of opportunities for securing raw materials, made them attractive partners in the eyes of the region’s governments and helped to improve trade and investments between Asia and Sub-Saharan Africa. Following this, business conglomerates from developed countries realised that they were being left behind and began to rush in too.

Better fiscal policies and economic management strengthened Sub-Saharan Africa’s banking sector, which again improved the investment climate. Robust economic growth and low banking penetration – two key ingredients that often guarantee strong returns – made the region an attractive location for bankers. Pension funds, sovereign wealth funds and investment bankers from Europe and the US did not want to be left behind either.

Money flowing into Africa-dedicated equity funds has been growing rapidly. This increase in demand has prompted index providers such as FTSE to launch a new Pan-African ex-South Africa index and MSCI to launch the Emerging Frontier Markets Africa Index. The stock exchanges in various countries in this region have also become more active, with the equity capital market raising US$4.5 billion through IPOs in Sub-Saharan Africa in 2012.

The cement industry

In a nut shell, the key demand drivers for cement in Sub-Saharan Africa are: increasing political and economic stability; robust GDP growth; the emerging middle class; steady population growth; rapid urbanisation; a serious housing deficit; the massive drive for investment in infrastructure; the strengthening of the financial services industry; increase in the flow of investment; the unlocking of the region’s natural resources; increased manufacturing for export.

In the past, most cement companies operating in the region were not investing in new capacities. Instead, the focus was on investing in cement terminals and grinding plants and maintaining existing, and often old, cement plant assets. This provided a good opportunity for many local players, who had the benefit of understanding the real risks as well as the capability to manage such risks, to take advantage of the situation and start investing in the cement industry in Sub-Saharan Africa. One such company was Dangote Cement P.L.C.

Read Part Two of this article here.

Written by D.V.G. Edwin, Group Managing Director & CEO, Dangote Cement P.L.C. This is an abridged version of the full article, which appeared in the September 2014 issue of World Cement. Subscribers can view the full article by logging in.

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