In 1996, the Kenya cement industry was so well ordered and demarcated that everyone knew their proper place in the pecking order.
There was Bamburi Cement sitting on top and supplying about 60 per cent of the cement to a market that was nothing to write home about—hardly any noteworthy construction activity was going on in the post-Goldenberg era and it was a huge gamble to invest as most manufacturers would do.
A kilometre away as the crow flies stood the political cash cow called East African Portland Cement Company (EAPCC), 41.7 per cent owned by Lafarge, the parent company of Bamburi, and Bamburi itself.
The balance of the equity was and still is largely distributed between the government (25.3 per cent) and National Social Security Fund (NSSF) taking 27 per cent, making it a delicate political act where employees received the best industry salaries, CEOs a freehand for mischief and Bamburi the most of influence. A curious six per cent token is listed at the NSE.
Athi River Mining up to that point was a speck of a family business involved in manufacturing industrial chemicals and blending fertiliser.
That would change, but not significantly yet, on its acquisition of a vertical shaft kiln plant producing just 60,000 tonnes of cement per annum at Kaloleni near Mombasa.
That year it listed at the Nairobi Stock Exchange (NSE) as it sought to raise money for its operations as much as protection from the political sharks of the Moi regime who never saw a business they did not want to grab.
Few, besides institutional investors at the NSE where it is trading at a price to earnings ratio of 25.9, would notice its steady climb.
Mid next year, it will be the largest integrated (combining manufacturing of raw material clinker and grinding) cement maker in East Africa, ahead of Lafarge’s 2 million tonnes.
Besides the gradual up-scaling of the capacity in Kenya to one million tonnes with the establishment of the grinding plant in Athi River, this is the first time the firm, named after the decaying town, is actually making cement there, and doubling the Kaloleni capacity.
The race to push the start buttons at its Tanga and Dar es Salaam plants bring its East African total to 2.6 million tonnes per annum.
The 1.6 million tonnes in Tanzania is distributed between 1.2 million in an integrated clinker and cement production in Tanga and the balance in a grinding plant at Dar es Salaam which is the regional game changer.
Until a few years back, Rick Ashley was known in the financial circles as the CEO of Old Mutual Asset Manager but now sits as the chairman of the ambitious ARM at their quiet Chiromo Road address, Nairobi.
Last week, he sat with the Business Daily and it was clear that concerns over the growing industry competition especially in Kenya was not far from his mind, and, clearly he did not expect it to be far from our minds given the concentrated industry coverage we have put out.
The finance man has watched over the ARM funds drive, especially the Sh1.2 billion equity-linked bond, which was 60 per cent oversubscribed, and it is only natural that issues of increasing gearing ratio against the backdrop of a fiercely contested market would attract his attention.
He is nevertheless strikingly sanguine about competition and the rising debt ratios.
“We took a conscious decision and backed growth seen in the East African cement market and we continue to see prospects despite entry of new players and increased capacities; the market is still growing,” he said.
The expansion at issue is that of feisty Athi River-based players Mombasa Cement who manufacture the fast-rising Nyumba brand and National Cement supplying the Simba brand.
Both of them have brought a new dimension to the industry with prices falling, particularly ex-factory, for the first time since EAPCC rattled players with loss-inducing predatory pricing in 2003.
The firm looks at the industry not in terms of market shares but in terms of competitive delivery of product, which they believe they are doing.
If you ask Kenya’s only cement firm that managed positive growth in profit and large part of it derived from cement sale, the key to their strategy is clinker—the raw material making up 70 per cent of cement with the remainder made up of pozzolana (pozzolanic ash) or gypsum.
ARM has remained the smallest player for years at eight per cent and reveals the reason was because they did not see sense in importing clinker to boost production.
That would have resulted in a 10 per cent margin on cement against what officials say is 30-32 per cent if you do not import clinker.
Mr Ashley does not see the new players as posing long term threat until they develop clinker capacity, which they are in the process of doing.
The firm’s mantra thus remains “integrated’ manufacturing beginning with clinker (processed limestone) production.
In 2010, the country imported one million tonnes of clinker for manufacturing 1.4 million of cement or 37 per cent of the 3.7 million tonnes officially consumed in Kenya.
That means exposure to the forex volatility and its somewhat related oil factor in transporting the commodity up to Mombasa and again inland to the Coast (ARM, Mombasa and Bamburi have factories here) or upcountry at Athi River where all have grinding plants.
The three older players ARM, EAPC and Bamburi dominated clinker production of 2.3 million tonnes.
East African Cement Producers Association (EAPCA) estimates the figure will grow to about 3.3 million next year if Mombasa adds 750,000 tonnes and ARM 650,000 on top of its 350,000 capacity.
Bamburi has the largest capacity at .3 million and Portland 650,000.
“We are the only one who do not import clinker at the moment. All the industry has to invest in capacity to increase the value of our production and margins,” says Mr Ashley.
He says imported clinker is at least 50 per cent more expensive, the reason he believes price wars are not sustainable and are only introductory offers meant to secure shelf space.
ARM expects cement prices to stabilise subject to energy outlook, as it asserts most of the gains from the present price war are accruing to middlemen than consumers.
Kenya consumption is projected to grow at just over 10 per cent this year.
But better prospects lie further south in Tanzania which is a cement deficit nation with vast reserves of raw material deposits which have caught the attention of the likes of Nigerian cement mogul Aliko Dangote.
The fragmented market is growing at a healthy 15 per cent and due to its geographical size and concomitant transport costs companies often export to Zambia and DRC than compete with local investors.
The dominant firms are Twiga (750,000 tonnes), Tanga (657,000) and Mbea (250,000) which is owned by Lafarge with an estimated one million tonne import making total consumption about 2.7 million tonnes.
With the 25 per cent (which EACPA wants increased) EAC common external tariff, even the 400,000 tonnes imported from Karachi is reported to be selling at marginal cost in Tanzania.
What makes the market more attractive is not just the fact that demand will hit 3.3 million next year.
A tonne of cement here sells at $137 compared to Kenya’s $124 (Nairobi) and $108 in Mombasa.
At present though, Kenya has the highest consumption at 3.7 tonnes, followed by 2.7 of Tanzania and 1.4 million in Uganda where Hima (Lafarge) and Tororo (owners of Mombasa cement and Mombasa Road, Nairobi, based Corrugated Sheet) are battling it out for the market.
Rwanda also produces cement through the 250,000 tonne capacity Cimerwa.
ARM last week released its 2010 financials reflecting a 22 per cent growth in sales of which 56 per cent is cement.
But most importantly. It was the only Kenyan firm to grow its profit after tax by a positive 23 per cent.
But as the industry competition grows, it will have to justify the Sh3.7 billion borrowed for the Kaloleni, Athi River and Tanzania investments.
Meanwhile, the East Africa cement industry has to contend with a newly -dominant player hardly heard of in 1996.