Industry

Rising competition to force down cement prices

House-construction

Cement output from new entrants and increased production by established players has eased construction costs. Photo/FREDRICK ONYANGO

Cement prices are forecast to fall by nearly 10 per cent this year due to increased competition that threatens the profitability of local manufacturers.

The wholesale price for a 50kg bag has dropped to Sh600 from Sh660 in December in Nairobi, easing construction costs for developers.

Sector executives expect further cuts in coming months due to increased cement capacity arising from new entrants and increased production by old players.

While easing costs for property developers, the move is likely to hurt the players’ margins as they face rising cost of raw materials including coal and fuel, which drive the manufacturers’ machines.

“I expect the prices to come down by another 10 per cent by the end of the year if costs of energy remain stable due to rising overcapacity,” said Mr Kephar Tande, the managing director of East African Portland Cement Company (EAPCC). “Demand and supply is roughly matched at about 3.3 million tonnes but I expect the gap to widen as supply grows to about 4.5 million tonnes by December because of new capacity from manufacturers,” said Mr Tande in an interview with the Business Daily on Wednesday.

The comments were echoed by Athi River Mining (ARM) Company: “There will be pressure on cement prices barring any rise in oil and electricity costs,” said Pradeep Paunrana, the firm’s managing director.

The fresh capacity has come from new entrants such as Mombasa Cement and Devki Steel while production enhancement by existing players including ARM and Bamburi Cement is set to leave the market with excess capacity despite the vibrancy of the construction sector.

This outlook will intensify the price war in the cement business as new entrants look to grab market share from established players who are also racing to defend their stakes in the increasingly competitive environment.

As a result, the manufacturers say the ongoing price war would hurt their profits at a time when their cost to income ratio is rising.

On the retail front, the price of cement has also fallen by about 12 per cent over the past year to between Sh670 and Sh700 in Nairobi with the prices increasing by up to Sh100 as one moves away from the city—which is the manufacturers production hub.

The price drop comes at a time when the players face rising costs of electricity, coal and oil, which account for between 35 and 45 per cent of their production costs.

Revolution spreads

Oil prices have risen to $110 a barrel from $96 in January as revolution spread in North Africa and the Middle East while the costs of electricity has also risen marginally on increased use of thermal power.

But coal—which the manufacturers use to drive their machines—is now trading at four month low of $117 a tonne and commodity traders quoted by Reuters expect it to remain stable till May.

Coal gained 45 per cent last year but the manufacturers say the competitive market prompted them to absorb the additional prices—which saw them announce drop in profits.

The bias for a fall in cement prices will complicate the players’ earnings outlook at a time when they are struggling to maintain their profitability, especially EAPCC and Bamburi.