Cement prices have dropped to a 12-year low on a market share war triggered by new entrants, deepening the cut of manufacturers’ margins.
The retail price of a 50kg bag of cement stands at about Sh650 in Nairobi from a peak of Sh740 in 2008 and 2009.
Cement prices in Nairobi have been dropping since 2010, but consumers outside the city, whose hinterland hosts five cement companies, pay higher rates due to transport costs. For instance, retailers in western Kenya are charging an average of Sh820 per 50kg bag of cement.
Analysts have linked the sharp price drop to a price war that has intensified with the entry of new players such as National Cement, Savannah Cement and Mombasa Cement.
Established rivals such as ARM Cement are also expanding their capacity, further boosting excess capacity in the local and regional market, making price increments difficult.
“While new entrants have succeeded in using discount pricing as a tool to segment the market, it is only a matter of time until intense rivalry cuts across the entire market,” Standard Investment Bank (SIB) said in a research covering the cement industry.
SIB said the outlook for cement firms’ margins was disappointing, noting that the industry’s margins hit an all-time low of 22.1 per cent last year.
“We expect continued margin pressure as cost of production is on the rise, while pricing power remains low due to overcapacity,” SIB said.
Local cement firms produced 4.6 million tonnes of the commodity last year against total consumption of 3.9 million tonnes, leaving the country with nearly 20 per cent surplus including imports.
SIB said the excess capacity is expected to persist in the medium term as increased supply from new plants offsets consumption.
ARM is set to build Kenya’s largest cement plant in Kitui which will have a capacity of 8,000 tonnes per day.
Nigerian businessman Aliko Dangote is also set to build a cement factory in the same location which will produce up to 5,500 tonnes per day. The surplus outlook means firms will need to build market share while controlling costs to maintain profits and dividend growth.
The construction sector has been one of East Africa’s fastest growing over the last decade, fuelled by a burgeoning middle class with higher disposable incomes and the pouring of billions in real estate by high-net worth investors.
Lower cement prices are helping investors manage building costs. The two largest cement makers, Bamburi and Portland, have over the past three years lost market share to National Cement, makers of Simba brand, and Mombasa Cement who supply the Nyumba brand.
Mombasa Cement’s market share in Kenya is estimated to have increased from 13 per cent in 2011 to 15 per cent last year. National Cement’s market share is estimated at eight per cent in both 2011 and 2012 but is set to grow to 10 per cent by 2015.
Savannah Cement, which started production last year, is projected to grab a domestic market share of seven per cent by 2015.
Bamburi’s share is estimated to have dropped from 40.5 per cent in 2011 to 39 per cent last year, and SIB expects its stake to fall to 32 per cent in 2015.
The company’s net margins have dropped from a high of 23.2 per cent in 2009 to 13 per cent last year, underlining the impact of increased costs and the cement price wars.
Bamburi’s net profit dropped 10.2 per cent in the six months to June as sales fell 17.4 per cent to Sh15.8 billion in the same period. Portland is also seen losing market share from 24 per cent in 2011 to 20 per cent last year and is projected to maintain that level through 2015.
The firm posted a net profit of Sh1.7 billion for the year ended June compared to a loss of Sh972 million the year before, boosted by cost-cutting and improved sales.
ARM is the exception, with the firm estimated to have grown its market share from 14.5 per cent to 18 per cent last year. This is, however, projected to reverse to 16 per cent in 2015, according to the SIB forecasts.
The company posted a 28 per cent rise in net profit for the nine months to September, boosted by higher sales. Its net profit stood at Sh1.53 billion in the period, driven by a 32 per cent jump in sales to Sh10.2 billion.