Cement companies grapple with debts on demand slumpWednesday May 13 2020
Cement makers face a tough year as pandemic-induced demand slump undermines the ability to service the huge finance costs resulting from recent investments made in their battle for market share.
Bamburi Cement #ticker:BAMB, which commissioned an additional 0.9 million-tonne grinding capacity per year to bring its total installed annual capacity to f 3.2 million tonnes, for instance, says its finance costs hit Sh436 million last year, from Sh258 million in 2018.
This was on account of the Sh2 billion long-term debt acquired by its Uganda subsidiary Hima Cement Limited (HCL) in mid-2018. The debt was used to finance the HCL’s capacity expansion project.
Bamburi chairman John Simba said the company had hoped for a windfall from the removal of the interest rate cap, stable economy and the Big Four agenda.
However, the pandemic has redirected all investment to the fight against the coronavirus, forcing the company to review its outlook.
“Post-Covid-19, with government expenditure, refocused towards the war on Covid-19, we will need to reassess the market and the general economic situation,” he said.
Also sailing the same waters is Devki Group’s National Cement Company, which has been on an expansion spree in recent months.
“We have seen a big drop in demand up to 30 percent because those who have finished projects do not want to start new ones. Profits are down and it is challenging. But there is nothing we can do because it is a global challenge and it is not just us,” said Devki Group founder Narendra Raval.
Last year, it acquired Athi River Mining and Cemtech to attain an annual consolidated production capacity to two million tonnes. Early this year, it set up a Sh6 billion plant in Salgaa, Nakuru, raising its production capacity to 3.5 million tonnes.
Market headwinds underpinned by lower demand for cement in Kenya and the inaccessibility of the landlocked markets such as Rwanda have pushed the cement makers on the edge.
Bamburi, for instance, booked a 37 percent decline in after-tax profit from Sh572 million in 2018 to Sh359 million last year.
Despite huge capital expenditure to fight for market share cement companies are facing a decline in the construction sector which saw consumption decline 1.3 percent last year.