Displaying items by tag: ARM Cement

Congratulations are due to Bamburi Cement this week after the completion of a new production line at its Nairobi grinding plant. The new US$40m line will add 0.9Mt/yr of cement production capacity to the unit, bringing its total to 2.4Mt/yr when it is commissioned towards the end of 2018. Together with the subsidiary of LafargeHolcim’s integrated plant at Mombasa the company will have a production capacity of 3.2Mt/yr.

Graph 1: Cement production and consumption in Kenya 1999 - 2017. Source: Kenya National Bureau of Statistics.

As Graph 1 shows above it is an interesting time to open new production capacity in the country. Both production and consumption fell for the first time since 2000 in 2017. Production fell by 8.2% year-on-year to 6.2Mt in 2017 from 6.7Mt in 2016 and consumption fell by a similar amount. The change was blamed on reduced demand for building materials in the construction sector occurring at the same time as a fall in the value of building plans approved in 2017. The country also suffered political uncertainty as its general election in August 2017 was subsequently annulled and repeated in October 2017.

With Global Cement Directory 2018 data giving Kenya a cement production capacity of 5.2Mt/yr from five producers and at least four grinding plants with a capacity of 4.6Mt/yr it looks like the country is in an overcapacity phase. The question for producers like Bamburi Cement is whether 2017 is just a temporary blip or not. After all, as per usual for many African countries, the demographic pressure for development to happen and per capita cement consumption to grow seems ineveitable.

Bamburi Cement is not alone in betting on growth. Also this week the Kenya Port Authority recevied four hoppers from the UK’s Samson for the Port of Mombasa. The hoppers will be used to import clinker, coal and gypsum at the site. Earlier in February 2018, National Cement opened a 1.2Mt/yr integrated plant in Kajiado County. On the larger scale Nigeria’s Dangote Cement has been preparing to open two cement plants, near Nairobi and Mombasa respetively. However, these project were reported delayed to 2021 in its annual report for 2016 around the time the company faced problems at home due to a local financial recession.

Meanwhile local producers have faced pressure so far in 2018. Bamburi Cement reported a 6% fall in turnover to US$357m in 2017 that it blamed on the weather, the elections and lower construction activity. Other producers have had a harder time of it with the East African Portland Cement (EAPC) reportedly having to rely on a land sale to remain solvent in April 2018. ARM Cement has also been forced to sell assets to remain operational. Its loss for 2017 more than doubled to US$55m. Amid the problems the UK-government investor CDC Group, which holds a 41% stake in the company, replaced board members of the company in a likely bid to shore up the situation.

It’s into this kind of situation that Bamburi Cement has opened its new plant. On the plus side though it is a grinding plant so it should be able to maximise the company’s use of clinker from either within the country or from imports from other LafargeHolcim operations elsewhere. In its press release for the new unit the company pinned its hopes on anticipated growth in domestic housing and infrastructure projects, backed by government schemes for affordable housing and roads. With the rating agency Moody’s having issued a report this week about the relative reslilence of the Kenyan economy despite recent shocks such as last year’s elections, Bamburi Cement may yet have the last laugh.

Kenya: CDC Group has replaced its board members at ARM Cement Ketso Gordhan and Pepe Meijer with Sofia Bianchi and Rohit Anand. The UK government-backed investment company owns a 41% stake in the company. In addition ARM Cement has appointed Konstantin Makarov as its new executive director, replacing Rick Ashley who resigned in May 2018, and John Maonga as its company secretary. Maonga succeeds Ramesh Vora who resigned in April 2018.

Bianchi worked as head of Special Situations at Blue Crest Capital, a European hedge fund, from 2007 to 2016. She brings experience in investment roles from sectors including mining and telecommunications. Bianchi has an MBA from the Wharton School of Business.

Anand holds over 11 years of experience investing in emerging markets across Asia and Africa. He has invested in sectors across infrastructure, telecoms, manufacturing, logistics and healthcare. He is currently responsible for the Industrial Businesses equity investments team covering manufacturing, real estate and logistics across South Asia and Africa. Prior to joining CDC, Anand worked with IDFC Private Equity in Mumbai where he was part of a team managing around US$1.3bn focused on growth capital investments in infrastructure in India. Anand started his career with Ernst & Young’s corporate finance team in India. He is a CFA charter holder, holds an MBA from the Indian Institute of Management and a Bachelors degree in Electronics and Communication Engineering from the University of Delhi.

Makarov holds over 15 years of experience in the financial markets in general and emerging markets in particular. He is responsible for launch of African practice and oversight of all sub-Saharan African and South East Asian transactions at StratLink Africa. Previously, he was directly responsible for market entry of US and Commonwealth of Independent States (CIS) based companies into sub-Saharan Africa and has been involved in activity focusing on emerging economies in Africa and South East Asia. He holds a Master of Science in Risk Management from Stern School of Business, New York University and Amsterdam Institute of Finance and a Bachelor of Science in Marketing from University of Massachusetts, Amherst.

Maonga, a Certified Public Secretary who is a Member and Fellow of the Institute of Certified Public Secretaries of Kenya, has over 30 years of experience in Company Secretarial and Registration Services.

ARM Cement’s declining fortunes this week may signal the end of the current growth cycle in the Kenyan cement industry. The cement producer posted a 20% year-on-year drop in its sales revenue to US$52m for the first half of 2017. Its financial returns have been turbulent since 2015. However, inward investment from the UK’s CDC Group in 2016 had appeared to help the company enabling it to pay of debts and even consider an upgrade project to the grinding capacity at its Athi River plant.

Graph 1: Cement production in Kenya for first half of year, 2013 - 2017. Source: Kenya National Bureau of Statistics.

Graph 2: Cement consumption in Kenya for first five months of year, 2013 - 2017. Source: Kenya National Bureau of Statistics.

Unfortunately it now appears that the Kenyan cement market may have peaked in 2016. As can be seen from Kenya National Bureau of Statistics figures in Graph 1 and 2, production hit a high of 3.31Mt in the first half of 2016 and it has fallen to 3.18Mt for the same period in 2017. Consumption too has fallen, to 2.5Mt for the first five months of 2017. At the same time the value of building plans approved by the Nairobi City Council dropped by 12% to US$1.02bn for the first five months of 2017 with falls in both residential and non-residential applications although the decline in residential was more pronounced. One of the country’s larger infrastructure projects, the Standard Gauge Railway from Mombasa to Nairobi entered its final stage of construction towards the end of 2016 with the completion of track laying.

Bamburi Cement has also reported falling revenue and profit so far in 2017. Its turnover fell by 8% to US$170 and its profit decreased by 36% to US$18m for the half year. Bamburi blamed it on a contracting market, low private sector investment leading to residential sector issues, delays in some infrastructure projects and droughts. The drought also hit the company’s operating profit via higher energy costs. On the plus side though Bamburi’s subsidiary in neighbouring Uganda did record a good performance.

It’s likely that the general election in Kenya in early August 2017 has slowed down the construction industry through uncertainty about infrastructure investment and general fears about political unrest. Thankfully these latter concerns have appeared unfounded so far but the memory of the disorder following the poll in 2007, where over 1000 people died, remains acute. And of course the 2017 election is not over yet following the intervention of the Supreme Court to nullify the result of the first ballot and call for a second. A longer election period with the impending rerun will further add to the pressure on the construction and cement industries.

An industry report on East Africa in February 2017 by the Dyer & Blair Investment Bank fleshes out much of the situation in the region. One particular point it makes though is that, as it stands at present, building materials may be too expensive to grow the market fully. Dyer & Blair suggest that lower construction costs and more affordable home ownership methods might be the key to driving low end housing demands and in turn this might grow cement consumption.

With lots of new production capacity coming online both locally and in neighbouring countries such as Uganda and Ethiopia, the Kenyan cement market faces the dilemma of trying to balance the medium to long-term demographics with the picture on the ground. Low per capita cement consumption suggests growing markets but if the demand isn’t present in the short term then the impetus for cement producers to expand shrivels especially with aggressive imports, rising energy costs and growing local competition. Once the election period finishes the picture will be clearer but the boom times may have abated for now.

Kenya: ARM Cement has appointed John Ngumi, Pepe Meijer and Ketso Gordhan as non-executive directors of the company. They replace Atul Mathur, Michael Turner and Daniel Ndonye, who have resigned as directors following an extraordinary general meeting of shareholders held on 26 August 2016.

John Ngumi holds a BA degree in Philosophy, Politics and Economics from the University of Oxford, UK. He started his banking career at National Westminster Bank, London and has since worked variously for Grindlays Bank, Barclays Bank, Citibank and CfC Stanbic Bank/Standard Bank of South Africa. In between he also co-founded one of Africa's first indigenous investment banking groups, Loita Capital Partners. Ngumi left CfC Stanbic Bank in 2015 upon his appointment by President Uhuru Kenyatta as non executive chair of the Board of Directors, Kenya Pipeline Company Limited.

Pepe Meijer is a Commonwealth Development Corporation (CDC) Advisor and former Managing director for PPC International up-to November 2015. During his PPC tenure Meijer also held various Executive, General, Senior and Middle management positions across PPC’s cement operations that spanned over 28 years. Prior to joining PPC, he worked in the gold mining industry as section engineer and in the fishing/processing /frozen-food industry as group projects manager.

Ketso Gordhan joined CDC in April 2016 as the Head of Africa. He previously spent several years as Chief Executive Officer of PPC Cement, South Africa’s largest cement company. At PPC, Gordhan led the expansion of the company into sub-Saharan Africa, helping build the footprint outside South Africa into Democratic Republic of the Congo, Rwanda, Ethiopia and Zimbabwe. Before PPC, Gordhan spent almost 10 years leading RMB’s private equity business. He has also held a number of public sector roles, including City Manager of Johannesburg and Director General of the Ministry of Transport, where he led major infrastructure projects, such as the South Africa’s N4 Toll Road.

Tensions have boiled over regarding imports of cement to Kenya in recent weeks as different importers have received opprobrium in the local press. Last week Dangote Cement was attacked for importing cheap cement into the country from Ethiopia, allegedly off the back of a cheap electricity deal. This week, Chinese imports have been in the firing line, following data reportedly seen by the Business Daily newspaper that showed that the value of Chinese cement imports rose tenfold year-on-year in the first half of 2016.

At the heart of these rows lies a strong demand for cement: Kenya had a cement production utilisation rate of 90% in 2015 according to Kenya National Bureau of Statistics (KNBS) data. It produced 6.35Mt in that year and used 5.71Mt for consumption and stocks. Its utilisation rate has been rising steadily since 2012. It was 93% for the first six months of 2016.

Unfortunately for the local producers this kind of demand attracts competition from within and without. Nigeria’s Dangote Cement is planning to build a 3Mt/yr plant at Kitui and Cemtech Kenya, a subsidiary of India’s Sanghi Group, is planning to build a 1.2Mt/yr plant at Pakot.

Local producer ARM Cement reported both falling turnover and a loss for the first half of 2016. It blamed this on increased competition in Tanzania. However, in 2015 it increased its turnover in Kenya by importing clinker over the border from its new Tanga plant in Tanzania. It also noted a ‘competitive landscape’ in Kenya and lamented the effects of currency devaluation on its financies as a whole. East African Portland Cement had a tougher time of it for its half-year that ended on 31 December 2015, issuing a profit warning of a loss and expected reduced profits despite a rise of 12% in sales revenue. By contrast, Bamburi Cement, LafargeHolcim’s subsidiary, reported both increases in revenue and operating profit in 2015. Although it too noted problems with interest rates and currency depreciation in the country during this period.

The focus on Chinese imports follows Chinese contractors winning some of the biggest infrastructure projects in the country. The China Rail & Bridge Corporation (CRBC), for example, is building a railway between Mombasa and Nairobi. The Business Daily newspaper has found data showing that Chinese cement imports worth US$19.8m to Kenya in the first half of 2016 compared to US$1.99m in the same period of 2015. The background to this is that China has more than doubled the value of all of its imports to Kenya since 2011 according to the KNBS. Total import volumes of clinker from all foreign countries increased by 51% in 2015 from 1.31Mt in 2014, the largest increase in at least five years.

If local cement producers are being locked out of supplying these kind of deals no wonder they are getting angry. However, another angle on what’s happening here might be that local producers who are suffering from increased competition, falling prices and a precarious national financial situation are lashing out at the easiest target. The local press doesn’t appear to have criticised ARM Cement for moving its Tanzanian clinker north of the border for example. Likewise, a Bamburi Cement spokesperson previously said that the producer had supplied 300,000t of cement to the rail project since September 2014, earning it nearly US$10m. Kenya needs cement as it builds its infrastructure. Fortunes will be made and tempers will be lost as it does so.

Kenyan cement producers kicked off this week about Chinese cement imports for the Standard Gauge Railway Project in Kenya. Local producers, including ARM Cement and Lafarge, have asked the Kenya Railways Corporation to explain why the Chinese-backed project is importing cement. Project builders the China Rail & Bridge Corporation (CRBC) has imported 7000t of cement so far in 2015 according to Kenya Ports Authority data.

Project completion is planned for 2017 with a requirement of 1Mt of cement. If CRBC carried on this rate then, roughly, the project might only use 42,000t of imported cement if the import rate holds. This is less than 5% of the estimated requirement. However, cement imports increases into Kenya have stayed steady since 2012. Imports rose by 2000t from 2013 to 2014. CRBC's imports will stick out significantly in 2015.

Kenya National Bureau of Statistics (KNBS) data places Kenyan cement production at 5.8Mt in 2014, an increase of 16.3% from 5.1Mt in 2013. Production growth has been steadily building since the late 1990s with, more recently, a dip in the rate of growth in 2011 that has been 'corrected' as the growth has returned. Consumption has risen by 21.8% year-on-year to 5.2Mt in 2014 with imports also rising and exports dropping.

Imports for the railway project are duty free as ARM Cement Chief Executive Officer Pradeep Paunrana helpfully explained to Bloomberg. Producers have also recently upgraded their plants to specifically supply 52.5 grade cement to the project. Given this, it is unsurprising that local Kenyan producers, including ARM Cement and Lafarge, are complaining about this situation, especially given the increasingly pugnacious African response to foreign imports led by Dangote and companies in South Africa. Both ARM and Lafarge hold integrated plants and grinding plants in Nairobi and Mombasa. This is the route of the new railway line.

The backdrop to this is that the Chinese cement industry is struggling at home as it adjusts to lower construction rates and reduced cement production growth. Profits made by the Chinese cement industry fell by 67.6% year-on-year to US$521m for the first quarter of 2015, according to National Development and Reform Commission (NDRC) statistics. At the same time the Shanghai Composite, China's principal stock market, has seen the value of its shares fall by 30% since June.

Although it is unclear where the cement imports in this particular row are coming from, informal or formal business links between large state controlled corporations such as a China's major cement producers will always be questioned by competitors outside of China for both genuine issues of competitiveness and simple attempts to claw more profit. If the Chinese cement producers are sufficiently spooked or they really start to lose money then what is to stop it asking a sister company building a large infrastructure project abroad to offer it some help? Or it might consider asking the Chinese bank providing 90% of the financing towards the US$3.8bn infrastructure project to force the Kenyan government to offer more concessions to foreign firms. Meanwhile one counter argument goes that Kenya has a growing construction market with a giant infrastructure project that may unlock the region's long-simmering low cement consumption per capita boom. The Kenyan government may face some difficult decisions ahead.