22 February 2013

Publication: Business Day
Author: Alistair Anderson

Established cement companies are confident of improving sales even with new entrant Sephaku bringing added production into the market later this year.

Analysts, however, believe cement makers need a boost from government projects.

Stanlib equity analyst Anashrin Pillay says he expects South Africa’s cement industry to “chug along a bit beyond the country’s gross domestic product (GDP) growth” this year. Well, the market would probably grow at between 4% and 5% without infrastructure spend, so it can move with the momentum of GDP growth,” he says.

Economist forecasts in South Africa have the economy growing at between 2.5% and 3% this year.

South Africa consumes about 12-million tons of cement a year. This is with producers running at 70% capacity. Capacity is at about 50% in the Western Cape where construction is quiet, which is disappointing, Mr Pillay says. “Barely anyone is building in the Western Cape.”

He says once the government makes announcements on specific infrastructure projects, there will be a lag of about 18 months, after which we will see big earnings and profit returns for cement makers.

“Cement companies will have projects going forward, but they are not going to hit capacity as an industry for a while,” he says. Stanlib holds shares in PPC, the largest manufacturer of cement in the country. PPC has between 30% and 35% of the cement market in South Africa. Mr Pillay says Stanlib is confident that the state’s multibillion-rand infrastructure plan will bring about returns, even if not all of the 17 strategic integrated projects earmarked by it are executed.

“PPC has 25% margins at the bottom of the current business cycle. It is an infrastructure play and will not face serious contractor risk.” Mr Pillay says PPC ticks many boxes for Stanlib.

“PPC is financially savvy. Foreigners are taking to the African strategy. It is gaining 21% of its revenue from African countries that are not SA. These are Zimbabwe, Botswana and Mozambique. By 2016 they hope to get this up to 40%,” Mr Pillay says.

He admits that PPC and the other big local cement firms such as AfriSam, Lafarge and APC Cement will lose market share to Sephaku, but believes the older companies will adjust to the challenges.

Sephaku is using funds from its Nigerian partner, Dangote Cement, to build its Aganang cement plant. Sephaku believes it can operate at a low cost because its plant will use new technology, while PPC and others have plants that are decades old. Mr Pillay says investors must bear in mind that if the Sephaku plant goes off line for whatever reason, the company will not produce cement.

Sephaku is the first new entrant to the local cement production market to open its own new plant since 1934. It is working with Sinoma, a Chinese company with experience in building cement plants. Sephaku is also building a cement mill near Delmas in Mpumalanga. Sephaku CEO Pieter Fourie says his group is looking to produce 2.5-million tons of cement a year by next year.

Mr Fourie believes new technology will make his company an attractive place for customers.

Some insiders feel Sephaku will use the same inputs as other cement companies, but Mr Fourie believes the new plant will be very efficient and has confidence in his staff’s ability to meet early targets. Mr Pillay reckons Sephaku will hit 1-million tons a year once its operations are under way. This sees the company taking up 10%-12% of national market share.

The other threat to South Africa’s cement producers are importers whose cement sales make up about 5% of the market. Last year, certain Pakistani cement was criticised by people in the industry who said it was low quality and did not hold up in practice. Pakistan’s Trade Commission in South Africa last year defended products made by a Pakistani cement company, Lucky Cement, saying they met all quality standards in South Africa and were also cheaper than established, locally manufactured equivalents.

Lafarge had said it was considering approaching the International Trade Administration Commission of South Africa to protect the local market from what it deemed cheap, low-quality cement from Pakistan. Various local cement manufacturers this year said importers were bringing in underweight bags of cement.

But the National Regulator for Compulsory Specification says investigations show that noncompliance is very uncommon and the body is not concerned. It puts the incidence of quality noncompliance of imported cement at about 8%.