Construction World December 2017

COVER STORY

CEMENTING FUTURE GROWTH

The current economic and political climate in South Africa, the African continent and also in the rest of the world, make it tough for especially smaller players in the cement industry. Wilhelm du Plessis spoke to Richard Tomes, Executive, Sales & Marketing at AfriSam about the challenges and opportunities for cement companies in this challenging time.

AfriSam is an 83-year old business. Its newest kiln was installed at Ulco, its flagship plant in the Northern Cape.

Global cement picture According to SAFCEC’s State of the South African civil engineering industry report for the second quarter of 2017, the world economy gained momentum in the fourth quarter of 2016 – especially in advanced economies such the USA and UK. However, economic performance amongst emerging economies has remained mixed. This uneven economic performance in especially the emerging markets makes this period challenging for multinational cement companies. Luckily for them the global outlook is anchored by the positive trends in the major markets of China, India and the USA – which offset the poor performance elsewhere. The large cement producers have diversified their portfolios in a strategic effort to capture growth in such markets. The performance in these high- growth areas is vital to the financial health of these groups. “Of the world’s five billions tons of installed cement capacity, China, an emerging market, demands two million tons to feed the needs of its increasing population,” Tomes says. China is followed by India and the USA, with Europe (as a collective) fourth in the cement demand stakes. “Africa’s combined cement demand is similar to Europe’s. The continent has seen good volume growth, but in South Africa,” says Tomes, “the demand has been flat. “Countries that have an increased cement appetite include Pakistan, Turkey, Vietnam, India, Kenya, Switzerland, Germany, Poland, and the USA. South Africa, Chile and Spain have performed badly. The worst performer is Brazil where cement sales have fallen by 9% year- on-year. This was caused by political uncertainty, the impeachment of the president and ratings downgrades. “It is worrisome because we are seeing similar trends in South Africa,” he says. SA’s historical reality “For many years,” explains Tomes, “the local cement industry was run as a government sanctioned cartel – it was protected as it was regarded as strategic.” The country was in isolation and did not trade with the rest of the world. During this period, the way cement companies set up new capacity, was in the framework of a cartel and all the players maintained market share. “The regional dominance that various cement companies had, was based on this cartel- thinking,” adds Tomes.

“When South Africa became a democracy in 1994, the country’s economy had to become efficient as it now had to trade with the rest of the world,” says Tomes. Between 2002 and 2007 the country ran out of cement capacity and had to start importing cement, while the opportunity attracted new entrants. “Demand outstripped supply – there was a time when cement companies made EBITDA margins of between 30 and 40%. So if you are a Mr Dangote or a Chinese player, and there is no or little growth in the rest of the world, you would want to invest in South Africa,” adds Tomes. “We attracted new players in the process – Sephaku and Mamba Cement. As demand has now dropped off significantly, competition is fierce – everyone is scurrying for market share. In fact, cement prices are now back at levels last seen in 2009,” Tomes says. A false sense Tomes explains that between 2002 and 2007 cement demand in South Africa doubled as World Cup stadia was built, and the country had various infrastructure projects including SANRAL’s road projects, the Gautrain, and airport upgrades. “It illustrates what is possible when there is economic confidence. The country had a successful political transition, peaceful democratic elections, hosted the 1995 rugby World Cup and was to host the first FIFA World Cup on the African continent in 2010. The industry had great momentum and confidence – and the major contractors did well on the back of confidence and good infrastructure investment,” he says. Unfortunately the confidence and momentum did not last. “Economists and industry experts indicate that confidence levels are back at levels we experienced in the run-up to the first democratic elections in 1994.” The political situation is the primary cause of this uncertainty. Last year’s local government elections yielded a few ‘fragile’ coalition governments in some of South Africa’s major metros around the country. In some instances, as witnessed in the Port Elizabeth metro, a failure to develop a good working relationship across party lines has impacted service delivery, affecting infrastructure spend, and with that cement demand. There are concerns about who is likely to emerge as the ruling party’s leader and possibly the next president of the country, should the ANC win the elections in 2019.

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CONSTRUCTION WORLD DECEMBER 2017