Construction World December 2017

The company has the capacity to produce 4 million m³ readymix concrete annually from its 40 strategically located plants across the country.

start matching each other by 2020. A more realistic view is to use the long term annual compound growth of 2,5%, meaning South Africa will only run out of capacity by 2030,” Tomes explains. The situation could even be worse as this calculation does not take into account the establishment of cement factories in Namibia and Mozambique which until now have not been able to successfully export cement across their borders into South Africa. Challenges facing the cement industry The biggest challenge, says Tomes, is lack of growth, which obviously causes low demand. “None of the South African cement companies are operating at optimum capacity levels,” he says. As the cement producing industry is an energy intensive process, the proposed energy tariff increases will mean that energy costs will spike. The cement industry won’t be able to recover this cost through price increases as the market is already oversupplied. We will see more margin squeeze happening,” Tomes cautions. The availability of skills is a major challenge. “Skilled people are reaching retirement age – to replace these with younger, skilled and experienced people is proving to be a challenge. If you add our desire to transform while not having access to the necessary skills, it means that you are forever on the back foot. “We are faced with the challenge that our schooling system is not yielding enough learners with sufficient maths and science marks to get the engineering qualifications that we need. Transformation is always going to be a challenge unless we get that right,” says Tomes. The impact on AfriSam AfriSam is an 83 year old business. “The newest kiln was installed at Ulco, AfriSam’s flagship plant, which is already between 30 and 40 years old. From an energy efficiency point of view we do not have the most efficient plants,” Tomes explains. The advantage of Ulco is that its mining costs are fairly low. It mines into a hill and uses less fuel as the trucks that carry payloads drive downhill. “From a pure technology and plant perspective, if we did not have the mining advantage, we would struggle to remain competitive against some of the new players,” Tomes admits. New entrants have installed modern kilns that are a bit more efficient; this slight advantage is however offset in certain markets when one considers haulage and transportation costs. “AfriSam is also fortunate as the Ulco plant is located in an area where there are no other plants close by. It has a particular reach – Free State, Northern Cape, Eastern Cape and some coastal areas where the newer entrants are not present. This is an area where AfriSam can compete well, but demand in these areas is unfortunately not sufficient, so we are forced to haul the product over long distances in order to achieve the desired capacity utilisation required to sustain the plant. “The Gauteng market, even though demand is not great in terms of growth, still accounts for 40% of the country’s cement consumption,” says Tomes. “It is fiercely competitive. All the cement producers compete here and apart from the new entrants, independent blenders who mix fly ash and cement are also competitors. “Fortunately for AfriSam, it is a diversified business. “It does not only rely on cement – it has a good

All this uncertainty is causing many investors and potential investors to simply just play a wait and see game. At the recent Concrete Conference held in Johannesburg, attended by all the major civil engineering and built environment associations, Industry Insight shared the massive decline in tender activity, with more than double the amount of construction projects either being postponed or cancelled when compared to the previous year. Fortunately for South Africa, shortly after our miraculous and peaceful transition to a democracy, the country had the 1995 Rugby World Cup and the 1996 Africa Cup of Nations. These two events were fantastic marketing events for the country and gave the investor community a massive confidence boost. This time around there is nothing on the horizon that seems to suggest that confidence will return in the short term followed by an uptick in construction activity. The reality The mostly negative sentiment has a direct bearing on major civil engineering contractors. With the economic outlook subdued, results are down all round. “The industry as a whole is not stable because there is not enough work. This feeds back to the cement and concrete industry. Private development still happens, but is nowhere near enough. From a civils perspective Limpopo, Mpumalanga and KwaZulu-Natal are still doing well. This is not the case in the Eastern Cape. Gauteng, which consumes 40% of the national cement demand, is significantly down,” says Tomes. Even though the South African hardware retail sector has been showing reasonable growth in the last while, they too are now starting to see their numbers decline, Tomes says. An uncertain South African reality Tomes says that South Africa has an installed capacity for cement production of 20 million tons. “Current demand is at around 13 million tons – this means that we have an oversupply of just over 30%. “If one takes an extremely

aggregate business which generates better returns than the cement business, in terms of return on capital, and has been able to contain its costs much better because its production is not as energy intensive as cement. It has a capacity to produce 10 million tons and is currently running at 80% of capacity,” says Tomes. He adds that the Western Cape

optimistic view and assumes that South Africa can make a miraculous recovery and achieve economic growth rates of 7,5% per annum (which has never been done before), then capacity and demand will

Richard Tomes, AfriSam’s Sales & Marketing Executive, stresses the need for consolidation in the local cement market.

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CONSTRUCTION WORLD DECEMBER 2017