Infrastructure spending and import substitution to drive cement demand in Africa in the next 5 years

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Infrastructure spending and import substitution to drive cement demand in Africa in the next 5 years

14 December, 2020

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Algeria, the Democratic Republic of the Congo (DRC), Ethiopia, Kenya, Uganda and Tanzania are expected to add about 18 million tons of cement production capacity in the next five years, even amidst an excess capacity scenario

Cement manufacturers in six select African countries are expanding their production capacities to meet demand created by mega-infrastructure projects and government efforts to substitute imports. In Algeria, the Democratic Republic of the Congo (DRC), Ethiopia, Kenya, Uganda and Tanzania, cement capacities are estimated to sum up to almost 100 million tons in 2021E, with Algeria and Tanzania accounting for 63 percent of the total.

Over the next five years, cement demand in all above mentioned countries is expected to increase, with capacities also mirroring the growth trend and adding more than 18 million tons. The DRC's cement demand is expected to have the highest increase, while Algeria and Tanzania are expected to witness the biggest additions, with 4 to 5 million tons to be added.

Despite the economic impact of the Covid-19 in the above markets, cement demand remains robust due to sustained government investment in infrastructure.

Cement demand outlook in select African markets

Mega-infrastructure investment to boost the countries' construction sector

Most of these six countries are expected to see an economic recovery in 2021 based on government efforts to boost major sectors, including construction, according to Juliana Vieira, Business Analyst at CW Group.

The countries' construction sector is on an upward trend, with many mega infrastructure investments announced in the past couple years, most of them related to transportation, road infrastructure and hydropower.

One of the major infrastructure projects is the Lapsset project in Ethiopia, with an investment of USD 25 billion that is expected to be completed in 2030. The project aims to link Kenya, Ethiopia and South Sudan, including investments in ports, highways, railways, airports and a dam, among others.

In Algeria, the highway of the Haust-Plateau will connect the highlands areas in the interior of the country, is estimated to cost USD 10.2 billion. The project, launched in 2014, suffered several financial constraints, causing delays. But it is expected to be completed in 2023.

The country's sustained public spending in infrastructure is expected to drive cement demand to increase at a CAGR of 2 percent.

In Tanzania, the government announced a USD 15 billion 2020-2021 budget for the infrastructure sector, including the Standard Gauge Railway project and the Julius Nyerere Hydropower project.

"In Uganda, the biggest project announced so far is the Uganda Standard Gauge Railway project, with an investment of USD 12.8 billion which is expected to be completed in 2025. The Standard Gauge Railway, that is happening also in Tanzania, is a planned railway system linking the country to neighboring countries, such as Kenya, Ruanda, the DRC, South Sudan, and is part of the Eastern Africa rail plan," explains Juliana.

New capacities to come online despite excess supply

In Ethiopia, infrastructure projects are also estimated to boost cement demand. Wanderson Teixeira, Junior Business Analyst at CW Group, observes that the Abay Industrial Development Share Company is expected to commission in 2021E an integrated plant, adding about 1 million tons of cement production capacity to the domestic market.

"Although the market has an excess in cement capacity, it has not been able to supply the increasing demand in 2020, due to production issues that led the country to have an unexpected surge in imports, reaching around 3 million tons during 2020," explained Teixeira.

Uganda's cement market is likely to witness capacity addition and upgrades amounting to almost 2 million tons until 2026. The country's additional capacity is expected to spur housing and real estate development within the region.

A new integrated lime, marble and cement plant plant is expected to be established in the next five years, led by Uganda Development Corporation in partnership with the private sector, adding value to the existing limestone and marble deposits in the licensed area of the Colon district.

Capacities additions in African select markets

Kenya is also expected to witness additions from National Cement and Mombasa Cement and a new player, Nairobi Business Ventures, increasing the production capacity by more than 2 million tons.

"National Cement announced the construction of a clinker plant which is expected to produce and sell clinker exclusively to its neighboring country Uganda", Teixeira pointed out. The country's cement demand is expected to be catered by the additional capacities coming online and increase in imports.

DRC's cement capacity is also estimated to see the entrance of not only several new players as also the reopening of the former CINAT. Increasing cement demand in the DRC is expected to be catered by additional capacities as manufacturers are unable to supply existing demand. In the country, almost 4 million tons of cement capacity is expected to be added in the next five years.

"The country is expected to witness the highest growth among these six countries, supported by investments of more than USD 20 billion, encouraged by the government to increase domestic cement production in order to reduce cement imports," the analyst added.

In Algeria, the country's cement production capacity is likely to grow by almost 4 million tons in the next five years, with the sector expected to continue to have one of the highest utilization rates in the region, driven not only by the domestic demand but also exports.

Lastly, two new cement manufacturers are set to enter Tanzania's cement market by 2026, according to Teixeira. "Manyara Cement announced in 2017 plans to build a new integrated cement plant. More recently, the company disclosed that they have already applied to a limestone extraction license for the site. In addition, there is also Hengya Cement in partnership with Sinoma, which announced the construction of a grinding plant mainly focused on exports".

Cement ex-works prices to decline in 2021 in Tanzania on higher competition

When comparing 2021E prices with the previous year, there is an increase in almost all markets, excluding Tanzania, which is expected to have a year-on-year decline of more than 10 percent due to a more competitive scenario as a new cement player has entered the market.

In terms of pricing analysis, cement ex-works prices in Ethiopia are estimated to have the biggest year-on-year increase in 2021 among the six select countries.

Uganda's ex-work prices, which are expected to remain stable year-on-year in 2021, are the highest among the markets, reaching about USD 120 per ton, mostly due to an increase in production costs led by clinker imports.

ÔÇ£Although cement prices in Uganda are expected to increase due to the growth of the construction industry, the entry of Kampala Cement and Simba Cement in 2018 have increased competition among manufacturers which drove down prices in this period,ÔÇØ explained Wanderson Texeira.

Cement prices in select African markets

The DRC has the second highest ex-works prices, that suffers a wide national variation, as the distribution is very expensive due to extremely challenging logistics. Prices in the country are expected to increase at a CAGR of 1 percent between 2016 and 2021E.

Algeria, on the other hand, is the country with the lowest ex-works prices, averaging less than USD 60 per ton, with prices seeing a downward trend since 2017, mostly because of a significant growth in production.

Ex-works prices are expected to witness a slight decline from 2016-2021E, with the exception of the DRC. The biggest decline is likely to be seen in Algeria, which is forecast to decline at a CAGR of 6 percent in the period.

This article was based on CW Group's webinar presented on March 18 by our Business Analyst Juliana Vieira and our Junior Business Analyst Wanderson Teixeira. Watch the webinar and download the presentation here.

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