East and West Africa Cement Companies Report November 2011

Evolving dynamics in SSA cement industry
When we initiated coverage of SSA’s cement sector, we stated our belief that SSA cement companies
were broadly value purchases save for EAPCC, which we believed then to be relatively poorly run and
DCP whose premium market rating and highly ambitious pan- African project prompted us to place it on
a watch list. Focus then was on;
� Rising consumption levels, growing at a faster pace than GDP growth of SSA economies;
� Aggressive cement capacity additions,
� Efficiency enhancement moves, largely via substitution of LPFO with cheaper alternatives (coal and
gas);
� The challenges faced by the industry in East Africa on the back of cheaper imports from the Middle
East and Asia, and;
� The slowdown in the construction sector in Southern Africa.
In this report, we update our recommendations on East and West African cement companies especially
as some new capacity additions go into production and headwinds re-emerge in the global economic
outlook. Significant game changers in the focus regions include:
� The coming on line of additional production capacity which will take the West African region from
deficit to surplus and significantly improve production capacity in East Africa;
� Enhanced efficiencies which have allowed margin growth, in some cases on the back of falling
capacity utilisation and pressure on factory gate prices;
� The emergence of inflationary pressures and depreciating currencies in both East and West Africa
and varied policy responses that have implications on physical infrastructure funding, and;
� The increasing risk of a global slowdown driven, in the main, by debt challenges in the developed
world.
Consumption and SSA economic outlook
Cement consumption is inextricably linked to GDP growth and the high economic growth being
experienced in SSA implies a robust cement consumption outlook in the region. As of the year 2010,
SSA was consuming c60.9mtpa at an annual rate of 78kg per capita (SSA population estimated at
0.8bn). Over the most recent five years, consumption has, on average, grown at a multiple of 1.6x to
GDP growth. East Africa registered the most aggressive growth, averaging 13.5%, which was at a
multiple of 1.8x to GDP, West Africa was second with 12.5% and a GDP multiplier rate of 1.6x, while
Southern Africa lagged at a five year average growth rate of 0.2%, weighed down by declines registered
between 2008 and 2010. A slowdown in growth will therefore have a direct bearing on consumption
growth outturn.
According to the IMF, SSA is expected to average 5.4% GDP growth to 2015. However, the rising
probability of a global slowdown driven by debt challenges in the developed world, places this growth
forecast at the risk of a downward revision. While 2008 has demonstrated that SSA economies can track
the developed world lower, we believe growth is likely to remain resilient and that at worst, SSA would
have a steep bounce from any slowdown. Factors that are likely to cushion SSA include;
� Strengthened ties with high growth regions in the East (Asia and India) that are expected to provide
a buffer as demand for mineral and agricultural exports in particular may remain robust. This is
particularly true for East Africa where linkages are even stronger due to relative proximity.
� Strong domestic demand in SSA, which is growing at a very fast pace underpinned by rapid
urbanisation, as well as a youthful and increasingly productive population.
� Lastly, most high growth African markets are on a solid macroeconomic footing compared to the
developed world and as such they still have flexibility to implement countercyclical policies should
the need arise. This will ensure a steep recovery if a decline occurs.
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