Cement wars: How Dangote price cuts drive competitors into loss territory

The entry of Africa’s richest man, Aliko Dangote, into the cement business in Tanzania has rocked the industry in the region, with cement manufacturers looking at huge losses.

The cutthroat competition introduced by Dangote Cement through price cuts, is forcing the firm’s competitors to sell their products at prices lower than their cost of production.

In the past two weeks, two of the region’s cement players with more than 60 per cent combined market share in Tanzania, posted negative results which they blamed on the price wars that have seen them consistently sell their products below cost as they struggle to stay afloat.

The Tanzania cement sector has experienced disruption following the entry of Dangote Cement, as discount pricing unsettled the large cement players in the region, further raising competition and cutting margins in the local and regional cement market.

Tanzania Portland Cement Company (TPCC), majority owned by Germany’s Heidelberg Cement, posted a 45.6 per cent drop in first-half profit after an output glut, while Kenyan headquartered Athi River Mining (ARM) Cement saw its losses compounded fivefold, from $2.54 million to $13.3 million.

ARM chief executive officer Pradeep Paunrana said that in the past six months, they have been forced to sell cement at a price below cost in Tanzania, which has hurt its 26 per cent market share.

“The commodity’s price in the Dar market fell from $88 per tonne in September last year to lows of $60 per tonne this year. This has greatly affected us,” Mr. Pauranha said.

Quest for market leadership

The price cut was occasioned after Dangote Cement slashed its prices by up to 40 per cent in 2015 to gain market share, leaving the smaller players struggling.

TPCC, Tanzania’s biggest cement maker, with a 36 per cent market share, reported a net profit of $5.5 million, down from $10.03 million a year ago. Its chairman Hakan Gurdal said the drop in profit resulted from the lower prices in an increasingly competitive market that saw the firm’s revenue drop by 16 per cent to $52.57 million.

“The market situation remains challenging, but we will continue to work to maintain our market leadership. We are now implementing strict cost controls to reduce the cost of sales and administrative expenses,” Mr Gurdal said.

Last month, Dangote announced that it would start using its own gas-powered plant in Tanzania this month to reduce its reliance on diesel generators for electrical power which had seen its operations costs increase. This means that the firm’s costs will drop significantly, probably affording it further price cuts, to the detriment of its competitors.

Back to drawing board

Even as the other firms complained of high production costs, Dangote’s Mtwara plant increased volumes by at least 64 per cent in the first half of 2017, pushing the six-month sales to more than 400,000 tonnes, despite the losses incurred in its operations costs.

“The factory is still reliant on diesel generators which results in net income losses that weigh on our operations outside of Nigeria. However, we expect to have gas turbines installed by September, which will immediately bring the plant into profitability,” the firm said.

Mr Dangote has used his Ethiopian and Tanzanian plants to gain a foothold in the regional cement industry.

His targeting of the consumers with low-cost cement, which is 20 to 40 per cent cheaper than other locally produced products, drove down retail prices in a market where they had remained static for close to a decade. It has since gained a 23 per cent market share after its 2015 opening of its three-million-tonne-per annum plant in Mtwara.

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For ARM, losses have now forced it back to the drawing board as it seeks a new round of fundraising to steady its business, probably through selling a stake to a new investor in the short term.

ARM’s Tanzania business has remained uncompetitive as cement prices there have been declining, with the current levels of $66 per tonne, from a high of $105 in 2016.

Strategic investor

The Tanzania business accounted for 29.3 per cent of ARM’s total sales and income in 2016 but also contributed 65 per cent of the loss before tax.

“Our plan is to sell our non-cement business, which is the fertiliser plant in this case, take short term shareholder loans and bring on board a strategic long-term investor. We are doing this to restore the value which has been eroded because of our Tanzanian operations,” Mr Paunrana said.

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In September 2016, the firm received $140 million investment from CDC Group, to reduce the long term debt which has been escalating over the years.

As at December, its debt halved halved to $126.17 million from $232.53 million in 2015, However, the firm is looking to add more debt to ease near-term repayment obligations.

Analysts at Genghis say that they expect cement firms in the region to continue performing below par as the production cost remain high in Tanzania and Kenya, due to a ban of imported coal in Tanzania.

“We are confident that challenges relating to supply of coal will come off from the second half of this year due to the new two coal mines in Tanzania. Other challenges relate to electricity supply , but this is expected to level off, though at a slower pace, as the government installs new transmission lines,” analysts at Genghis said.