Infrastructure Investment Drives Cement Demand in Infrastructure Investment Drives Cement Demand in East Africa East Africa

Charles Charles Shonayi, Research AnalystShonayi, Research Analyst

Mining & IPC Mining & IPC

15 February 201215 February 201215 February 201215 February 2012

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Functional Expertise� Experience in market research and growth strategy consulting projects. Particular expertise in:

- Qualitative and quantitative market analysis

- Opportunity analysis

Industry Expertise� Experience base covering broad range of sectors, leveraging long-standing working

relationships with leading industry participants’ Senior Executives

- Research on South African Automation and Control Solutions Market and the South African Heat Exchangers Market

- Research on Cement Industry in Egypt and East Africa

- Sub-Saharan Africa Mining Industry Trends

- South African Gold, Platinum and Coal Mining

Today’s Presenter: Charles Shonayi

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- South African Gold, Platinum and Coal Mining

What I bring to the Team

- Strong research and analytical skills

- Ability to focus and prioritize on project deliverables

Career Highlights� Started professional career with Frost and Sullivan in 2010� Economist with Reserve Bank of Zimbabwe in the Economic Research Division from 2002 to

2007

Education� Master in Business Administration with Edinburgh Business School (UK) (In Progress)� Post Graduate Certificate in Business Administration from Edinburgh Business School (UK) � Bachelor of Science Honors in Economics from the University of Zimbabwe (UZ).

Charles ShonayiResearch Analyst

Industrial Automation &

Mining

Frost & Sullivan

South Africa

Cape Town

3 What are the factors expected to drive growth?

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2

4 What are the risks?

Key Challenges explained

Agenda

Current and Future Key Trends

3

4 What are the risks?

5 Conclusions

Market Overview: East African Cement Industry, 2010 - 2017

Market Stage

Growth

Forecast Market Growth Rate

7.3%

(2010 – 2017 CAGR)

Production Capacity

10.7 million tons

p.a.

(2010)

Production Capacity at End of Forecast Period

17.0 million tons

p.a.

(2017)

Cement Demand at End of Forecast Period

12.0 million

tons p.a.

(2017)

Current and Future Key TrendsCurrent and Future Key Trends

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Stable IncreasingDecreasingNote: All figures are rounded. The base year is 2010. Source: Frost & Sullivan analysis.

Cement Consumption per Capita

60.0 kgs

Customer Price Sensitivity

9

(Scale:1 [low] to 10 [High])

Cement Consumption

8.2 million tons

p.a.

2010

Market Concentration

56%

(% of market share held by top 3 companies)

Number of Competitors

12

(Active market competitors in base year)

Kenya, Tanzania and Uganda

Cement 2010

Imports 25 000 tons

Exports 620 000 tons

Production (Actual) 3, 659 million tons

Consumption 3, 054 million tons

Production Capacity 5.3 million tons

Kenya Tanzania

East Africa Cement Industry: Cement Statistics East Africa Cement Industry: Cement Statistics

Cement 2010

Imports 500 000 tons

Exports 50 000 tons

Production (Actual) 1.980 million tons

Consumption 2,770 million tons

Production Capacity 3.0 million tons

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Source: East African Community, Frost & Sullivan

Uganda

`̀

Cement 2010

Imports 420 000 tons

Exports 320 000 tons

Production (Actual) 1,170 million tons

Consumption 1,640 million tons

Production Capacity 1.5 million tons

Kenya is the largest market for cement in East Africa with an annual production representing 53.0 % of the region’s total capacity. Tanzania and Uganda contribute 30% and 15 % respectively of the region ‘s total production capacity. Rwanda and Burundi’s annual

cement production capacity was approximately 100 ,000 tons and cement consumption in the two countries was approximately 350, 000 tons in 2010.

• High energy cost: The quality and reliability upon electricity power in East Africa is generally not guaranteed and cement producers are forced in some instances to use expensive thermal and coal power.

Market Challenges & Impact Scenario for Risk Aversion

• Excess capacity: This is expected to result in downward pricing pressures more likely to benefit consumers in EAC at the sametime raising concerns about the long term profitability of the industry.

Impact

• EAC Cement manufacturers are faced with irregular supply of

electricity and raw materials, which are key production inputs.

Cement manufacturers should consider investing in newer and more energy-efficient manufacturing technologies.

• Cut throat competition especially in the Kenyan market is expected to result in falling prices of cement.

Key Challenges

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None Low Medium Medium-High High

Source: Frost & Sullivan

• Influx of cheap Asian imports: Global oversupply combined with collapsed freight rates have resulted in increased levels of imports reaching the East Africa markets at a substantial lower cost compared to local production.

• High distribution costs: High fuel costs coupled with the poor state of road and rail networks in East Africa connecting domestic customer groups and key markets in the region is pushing upwards the cost of moving cement.

• Tariff ratification by the EACPA is crucial in eliminating the risk of increased competition from imported cement EACPA must lobby their governments to reinstate protectionism to compete favorably with cement imports from Middle East and Asia.

• Strategically aligning their market strategies with the location of production facilities. This can be done by region focused strategies or increasing their production capacities in regions where they have a larger market share or easy access to raw material.

Growing urbanisation and housing demand

• The need for infrastructure development and new housing is still very significant in East Africa due to growing urbanisation. Furthermore, the under developed mortgage markets in EAC indicates that

demand for new housing construction, although relatively high, is likely to accelerate in coming years as a result of rising disposable income and improved access to credit which would have more people moving to better and larger housing.

Rising Infrastructure Development

• In East Africa, planned public sector infrastructure spends between 2011 and 2015 are centered on developing the region’s electricity generation industry, constructing new and upgrading existing airport, port, road and rail infrastructure, and expanding and rehabilitating water collection and reticulation infrastructure.

Rapid economic growth

What factors are expected to drive growth in the EAC cement industry?

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Rapid economic growth

• The EAC achieved the highest GDP growth with an average of more than 5 percent in 2010 and 2011. The sustained economic growth in light of the global financial crisis is anticipated to drive investment in the construction sectors of the economy.

Reconstruction in DRC, Sudan and South Sudan

• Export markets in the high-growth segment of countries such as Sudan, DRC, which are characterized by very low cement consumption per capita are expected to continue to grow. Most countries from this group have or had political instability, which has curtailed the development of the infrastructure and construction sectors.

Improving governance and political stability

• Improved governance and political stability in new member states to the EAC, Burundi and Rwanda have opened up new markets with dynamic construction sectors.

Pressure on margins

• Cement manufacturers continue to face eroding margins forcing cement companies to reinvent current

business models and adopt strategies to cut costs. This follows rising electricity and fuel prices and raw

material costs. There is pressure to keep prices down to gain market share.

Impact of the Global Financial Crisis

• The lack of funding aggravated by the financial crisis led to delays or cancellation of certain projects

which will negatively affect demand for cement.

What are the Risks to growth in the EAC cement industry?

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which will negatively affect demand for cement.

• The repatriation of foreign currency by nationals resident in the diaspora is also affected due to job

losses leading to a slowdown in the residential housing construction sector.

Inadequate contractor capacity

• Shortage of qualified ECPM personnel to implement large commercial construction and engineering

projects is expected to yield reduced uptake of these projects thereby reducing demand for cement.

East Africa offers large cement

market

� The low per‐capita consumption of cement offers scope for growth .East Africa’s average per capita consumption is still low averaging about 60kgs and the process of catching up with international averages will drive future growth.

Government infrastructure

� Cement demand in the region is anticipated to remain strong in the medium term supported by the resurgence in infrastructure and housing sectors which are boosting investments in new production lines, retrofit old plants and expansion of production capacity mainly driven by

ConclusionConclusion

Pursuing cost control measures

to remain competitive

� To remain competitive cement producers must implement sustainable cost optimization strategies focusing on alternate fuels, low cost technology and value adding models.Modernisation at the plants, improvement of plant processes and absorbing the best practices in mining and manufacturing is required if EAC producers are to compare favourably to leading world cement producers in terms of profitability.

infrastructure spend expected

drive growth

production lines, retrofit old plants and expansion of production capacity mainly driven by government investments in infrastructure.

� Planned public sector infrastructure spends are centered on developing the region’s electricity generation industry, constructing new and upgrading existing airport, port, road and rail infrastructure, and expanding and rehabilitating water collection and reticulation infrastructure.

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For Additional Information

Christie Cronje

Corporate Communications

Africa

+27 21 680 3566

Christie.Cronje@Frost.com

Stephane Gay

Account Manager

Environment & Building Technologies

+27 21 680 3279

Stephane.Gay@Frost.com

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David Winter

Research Manager

Mining

+27 21 680 3275

david.winter@frost.com