The Sunday Mail
Clemence Machadu Insight
Howdy folks!
As PPC was popping the champagne bottles to celebrate the commissioning of its new US$85 million cement plant in Harare’s Sunway Industrial Park, Government was probably also celebrating that new jobs had been created and industrial production would increase. PPC will double its cement production to 1,4 million tonnes per annum.
The commissioning of the plant comes at an opportune time as Government has reviewed customs duty on cement imported from the region and beyond from 25 percent, and imposed a surtax of 25 percent to US$100 per metric tonne with effect from last month.
This new protection regime translates to US$5 per 50kg bag of cement imported.
While this guarantees more local cement demand, as imports start to be substituted, the local market can only take so much.
The national requirement for cement is about 1,2 million tonnes per annum, and can now be met by PPC alone, actually leaving an excess in supply.
But the oligopoly cement market also has other local players claiming the piece of cake — Lafarge with an installed capacity of 450 000 tonnes per annum and Sino Cement which has a 400 000 tonnes per annum installed capacity. Combined, the three players can produce nearly 2,3 million tonnes per annum.
As if that is not enough, the industry is bracing for the entrance of yet another giant player, Dangote Cement Company.
The entrance is certainly going to dilute the market share and reduce sales for each of the players.
Dangote Cement wants to set up an integrated cement plant producing 1,5 million tonnes per annum, which will make it the biggest cement manufacturing company in the country.
In total the four companies will produce about four million tonnes per annum.
It is clear that domestic demand will be too low to meet the high production levels.
It is, therefore, imperative for local cement companies to start looking for outside markets for cement sales as the local market cannot absorb the entire quantity produced.
There are, however, a number of issues that should be addressed before giving serious attention to the export market, with competitiveness topping that list.
Already, local cement producers have been battling with the challenge of lower sales volumes forcing them to produce at low capacity, until protection came to their rescue.
Since the industry operates on fixed costs, the lower the capacity sold, the narrower the cost distributed on the same base.
It also affects the price competitiveness of cement in the country, as production costs per tonne can go as high as US$150, while the regional average is half that amount.
Electricity, which is a key cost in cement manufacturing, is also an issue of particular concern as Zesa continues to push for an increase in power tariffs. The cement manufacturing industry is energy intensive in nature and power costs form the most critical cost component.
At the current tariff rate, electricity makes up about 25 percent of cement production costs in the country. Zimbabwe’s electricity tariffs are already the second highest in the region and if Zesa is given the green light to increase tariffs, it might worsen the situation.
Government should, therefore, consider rationalising power tariffs for cement manufacturers to help them recuperate during their period of protection.
Transportation is another key challenge.
Given that cement is a bulky commodity, transporting cement is quite a costly affair. Given the deterioration of rail infrastructure, most companies have had to transport their product using road.
The cost is further worsened by the poor state of roads, toll fees, numerous police roadblocks and insurance.
The high transportation costs are the reason why Zimbabwe’s cement exports are just concentrated in nearby countries like Mozambique, Malawi and Zambia.
Development of rail infrastructure might help the sector to break into other attractive markets further in the region.
While local cement players are currently heavily protected from imports, they should not forget that the incubation is only a temporary measure that will not last forever.
They should start taking concrete measures that will enhance their competitiveness in the medium term, if they want to sustainably stay in the game when the protection lid is lifted.
Otherwise the commissioned plants will become white elephants.
Later folks!
