Cement production costs projected to fall sharply

Tanzania’s cement production costs are projected to decline in the near future on the back of the falling energy costs and improved supply, hence pushing the country’s competitiveness edge in the region.

A study entitled: ‘Equity Research Cement Sector Local Listed Companies’ indicates that due to the expected entry of three new serious players prices are also projected to decline.

The researchers, a brokerage firm known as Tanzania Securities, says:“We see an improvement in energy supply, introduction of new sources of energy and stabilization of energy prices in the country as a special opportunity for cement producers”.

In the last two years, the report says, the industry had passed at a rough production terrain following power rationing, higher energy prices and erratic power supply for most part of their production circles.

However, every cloud has a silver lining, as recently, cement producers have linked their plants with available alternative sources of energy, coal and gas.

“Energy supply has also improved in the past few months,” the lead researcher of the report who also is the Chief Executive Officer of Tanzania Securities, Mr Moremi Marwa says.

Due to the cement industry bright future, the report recommends a medium term ‘buy’ status on shares of both cement companies listed on the Dar es Salaam Stock Exchange (DSE) -- Tanga Cement Company (Simba) and Tanzania Portland Cement Company (Twiga).

The good thing is that competition will also increase in the next 12 months or so following the entry of three new cement firms in the market which are Kenya’s Arthi River Mining (ARM) which is currently building what is expected to be the largest cement producer in the country when completed during the second half of next year.

Others are ARM plants, based in Tanga and Dar es Salaam will produce up to 1.5 million tonnes per annum (mtpa). Dangote Cement from Nigeria is in the construction process of an equal magnitude with ARM at 1.5mtpa plant in southern Tanzania -- to be completed in 2015 and Lake Cement is also constructing a plant expected to be completed in 2013 to produce 0.5mtpa.

“We project a drop in prices due to the expected entry of new players,” the study indicates. The study released last week shows that favourable retail prices will give the country a comparative advantage over its competitors throughout Africa.

“We consider Tanzania’s prevailing price of 120 US dollars per tonne to be competitively very low versus West Africa’s 200 US dollars per tonne,” the research analysts say:

“Our projections show that prices will continue to fall to between 90-105 US dollars per tonne in the medium term and translate into higher export levels to available markets (of Rwanda, Burundi, DRC or Zambia (with a 200 US dollars per tonne price)”.

Apart from the country to become a net exporter of cement in the next two years, its production capacity standing at 3.25 million tonnes per annum expects to double in the next
three years to 6.75 million tonnes.

On local projection, the study shows that consumption is also projected to increase from the current 2.25 million tonnes annually to 3.75 million tonnes in 2015. “Consumption per capita in Tanzania is expected to remain over 70kg this year higher than 60kg for the East African Community (EAC),” the report says.

The residential and commercial housing, according to the report, will continue to dominate local cement demand, at around 85 per cent in the medium term. Analysts, however, continue to remain cautious of the fact that Sub-Saharan Africa (SSA) economies are unpredictable and subject to swings.

“Factoring this fact, we hold our projections to be true ‘Ceteris Paribas’ (everything remaining equal),” The analysts, Moremi Marwa and Magabe Maasa, say in the report. They added:

“Abundant source of high quality limestone deposits in Tanzania will continue to provide unrivalled and competitive advantages for local cement producers over their competitors in the region”.

The new three entrants will also change the market share pattern in the country, which at the moment is controlled by Twiga with 43 per cent and followed by Simba 36 per cent and Mbeya Cement (Tembo) 12 per cent, the remaining is held by imported cement.

Following positive prospects, the study recommended a medium buy for both listed cement firm. For Twiga it recommends a buy at 2,500/- a share with up and down side of 10 per cent while for Simba 2,400/- a stock with up or down side of 5 per cent. At the closing of DSE last week price of Twiga shares were selling at 2,080/- each, while of Simba 2,380/- a share.

They are also trading on respective trailing price/earnings ratios (P/ Es) of 8.60 per cent and 6.91 per cent. The two companies have a trailing combined market cap of 587bn/-, equal to 23 per cent of 2.54tr/- domestic market capitalization of the bourse -- a relatively very impressive figure on its own.

“We acknowledge the fact that, the cement industry in the country will face challenges (falling prices, stiff external competition, and so forth) in the short term. “Our mid and long term projections on the other hand, point to the industry with lower energy prices, efficiency gains, improved scales, improving demand and improving infrastructure network,” the researchers say.
Source: The Daily News,http://www.dailynews.co.tz, reported by Abduel Elinaza
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