Concrete is the second-most widely used material in the world, after water. The earliest concrete structures, in Syria and Jordan, date back to 6500 BCE. Fast-forward to 600 BCE and it was the Romans who took the use of the building product to new heights, using volcanic dust, called pozzolana, to strengthen concrete. Many of those structures still stand today.
The real industrialisation of cement began in 1793 with a big step in technology when clinker was created, ground up and used as an additive. In 1824, Portland cement was invented by burning finely ground chalk and clay until the carbon dioxide was removed.
Into the 20th century, cement became the product that literally underpinned civilisation. How the wheel has turned 128 years later, when domestic cement companies are battling rampant overproduction, weak demand and imports flooding in from cheap manufacturing areas such as Vietnam, Mozambique, Namibia, Saudi Arabia and the UAE.
The first cement business in South Africa was Pretoria Portland Cement (PPC) in 1892, which was incorporated to counter imports from Europe. PPC remains listed on the JSE but it’s a shadow of its former self when, as a company in the all share top 40, its valuation was in the tens of billions of rand.
Priced at 358c with a market value of R5.8bn, the shares went as low as 42c in late 2020, giving PPC a value of R700m as the market fretted about the weakness of the cement sector and PPC’s crushing debt load from an overambitious African expansion spree.
The heyday of the domestic cement industry was the 1990s and 2000s, though that very success was also the seed for the sector’s downfall. Three decades ago, the domestic cement industry could have been considered a cosy cartel — all members prospered as collusion quietly ruled.
The cartel was set up to counter a weak domestic cement market and rising imports, so a quartet of companies colluded to protect cement pricing and market share.
From 1998 to 2009 the artificial market drove up cement prices as PPC, AfriSam, Lafarge South Africa and Natal Portland Cement (NPC) carved up the sector as a means to shore up the South African cement industry. Sales also surged as the construction sector was in a building boom thanks to the 2010 Soccer World Cup.
However, in 2008/2009 the cartel cracked as the Competition Commission raided the cement companies, leading to hefty fines for AfriSam and Lafarge in 2011 and 2012. PPC turned state witness, gaining exemption from the penalties.
Then a series of new entrants came into the market and there was a period of sector consolidation — as a result, the sector is now having to deal with overcapacity and cut-throat pricing.
Aside from PPC, the only other JSE-listed cement company is Sephaku, owned by African cement giant Dangote, whose shares trade at 157c with a market capitalisation of a modest R390m.
Over the years there have been a series of consolidations and buyouts of other JSE-listed cement companies, giving rise to the likes of Anglo Alpha (later AfriSam), Blue Circle (taken over by Lafarge) and NPC (taken over by Brazilian industrial group Camargo Correa via its subsidiary InterCement). New entrants also appeared with more efficient, price-competitive plants to challenge the legacy incumbents.
In 2013, Nigeria’s Dangote arrived via the acquisition of Métier Mixed Concrete for R365m, marking the first new entrant since 1934. The deal went hand in glove with Dangote entering a joint venture with Sephaku to build and manage cement operations. Two new cement plants were built, adding 3.3Mt of capacity to the domestic market at a cost of R3.3bn.
In 2014, Mamba Cement entered the market in a R1.8bn investment by a consortium anchored by China’s Jidong Development Group and the China-Africa Development Fund, which added a further 1.1Mt of domestic capacity.
A lack of demand, especially for large government infrastructure projects, has led cement companies to push further into the bagged market
With all of this new modern, lower-cost capacity hitting the domestic marketplace, the established, higher-cost players winced. Further profit pressure was exerted from imports as they weren’t subject to import duties at the time. They had started to gain traction mostly in the coastal provinces.
Fast-forward to 2024 and there has been much movement in the local market over the past two years, with Chinese firms arriving in force and becoming ferocious competitors.
In 2023, Huaxin Cement bought the South African operations of InterCement as it divested. Further, Switzerland-based global cement giant Holcim Group sold Lafarge to Afrimat.
The domestic industry lobby has had some success limiting imports with hefty tariffs placed on imports of cement from Pakistan. However, that led to a movement of imports from other countries such as Vietnam, which the local cement lobby is now challenging. Further, an initiative has been accepted in which the government and municipalities can only procure locally manufactured cement when undertaking construction projects.
That’s all well and good. However, spending from state bodies hasn’t moved the needle yet due to budget constraints.
The state of the domestic cement industry was laid bare in the recent results of PPC and Sephaku. PPC’s new CEO, Matias Cardarelli — previously chair and CEO of InterCement South Africa — said total cement demand now is estimated at 12Mt- 13Mt a year, adding that there is too much capacity in South Africa, latent capacity could come into production and imports are running at about 1Mt a year.
A lack of demand, especially for large government infrastructure projects, has led cement companies to push further into the bagged market. Lower-priced and lower-quality density product was launched, which eventually led to a price war that — alongside weaker consumer demand in a high interest rate environment — curbed demand.
Many plants from the legacy players, mostly older ones such as Lafarge and PPC, are operating well below capacity utilisation. Higher fuel costs also led to the use of alternative kiln fuel such as old tyres to lower costs.
In looking at three local players where investors can gain exposure to cement either directly (via PPC or Sephaku), or indirectly (Afrimat), IM lays bare the challenges and opportunity.
Both PPC (see company review on page 21) and Sephaku published year-end results in June. PPC, the largest domestic producer, has emerged from years of restructuring and asset sales as previous CEO Roland van Wijnen overhauled the company.
Assets in the Democratic Republic of Congo and Rwanda were sold to reduce debt. Profit, mostly from Zimbabwe, improved as a result though the domestic market remained stagnant.
PPC reported that the South African and Botswana business recorded profit before tax of R25m (down from R144m in 2023) or just over 10% of total group pretax earnings of R233m. The bulk of group profit came from Zimbabwe as the aggregates business lost R65m (an improvement from the prior year’s loss of R150m).
Revenue for the year increased 20.6% to R10bn with pretax profit of R88m rebounding from the previous year’s R328m loss. Headline earnings came in at 19c a share and, with an improved balance sheet, PPC paid its first dividend in almost a decade of 13.7c a share. PPC has also undertaken a share buyback programme.
Much of the excellent work undertaken by previous management was on reducing debt, asset sales and restructuring. Cardarelli was blunt about the situation: the materials business hasn’t been performing for a long time and remains loss-making; the South African cement business needs to be “sorted out” as its performance had been placed on the back burner; the priority has been stabilising PPC.
Sephaku also reported an improvement as a move from losses back into a modest profit within the majority cement division resulted in headline earnings of 25.71c a share. Group revenue for the year rose 18.6% to R1.16bn with pretax profit 138% higher at R85.4m. The performance was due to healthy growth in Métier.
Like PPC, Sephaku managed to pass on price increases but management commented that sector volumes remain below Covid levels with huge sector competition and market oversupply. It expects no material sector improvement in the next six months and is concerned about the government carbon tax hitting costs.
The new boy on the block is general mining counter Afrimat, which made a bid for Lafarge in 2023 with the deal concluding in April. Afrimat paid $6m for the cement and aggregates business and assumed R900m of debt.
Lafarge has excellent aggregate assets, which was the key allure for Afrimat as it extends its nationwide coverage. Lafarge cement needs rehabilitation though and Afrimat intends to spend R300m on the plant to fix the neglect as the former owner lost interest in the asset.
With current cement production of 700,000t, Afrimat wants to increase this to 1.2Mt and, under its Project Oppenheimer initiative, plans to improve efficiency and productivity, and disrupt the bagged market with new product initiatives.
Given that Afrimat has an outstanding track record of rehabilitating assets, IM has no doubt the Afrimat magic will return Lafarge to its glory days of R300m-R400m profit — a decent uplift for Afrimat given the price paid.
After reviewing results, sector prospects and potential, IM cannot, at this stage, recommend PPC, as the stock is trending sideways and clearly there is more work to do to re-establish the company’s growth profile. We rate PPC a hold.
Sephaku is a small player with a major player in Dangote behind the stock. IM places a buy on Sephaku.
Lafarge, within Afrimat, is unprofitable for now. IM is confident that management will quickly resurrect the company and make it highly profitable, adding some kick to the general mining counter.
For investors looking for a more diversified play with a cement uplift, IM maintains a buy on Afrimat.
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