A 50kg bag of cement in Nairobi, Nyeri and Nakuru is being sold by dealers at an average of Sh650 from Sh750 in 2008 and 2009 – with ex-factory prices dropping to as low as Sh575 per bag.
The decreasing margins are seen as a threat to the survival of local companies, most of which have recently upgraded their factories through expensive bank loans.
“The firms need relatively high margins to sustain business models capable of tapping into emerging opportunities requiring capital-intensive expansion,” Faida Investment Bank said in a report on the sector.
Cement prices have been dropping over the past three years despite a rise in raw material costs – mainly coal, electricity and fuel, which account for nearly half of cement makers’ production costs.
Industry players have blamed the current situation on the East African Community’s decision to lower the import duty on Portland cement – the most common type of cement used for both housing and infrastructure construction projects.
In January, EAC council of ministers lowered the duty charged on the commodity from 35 per cent to 25 per cent and at the same time removed the building material from the list of “sensitive products” that require protection from imports – sparking an outcry among industry players.
Under the list of “sensitive products” covered by EAC Customs Union Protocol, cement imports from non-EAC countries were subjected to a 55 per cent common external tariff, which was to be decreased at a rate of five per cent every year from 2005 – to stabilise at 35 per cent by 2009.
However, in June 2008 the region suffered an acute shortage of cement due to massive construction projects that were undertaken in South Africa in preparation for the 2010 FIFA World Cup.
On the basis of the shortage, import duty that was by then standing at 40 per cent was reduced to 25 per cent. The rate was later revised upwards to 35 per cent and remained at that level until it was reverted back to 25 per cent in January.
Local firms lamented that even at 35 per cent duty, imports were still largely cheaper than the locally produced commodity because most Asian manufacturers operate in “subsidised economies.”
ARM Cement boss Pradeep Paunrana warned that the reduced tariff would encourage dumping of cement from Pakistan and the Middle East into the region.
“We are currently producing seven million tonnes of cement and the demand is about four million tonnes. This is why we need more protection from external competition,” Mr Paunrana said.
This year, East Africa is expected to produce about 12.9 million tonnes of cement against a demand of 11 million tonnes, leaving a surplus of about two million tonnes or 15 per cent of production.