Africa's 'infrastructure apartheid' is deep; Lusaka, Luanda and Accra painful for construction firms

Cement companies report healthy profits and robust expansion plans, but half of Africa's fixed infrastructure stock is held by just four countries.

CEMENT is boring, but it can really bring in the big bucks in Africa.

The continent’s richest man, Aliko Dangote, is having a good week; Nigeria’s largest cement producer, Dangote Cement today announced a net profit of N68.6 billion ($344 million) for the three months ended March 31, 2015, a robust 44.1% increase over the profits recorded in the same period in 2014.

According to the cement giant’s unaudited results for first quarter of 2015, revenues rose by 10.8% to N114.7billion ($570 million) compared to the same period in 2014.

The company sold 3.8 million tonnes of cement, driven by production in Dangote’s factories outside Nigeria, including those in South Africa, Senegal and Cameroon; factories in Zambia and Ethiopia will soon begin producing as well.

It’s good news too in South Africa, where PPC Ltd, (that used to be Pretoria Portland Cement but the company now only goes by the initials) the largest cement maker, has had its share price gaining the most in six years after the country imposed provisional anti-dumping duties of as much as 77% on cement imports from Pakistan, in order to protect the local cement manufacturing industry.

PPC is looking to expand into the rest of Africa to counter the Dangote hegemony, with an aim to increase its sales outside South Africa to 40% of its total earnings by 2017, up from the current 22%.

Ethiopia, Rwanda acquisitions

In line with this strategy, PPC has acquired a 50% stake along with South Africa’s Industrial Development Corporation in Ethiopia’s Habesha Cement, which will build a 1.4 million metric tonne-a-year cement plant in Ethiopia.

PPC has also acquired a 51% shareholding in Rwanda’s Cimerwa, and plans to raise the company’s production capacity from 100,000 metric tonnes a year to 600,000 tonnes, and is investing $230mn in a 1 million metric tonne-a-year production plant in the Democratic Republic of Congo.

The rapid expansion of production capacity across sub-Saharan Africa has led to a sharp drop in cement imports, reversing the deficit that has built up over the past decade, says a recent industry brief by Ecobank.

Nigeria, which as recently as 2010 was importing $500million worth of cement each year, has seen imports slump to $139million in 2012, while Ethiopia’s imports have fallen by 75%, to just $43million over the same period, as both countries tightened their import regimes and protect local manufacturing, as South Africa is now doing with its anti-dumping measures.

Cement consumption is a relatively accurate proxy indicator for economic growth – one stunning statistic shows that China has used 3 billion tonnes of cement in the past three years, more than what the US used in the entire 20th century.

By some estimates, half of China’s infrastructure has been built since 2000, with new rail networks, interstates, dams, airports and high-rise apartment buildings springing up across the country.

Although Africa’s cement consumption per capita falls far below the global average of 500kg per person, the continent has experienced sustained growth in cement demand, reflecting real GDP growth averaging 5% per year over the past decade.

The region’s largest markets in Nigeria (126 kg per capita), Ghana (187 kg), Kenya (80 kg) and Ethiopia (61 kg) all showing huge potential for growth. 

Africa cement king

Currently Nigeria is sub-Saharan Africa’s largest consumer, with an estimated 18.3 million metric tonnes consumed in 2013, followed by South Africa, with 12.2 million. Together these two countries account for half of sub-Saharan Africa’s cement consumption.

Angola, Ethiopia and Ghana all consume between 5 million and 6.5 million metric tonnes, while Kenya (3.7 million) and Tanzania (3 million) are East Africa’s leading cement consumers.

But companies like Dangote, PPC and Lafarge can begin to rub their hands in anticipation of the coming windfalls, as demographic change is expected to drive up cement demand over the coming decades.

Africa’s urban population is expected to rise to 865 million by 2050 and Nigeria, Africa’s most populous country and largest economy, is facing a critical housing shortage, with the need to build at least 18 million additional houses in order to meet current demand, says the industry brief by Ecobank.

Sub-Saharan Africa’s growing middle class is also driving a boom in the commercial real estate sector, boosting the construction of shopping malls, hotels and other leisure and hospitality projects.

According to data from the African Development Bank (AfDB), the continent needs to invest around $100 billion a year over the next decade to meet its infrastructure shortfall, a third of which is needed for maintenance.

This is a huge number considering the continent had an infrastructure stock of just $400 billion in 2012, and half of this fixed capital was held by just four countries: South Africa, Algeria, Egypt and Morocco, according to a recent report on construction in Africa by KPMG.

Infrastructure “apartheid”

In fact, Africa’s “infrastructure apartheid” is so deep that three-quarters of Africa’s capital stock was held by just 10 countries. Put it differently, 44 African countries share between them only 25% of the continent’s infrastructure.

But Africa’s construction industry is fragmented and supply chains are inefficient. It partly explains why construction costs per square metre in many African cities are much higher than in other developing regions.

A multi-unit residential highrise in Lusaka, costs $1,283 per square metre to build, the most expensive among 12 major African cities surveyed in the KPMG study. Luanda is also expensive at $1,019 per square metre, and Accra at $1,100.

East African cities are cheaper to build in, according to the study. Nairobi is the cheapest among the cities surveyed, at $558 per square metre, followed by Kampala at $641, then Dar es Salaam, at $669.

But even that falls short of cities in Asia, where economies of scale, efficient supply chains, and (sometimes) government subsidies bring down the price to as low as $415 in Mumbai, and even $250 in some cities in China.

“There’s really no scientific reason why it should cost that much to build houses here. It really has more to do with the depth of development and efficiency of the supply chain, the way builders work, access to large tracts of land, and the cost of infrastructure,” Britt Gwinner, housing and finance programme manager of the International Finance Corporation at the World Bank, is quoted to have said at an affordable housing conference hosted by the McKinsey Global Institute, held in Nairobi in March.

-Additional reporting by Bloomberg

UPDATED to reflect that Dangote’s factories in Zambia and Ethiopia will soon begin production.

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