BUSINESS TRENDS by GRANDY NTUMBO –
THE cement manufacturing sector turns out to be one of the most complex, unique and interesting competitive business environments in Zambia as well as in the region.
This could be seen from the increasing number of incidences of breach of operating regulations by cement manufacturers in the last three years.
Think of it, hardly three years ago, a Lafarge Zambia chief executive officer, is reported to have complained that there was overcapacity and ‘cut-throat competition’ in Zambia’s cement manufacturing sector.
Indeed, the country has in the last six years seen one of the most rapid growth rates in investment in cement capacity on the entire African continent.
Why has the cement sector in Zambia been attracting enormous investment in the last six years?
Why should an investor under normal circumstances invest in a sector that has already reached full capacity?
Why has industry regulators; the Zambia Compulsory Standards Agency (ZCSA) and the Competition and Consumer Protection Commission (CCPC) kept a watchful eye on this sector?
What’s so special about this sector?
Remarkably, Zambia’s demand of cement is estimated to be around 1.8 to 2.2 tonnes per annum, while the estimated production levels are estimated to be around metric tonnes per annum.
Of course, this increase in investment in the sector is not only due to the increase in public sector infrastructure project construction forecasts, but also due to the anticipated demand across Zambia’s borders.
To understand the ‘merry-go-round’ that has been going on in this sector, it’s important to have a recap of some of the main incidents that have occurred in the last six years.
As alluded to in the previous article, Sinoma Mpande Limestone Ltd has over the recent years built a 1.16 tonne per annum plant in Chongwe, while Dangote Industries Zambia Ltd has a 1.5 Mta integrated plant at Ndola.
The entry on to the Zambian market by Dangote Cement in 2015 has had a profound effect on the domestic price of cement.
Following the launch of this plant, cement prices soon fell from K90 to K55, which translated to US$5.70 from a price of $9.40 to per 50 kilogramme bag, at that time.
Apart from the incidence of massive investments in the cement sector which have culminated in overcapacity in the sector, major players have in the last three years been flouting operating regulatory requirements:
Market leader, Lafarge Zambia Plc in early January last year increased cement prices to K94 and K98 for its Mphamvu and Superset brands respectively.
This price increase prompted investigations by CCPC to ascertain the existence of any unfair competition practices.
Indeed, the CCPC investigations were followed by the recent decision by the Board of Commissioners of the CCPC to fine Lafarge Zambia Plc and Mpande Limestone Limited for price fixing and division of cement markets.
Why should the CCPC get concerned with a whooping price hike from a market leader like Lafarge cement?
Ironically, any market leader in the cement sector influences market conditions in the country, particularly, price strategy.
In Zambia, such a price strategy is exacerbated by the lack of import competition of cement.
The recent CCPC action on Lafarge and Mpande was preceded by the action of the ZCSA inspectors on another named cement manufacture whose cement failed periodical quality conformity tests.
Imagine, ZCSA had to compel this producer to recall tons of truckloads of its cement from the market. Three years earlier on, Lafarge Cement Plc was fined by the CCPC for alleged price discriminatory practices.
In this incident, Lafarge is alleged to have been abusing its dominant market position by selling cement to other countries including the Democratic Republic of Congo at alleged unreasonably lower prices compared to those being charged on local Zambian markets.
Remarkably, cement is homogenous in nature and this therefore means; it is a standard; mass or uniform product.
Interestingly, the method of producing cement is the same.
Cement manufacturers can only blend their products to make it differ in strength according to intended construction purpose, such as Lafarge’s Superset and Mphamvu brands.
Otherwise, there’s no difference between cement made by Dangote, Sinoma or Lafarge.
Cement is essentially cement, nothing less, and nothing more, period!
Additionally, the nature of the product makes the industry susceptible to intense price competition.
That is where the competitive battle lies.
Cement by its nature cannot be differentiated.
That is why Dangote cement Zambia has just found an alternative low cost of electricity by producing thermal power and selling the excess 18 Megawatts to Zesco.
Following on, owing to its use in infrastructure development and domestic housing construction, Cement is a critical product and therefore, its volume of supply and price has wider impact on economic development of the country.
On the other hand, every cement manufacturer understands that cement has an inelastic demand!
So they can increase the price of the products without significantly suffering a reduction in the volume of demand.
This therefore means that the potential risk of incidences of Lafarge, Dangote, Zambezi Portland, Mpande Cement and so forth, colluding is extremely high.
On the other hand, as illustrated in last year’s incident between the ZCSA and a named producer, manufacturers can opt to cut corners to reduce costs by producing sub-standard cement.
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The author is the Managing Consultant at G. N Grant Business Consultant, a Chartered Certified Accountant (ACCA), a Master of Business Administration (MBA) holder, with a Specialism in Strategic Planning, and a candidate for the Herriot Watt University (Scotland) Doctor of Business Administration (DBA)