SA’s cement industry faces multiple threats

The sustainability of South Africa’s cement and concrete industry is being threatened by multiple challenges.

These include economic decline, cheap imports, rising input costs and the crisis in the construction industry caused by the activities of the construction mafia and lack of major projects.

The latter has been exacerbated by the planned massive expenditure by government on infrastructure to kick-start the economy post the Covid-19 pandemic largely failing to materialise, placing about 35 000 local jobs and billions of investments in the cement industry’s value chain jeopardy.

Read: Engineering body issues dire warning over collapsing public infrastructure

Cement and Concrete SA CEO Bryan Perrie said the industry has been under huge pressure due to a toxic cocktail of factors.

For starters, local cement production capacity is about 20 million tons, but the industry is currently producing only 12 million tons, while more than a million tons of cement imports – the equivalent of an entire cement plant – enters the South African market each year.

“More is required to secure the sustainability of a sector impacted by both the global pandemic and a decade-long slowdown in South Africa’s planned infrastructure build,” he said.

Imports

Elsie Snyman, CEO of construction market intelligence firm Industry Insight, said cement imports decreased by 30% year-on-year to 712 161 tons in the 11 months to November 2022. They had increased by 9% year-on-year to almost 1.1 million tons in 2021.

Snyman said more than 90% of the cement imports in 2022 were from Vietnam, via Durban.

She estimates that total cementitious sales declined by 0.7% year-on-year to 8 093 026 tons in the 11 months to November 2022, which means imports represent about 8.8% of domestic volumes currently,

and estimates that the industry is operating at less than 40% of its full capacity.

“At a national level, imports at less than 10% may not seem too serious but imports are centralised around the coastal areas, where the impact is more severe for the local producers, such as NPC [Natal Portland Cement in KwaZulu-Natal] and PPC in the Western Cape.

“One can argue that there is also limited local competition in these areas, but the balance still has to be in favour of local producers considering their contribution to investment and employment in the area,” she said.

The challenges facing the industry have led to engagements between it and the International Trade Administration Commission of South Africa (Itac) and Department of Trade, Industry and Competition to take positive action to prioritise its local cement industry.

Perrie said the cement industry has lodged a general import tariff application with Itac.

This follows the gazetting in June last year of anti-dumping tariffs on cement imported from Pakistan.

Perrie said the industry is also conducting an investigation with a view to possibly lodging an application with Itac for anti-dumping tariffs on cement imported from Vietnam.

The problem with anti-dumping tariffs is that they are country-specific and the minute the industry proves to Itac that dumping is taking place, the importers tend to import cement from a different country.

“Then you have to go through the same [anti-dumping application] process again,” he added.

“That is the reason the industry is looking at a general import tariff on all imported cement, which, if granted, will mean it doesn’t matter where the imported cement comes from and whether it’s dumped or not.”

Short-lived boost

Cement was designated by National Treasury from 4 November 2021, meaning the use of imported cement on all government-funded projects was prohibited from that date.

Read: Treasury bans use of imported cement on all government-funded projects

However, this boost to local industry cement was short-lived, with the Constitutional Court subsequently ruling that individual state-owned companies and government departments must make commitments to use local products rather than being instructed to do so by National Treasury in terms of preferential procurement rules.

Perrie said the government and National Treasury can now only make procurement recommendations to municipalities, provinces and state-owned enterprises, which has undone the short term benefit the industry received from the designation of cement.

He is only aware of the SA National Roads Agency (Sanral) having a requirement that all the cement used for all its projects be locally produced.

Perrie said the Constitutional Court ruling has made it more difficult for the cement industry because it means it will have to individually approach every government department, every province and every municipality in an attempt to get them to use locally produced cement.

“Most municipalities are totally dysfunctional anyway so I’m not sure how successful that will be,” he added.

“That is why the industry is rather looking at the general import tariff, which will hopefully cut out a lot of imports and do away with the need for designation.”

However, the government has asked cement producers to commit to “no price increases” in return for government approval of “safeguard action” against cheap cement imports, which raises serious doubts about the success of the application to Itac for a general import tariff on cement.

Snyman said Statistics SA data indicate that South African cement prices increased by 13.7% year-on-year as at November 2022, compared with an average increase of 7.1% in 2021.

She stressed that a country-specific tariff protection will largely be ineffective because importers have already embedded themselves firmly in the market and will more than likely find alternative source country.

Snyman believes pricing will be a key focus point to determine how successful producers will be in their application for a broader tariff protection.

“But capping price adjustments will be highly unfair given the impact of, for example energy prices on cement production, that is not a major consideration for importers,” she said.

PPC CEO Roland van Wijnen said in November that cement prices in South Africa are too cheap and need to increase by a further 15% for the local industry to be viable.

Van Wijnen confirmed PPC’s cement margins in South Africa decreased due to its energy costs increasing so much it was unable to recover all these costs through price increases.

Read: PPC laments lack of cement sales growth from SA infrastructure programme (June 2022)
Listen: Roland van Wijnen on PPC’s HY results (Nov 2022)

Impact on producers

Perrie is unsure whether South Africa’s cement industry is in crisis and if there is a risk of some cement producers failing.

Snyman said cement producers managed to hang on through the last recessionary period and reduced their capacity in line with demand; she therefore does not believe any of them are going to fail.

Van Wijnen said in November that PPC is well placed to supply any increase in demand as the roll out of the South African government’s infrastructure development plans gain momentum while, at the same time, it has a strong financial position and the right focus to weather the current economic cycle.

Similarly,  Sephaku Holdings (SepHold) CEO Neil Crafford-Lazarus said in its interim financial results released in November that the group is well positioned to survive the current constrained trading environment and remains cautiously optimistic.

Snyman is hopeful the industry is nearing the lower turning point and is slightly more optimistic about government spending for this year.

“If Treasury’s October Medium-Term Budget Policy statement is anything to go by, we should see an increase in infrastructure spending, with an average nominal increase of 17% over the three-year period [2023-2025], ” she said.

“The forthcoming election in 2024 will certainly provide some motivation, given the dire state of the country’s infrastructure,” she added.

“The challenge remains on how successfully government can implement these budgets, as we have seen, time and time again, that budgets are always underspent.”

However, she remains cautious about the outlook for the building industry due to the impact of higher lending rates on the private sector and economic growth, adding that government’s focus will more than likely be on economic rather than social infrastructure.