Overview of Kenya’s construction sector, now and its future growth

The Kenyan construction industry is set to grow steadily for the next decade attributed to an increased number of projects being carried out in the country.

BMI Research shows that the local industry will grow by 8.7 percent this year and remain steady up to until 2026 with an annual growth of 6.2 percent which will see Kenya outperforming all sub-Saharan countries.

BMI pegs this on the government’s’ huge spending on infrastructure development such as the Standard Gauge Railway and the Lamu port South Sudan Ethiopia Transport (LAPPSET) corridor being key drivers of local economic growth.

“Kenya’s construction market  will record significant expansion over our 10 year forecast period between 2017 and 2016…significant support for the sector will stem from the Kenyan budget, backed by foreign investment into the country’s planned infrastructure development,” says the BMI Study.

Turner and Townsend report, ‘International construction market survey 2017’ themed Building momentum’ which ranked  Nairobi as one of the cheapest city for construction despite declining competition and the high cost of land noted that, “Overseas investment driving expansion”.

“The real estate and construction sectors continue to be key drivers of economic growth in Kenya, as they have been for the last five years, and the Kenyan construction industry contributes 7 percent of GDP,” read part of the report.

Data from the Kenya National Bureau of Statistics (KNBS) the construction industry grew by 9.2 per cent in 2016 from an expansion of 13.9 per cent registered in 2015.

Increased activity in the construction of roads and development of housing also translated to an increase in employment in the sector from 148.6 thousand jobs in 2015 to 163.0 thousand jobs in 2016.

“Overall expenditure on roads is expected to increase by 38.3 per cent from KSh 113.2 billion in 2015/16 to KSh 156.5 billion in 2016/17. Total development expenditure is also expected to grow by 31.7 per cent from KSh 87.8 billion in 2015/16 to KSh 115.6 billion in 2016/17. Development expenditure on trunk and primary roads is expected to grow by 36.2 per cent from KSh 51.6 billion in 2015/16 to KSh 70.3 billion in 2016/17,” according to the KNBS 2017 Economic Survey.

However, cement consumption in the country dropped by  62,000 metric tonnes in the first five months of the year.

Data from KNBS shows cement consumption stood at 2.5 million metric tonnes in the five months to May compared to 2.56 million in a similar period last year.

Dyer and Blair investment Bank Cement Sector East Africa overview report published in February says the construction sector remains resilient despite headwinds.

“We forecast a 3 year compound annual growth rate (CAGR) in cement consumption per capita of 8.1 percent to 96.7 Kgs in 2018, on the back of 3 year CAGR of 8.7 percent in cumulative regional cement consumption to 14.9 MN Tonnes in 2018F.”

“The East African region (Kenya, Uganda, Tanzania) cement and construction sectors have noted resilience over the last 3 years despite headwinds stretching from power tariff hikes, currency devaluations and high interest rates which curtailed vibrant construction activity, hence high cement consumption growth.”

ARM Cement PLC, the sector’s third largest player after Mombasa Cement and Bamburi  Cement  and the  East Africa Portland Cement Company among the listed companies at the Nairobi Securities Exchange.

The private companies are Mombasa Cement, National Cement and Savannah Cement.

Bamburi Cement is associated with the Nguvu brand. It was established in Mombasa in 1951. Production started 3 years later. It was listed at the NSE in 1970. It is the leading cement producer in Kenya in terms of production. In terms of shareholding, Lafarge Group takes the lion’s share at 58.6 percent (2012, Dyer & Blair). Bamburi Cement owns the Bamburi Special Products Ltd which produces precast concrete products and ready-mix concrete. Bamburi controls 40.5 percent of the market share.

East Africa Portland Cement produces Blue Triangle cement. It is the oldest cement producer in Kenya. Founded in 1933, EAPCC was initially a cement importer before it established its first production plant in Athi River in 1956. EAPCC shareholders include Lafarge Group (14.6 percent), the Government of Kenya’s Treasury (25.3 percent) and NSSF (27 percent). Bamburi Cement has a 12.5 percent stake in the company. EAPCC has also diversified into precast cement products. EAPCC controls 24 percent of the cement market.

Lafarge Group is a French company. It is the world’s second largest producer of cement. Globally, it runs 134 cement plants. In Bamburi Cement, Lafarge Group owns 58.6 percent of the shares through two companies: Fincem Holding Limited and Kencem Holding Limited. In EAPCC, owns 14.6 percent of the shares through a company called Cementia.

ARM Cement PLC (formerly Athi River Mining) is the third largest cement producing company in Kenya with a 15.5 percent market share. Its flagship brand is Rhino cement.

The company has entered into an agreement with Omya (Schweiz) AG of Switzerland and Pinner Heights limited of Mauritius for the sale of 100 percent of the shares in mavuno Fertilizers limited and its subsidiary, ARM mineral and Chemicals Limited and ARM Energy limited.

The proposed transaction is subject to various conditions precedent including requisite approvals from shareholders and regulatory authorities.

ARM intends to ‘further strengthen its core activities and strategic path of enlarged focus and strengthening of its cement business,’ reads the cautionary announcement as posted by the Nairobi Securities Exchange.
 
Mombasa Cement is the fourth largest producer controlling 13 percent of the cement market. Although it was founded in 2007, its plant was opened in 2013 in Athi River. It produces Nyumba cement. It is a subsidiary of Uganda’s Tororo Cement Limited.

National Cement is the producer of the Simba cement. It was formed in 2008 by the Devki Group of Companies in Athi River. It controls 7 percent of the market.

Savannah Cement is also based in Athi River. Its main shareholders are a Chinese investor, Wan Ho (40 percent) and Savannah Heights (40 percent).  It is associated with the Savannah brand. It was commissioned in July 2012.

ARM  Cement operates in Kenya, Rwanda and Tanzania.

ARM Cement is riding on the three countries supportive macro-economic trends- a young, growing and increasingly urban population coupled with improving economic performance indicators to drive its growth.

“Kenya, Tanzania and Rwanda show similar trends in key economic drivers underpinning strong growth, such as increasing GDP, dropping inflation, rising young population.”

Besides having posted half-year net loss up by 428.53 per cent to KSh1.41 billion from KSh266.78 million in June 2016 and a plunge in its revenue of KSh1.32 billion, to KSh5.35 billion, Dyer and Blair  forecast ARM to record a PAT of KES 440.0 MN in FY17F, from an estimated loss (after tax credit) of KES 241.3 MN in FY16E.“

Bamburi Cement has also reported falling revenue and profit in 2017. Its turnover fell by 8 percent to Ksh 17.5M billion and its profit decreased by 36 percent to ksh 2.7billion for the half year.

Bamburi blamed it on a contracting market, low private sector investment leading to residential sector issues, delays in some infrastructure projects and droughts.

The drought also hit the company’s operating profit via higher energy costs. On the plus side though Bamburi’s subsidiary in neighbouring Uganda did record a good performance.

According to the Dyer & Blair Investment Bank points out that lower construction costs and more affordable home ownership methods might be the key to driving low end housing demands and in turn this might grow cement consumption.