PPC: Why is it so expensive to produce cement in SA?

JSE-listed cement and building materials producer PPC believes the government should pay attention to why it’s so costly to produce cement in South Africa – despite its confidence that the new R3 billion cement plant it’s building in the Western Cape will enable the company to increase its competitive edge against cement imports.

PPC CEO Matias Cardarelli on Monday (9 June) said the government also needs to address the outsourcing of cement blending to independent blenders from a public safety and fair market competition perspective.

Cardarelli mentioned that it’s very costly to produce cement in SA compared to other countries, which is the reason cement has consistently been imported into the country for many years.

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Levelling the playing field

Referring to the government, he said it should play a role in creating a level playing field for local cement producers against importers, adding that more than one million tonnes of cement has been imported into the country in recent years, however, he emphasised that imported cement is not PPC’s priority.

“We are becoming more modern and efficient and we are sure that we are going to compete going forward.”

According to Cardarelli, the South African cement sector hasn’t benefitted from the designation of cement for infrastructure projects, as it has not seen “the infrastructure plan by the government unfold”.

He approves of the planned R1 trillion infrastructure investments by the government and is confident  the government of national unity will get the ball rolling, but “so far they have not executed that plan”.

Competition

He said international players are entering the South African market and two Chinese international companies have bought assets into the country, with rumours that a third player may be joining them soon.

Apparently, this company will bring in new technology and change the market landscape.

This is a reference to Mamba Cement, which is jointly owned by the Jidong Development Group and the China-Africa Development Fund – as well as the acquisition of Natal Portland Cement (NPC) by China-based Huaxin Cement.

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Cardarelli said PPC’s plans include replacing its two old plants in the Western Cape with a new plant in two years’ time, which means the company will own the two newest and most modern plants in SA – while its third plant is also “pretty modern”.

He added that its two old plants are unable to run efficiently from a cost margin and environmental perspective, and that the imminent project is focused on lessening PPC’s environmental impact while increasing its financial outcomes.

However, Cardarelli said the decision to build the plant was also influenced by the fact that someone else would eventually have taken the initiative, which would affect PPC’s position in the market.

He added that it’s a perfectly valid process worldwide to blend cement with extenders – and that PPC and NPC have their own blending plants.

A public safety risk

However, he said PPC studies have routinely shown that in some cases that blended cement produced by independent blenders, which is then distributed into the market, has low standard strength. Cardarelli stated that this is a public safety risk.

“If you are not producing cement at the standard required by South African legislation and worldwide designation, there is a real risk that cement will not have the strength for the uses they are giving to that cement.

“I’m not saying that all blended cement shows that low strength standard, but some have consistently shown that,” he said.

“When you sell cement under the strength needed, the cost of that cement is going to be cheaper, and that is why the sector is facing unfair competition from independent blenders.”

PPC on upward trajectory

Despite a 1.9% decrease in revenue to R9.87 billion in the year to end-March, PPC on Monday reported a 28% increase in earnings before interest, tax, depreciation and amortisation (Ebitda) to R1.59 billion.

PPC’s Ebitda margin improved in the year to 16.1% from 12.3%.

Headline earnings per share grew by 110.5% to 40 cents from 19 cents.

An ordinary dividend per share of 17.6 cents was declared, which is more than 28% higher than the 13.7 cent dividend declared in the previous year.

Awakening the giant

Cardarelli said implementing phase one of PPC’s ‘Awaken the Giant’ strategic turnaround plan has resulted in a step change in the group’s margins, profitability, and cash generation, which are the highest since its 2018 financial year.

“This early success is largely as a consequence of a fundamental change in our strategic direction, the organisational culture, and an absolute focus on our core competencies,” he said.

Cardarelli is increasingly confident about the outlook for PPC.

He said optimising PPC’s competitive position in the current markets will better prepare the company for market changes and that it remains cautiously optimistic about the construction market uplift in South Africa, but does not know the base or scale.

“So our plans are based on a scenario of low to no growth in demand while we keep fully ready to capture any growth opportunity when finally this long negative construction cycle comes to an end – and it will come to an end.

“At the same time, we will continue to implement price adjustments.

Market share for us does not come at all costs and, through [a] competitiveness strategy, we naturally create the conditions for market share recovery.”

Shares in PPC rose 1.2% on Monday to close at R5.04 per share.

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