AfriSam's Ulco plant, near Kimberley in the Northern Cape, has the capacity to provide cement also for  the Free State and the Eastern Cape.   Picture: SUPPLIED
AfriSam's Ulco plant, near Kimberley in the Northern Cape, has the capacity to provide cement also for the Free State and the Eastern Cape. Picture: SUPPLIED

The merger between South Africa's two largest cement producers, PPC and AfriSam - if it goes ahead - would give the combined group better buying power from its suppliers and improved reach across the country, according to AfriSam's acting CEO.

Rob Wessels said a reduction in overheads at senior management level would "probably" be looked at, and any overlaps at head offices as well, but he did not see anything changing at plant level.

He said the combined footprint of PPC and AfriSam across the country would provide the joint group with a better route to market for its products.

On the way back from a site visit to AfriSam's Ulco plant, situated about 80km from Kimberley, Wessels said on Tuesday that the plant was well placed to service the Northern Cape, Free State and the Eastern Cape. The plant has the capacity to produce 1.25 million tons of cement a year.

 But overall cement demand is weak.

In South Africa in 2007, before the global financial crisis, cement capacity was at 15 million tons and demand was slightly above that. Demand had steadily been increasing leading up to 2007 because of infrastructure spending and 2010 Soccer World Cup construction.

Many groups invested in capacity during that period, expecting demand to grow. Dangote Cement invested in Sephaku Cement, while other suppliers such as Mamba Cement entered the market.

But after 2007, cement demand dipped to a low of 12 million tons a year, and with the increase in capacity, supply currently sits at 20 million tons while demand is only about 13 million tons.

Unfortunately, when the cycle is looking up, companies make big capital investments. "In retrospect, with the benefit of hindsight, there was a bit of false market created by the World Cup and other big construction projects," said Wessels.

Economists are forecasting a decline in cement demand of between 2% and 3%.

Richard Tomes, AfriSam's sales and marketing executive, said South Africa was looking at an oversupply of more than 40% for a number of years, with some economic projections estimating that the oversupply would continue until 2030.

Graphic: RUBY-GAY MARTIN
Graphic: RUBY-GAY MARTIN

Tomes said that in the market in which AfriSam was operating, it was caught between modest growth and weak demand. Overall conditions in the construction industry were not good, he added.

Wessels said that when the market was dealing with oversupply and contraction in demand, and investors were not getting their returns, these factors created a cycle of consolidation.

A bigger income statement and a larger geographical footprint across South Africa and the rest of the continent would put the combined group in a better position to withstand the "pain" for longer.

AfriSam also has operations in Lesotho, Swaziland and Tanzania. PPC operates in Botswana, Zimbabwe, the Democratic Republic of Congo, Rwanda and Ethiopia. "As a combined entity with a combined balance sheet, we've got the ability to wait out [a downturn] better," said Wessels.

A merger would create an entity with an estimated total capacity of 16million tons.

This is not the first time a merger has been mooted. In 2014, PPC received the first merger proposal from AfriSam, but the offer was rejected as PPC's board did not see any advantage because of its smaller rival's high level of debt.

Consolidation has already happened internationally, with a number of global players merging. In 2015, Holcim and Lafarge completed a merger to form the second-largest cement producer in the world. Last year, HeidelbergCement, the world's fifth-largest producer, acquired a stake in Italcementi, an Italian producer.

Wessels said both AfriSam and PPC could survive without merging as both were margin-positive and had positive cash flows, even if it was not on the scale of a few years ago. However, both groups would need to undergo capital restructuring if they did not merge, he said.

There have been fears that a failure to merge would result in Dangote Cement making a move on one of them, but some analysts think this is unlikely.

Sade Obilomo, an analyst at First City Monument Bank in Nigeria, who follows Dangote Cement, said the group had indicated that it planned to double its expansion in Africa. But with the oversupply in South Africa, she did not think that Dangote would be looking at making more investments here.

She said it would be looking at making investments in countries it was exporting to.

PPC declined to comment this week, saying it would update investors and the media at its AGM on August 28.

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