On June 25, Western Cement announced that it would sell cement and related assets in Xinjiang to Conch Cement at a total price of 1.65 billion yuan. West Cement stated that the net proceeds from the disposal are more appropriately used to repay part of the senior notes issued by the company (with an interest rate of 4.95%) and release operating cash flow to support the group's expansion projects, especially in Africa.
The announcement said that the effectiveness of Western Cement's focus on overseas markets has been reflected in recent financial results. In 2024, the sales volume of cement and clinker in Africa and Uzbekistan was about 4.03 million tons, accounting for only about 20% of the total sales volume of cement in the west, but the revenue from overseas markets accounted for 38% of the total revenue of the Group and contributed 67% of the gross profit margin.
Western Cement also cited in the announcement that the gross profit per ton of cement in Africa and Uzbekistan far exceeded that in China, reaching 323 yuan and 64 yuan respectively, compared with 42 yuan for domestic cement. The Board remains highly optimistic about the growth potential of Western Cement in overseas development areas.
International giants are withdrawing from the African market
in recent years, due to the serious overcapacity of domestic cement production, fierce market competition, and the future demand will continue to decline substantially, industry giants have increased their overseas layout.
According to the big data of China Cement Network, by 2024, the overseas clinker production capacity of Chinese cement enterprises has reached about 79.8 million tons, and the production capacity under construction is about 14.2 million tons, and a number of mergers and acquisitions projects are in progress. Specifically, in addition to the acquisition of Turkish cement enterprises by Taiwan Cement, the market is mainly located in Europe, and the overseas production capacity of other domestic cement enterprises is mainly distributed in Southeast Asia, Central Asia and Africa, among which Africa is the focus of overseas investment of domestic enterprises.
As stated in the announcement of Western Cement, Africa's population growth rate is the highest in the world, with the total population expected to increase from 1.5 billion in 2024 to nearly 2.5 billion in 2050, and some regions also have the fastest GDP growth in the world. Infrastructure development and urbanization in the African market is supported by a number of local and international development initiatives, including the Chinese government's "the Belt and Road" initiative. Sub-Saharan Africa's per capita cement consumption is extremely low compared to global levels and is a small fraction of the developed markets. Cement production facilities in most countries are underdeveloped, supply is insufficient and the industry is highly fragmented.
However, while domestic cement companies are targeting the African market, the international cement giant Holcim Group is withdrawing from the African market.
At the end of last year, Holcim announced that it would sell its 84% stake in Lafarge Africa to Huaxin Cement for $1 billion. Upon completion of the transaction, Holcim will effectively exit the Nigerian market. In addition, as early as 2021, Huaxin Cement acquired 75% of Lafarge Zambia and Lafarge Malawi.
Western cement giants have entered the African market earlier than domestic cement enterprises, and have the first-mover advantage, and are not weaker than domestic enterprises in management and technical level. The withdrawal of Western cement giants from the African market may illustrate that the African cement market is far from as good as imagined, even if the potential is unlimited, but the challenges are equally enormous. What are the possible difficulties in
entering the African cement market?
1. The cost may be much higher than that in China. According to the data of China Cement Network, Africa is indeed one of the regions with the highest cement prices in the world , for example, the price of cement in Ethiopia is more than 320 US dollars per ton. Western Cement has pointed out in the announcement that the gross profit rate of African cement business is as high as 323 yuan/ton. However, this refers only to the gross profit margin, if sales expenses, management expenses, taxes and other non-operating expenses are deducted, the actual profit margin may be greatly discounted. In addition, the current cost of domestic cement enterprises to build factories and acquire enterprises in Africa is much higher than that in China, resulting in huge financial costs and depreciation costs. In addition, there may be various hidden costs in Africa, such as local relations, local donations and various concessions.
2. Stability of national political situation. Africa is the region with the most frequent regime changes and the highest incidence of unrest in the world. Within the same country, there are many nationalities, numerous local factions and serious local protectionism. The central governments of many countries have limited jurisdiction over local tribes, and tribal conflicts occur from time to time, so investment in Africa may face greater security risks. For example, the recent serious military conflict in Congo-Brazzaville once impacted the local cement plant.
3. Lack of professionals. Overseas investment is different from domestic investment, which involves a wide range of aspects, including politics, economy, cultural customs, markets, foreign languages and so on. It requires a higher comprehensive quality of international talents, which is also relatively lacking at present. Especially if we need to go overseas on a large scale in the future, the gap will be even greater.
4. Exchange rate changes and profit recovery. The overseas investment of Chinese-funded cement enterprises is mainly in developing countries, where the economy is relatively backward and the exchange rate fluctuates greatly, which may cause the original profitable projects to become losses due to exchange rate fluctuations. In addition, African countries generally have limited and precious foreign exchange reserves, and if the money earned abroad cannot be brought home in an effective way, the profits can only be on the books.
5. Cement overcapacity. Although the demand for cement in many African countries is in short supply, the demand density is extremely low (the demand for cement per square kilometer), coupled with backward infrastructure and high transportation costs, the demand in the region is prone to saturation, and if we continue to increase the scope of sales, the cost of sales will be higher and higher. In addition, domestic cement enterprises piled up to go out, and there may be competition among them, and the industry should also avoid "rolling up domestic and foreign".
Africa is indeed a huge potential market, and going out is the only way for domestic cement enterprises to develop in the future, but if you want to go overseas to "get rich", the dream may be a little too full. When domestic cement enterprises go out, they must control investment costs, use the most advanced technology to "arm themselves", select countries with stable political situation and good economic development potential, equip them with sufficient professionals, and avoid "involution".
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