Under-pressure cement sector wants tariffs

11 Jul 2019
Under-pressure cement sector wants tariffs
Mail & Guardian, 11 July 2019
by Thando Maeko

Local cement producers are making submissions to the International Trade Administration Commission of South Africa (Itac) to impose tariffs on cement imports from China and Vietnam in a bid to protect the South African industry. Cement imports grew 166.4% and 144.1% year on year in September and October 2018, respectively, according to Industry Insight, which provides market information on the construction industry. The first 10 months of last year saw 849 781 tonnes of concrete being imported, representing an increase of 104.7%, compared with the same period in 2017. Data from the South African Revenue Service shows that higher than average imports of more than one million tonnes are expected this year. PPC, the JSE-listed supplier of cement and lime, earlier this year reported that, “Cement imports increased by 84% to 1-million tonnes for calendar year 2018, albeit off a relatively low base.

Imports received via Durban increased by 89% to more than 600 000 tonnes, while imports received in the Cape rose by 48% to 209 000 tonnes,” adding pressure to an already struggling construction industry. For the year ending March 31 2019, PPC reported that sales declined 2% to 3%. This decline was partly a result of increased competition from imports, which rose by 84% in 2018. The Concrete Institute (TCI), which represents the major cement producers in the country — PPC, AfriSam, Lafarge, Sephaku Cement and Natal Portland Cement — says the oversupply of cement has left it with no choice but to approach Itac to “safeguard” local producers from cheaper imports. “The increase in imports of cement is affecting demand for locally produced cement to such an extent that [South African] manufacturers are considering mothballing plants, retrenching staff and putting expansion plans on hold,” the institute said in a statement in March.

In 2015 Itac, which sets and investigates tariffs on imported goods, imposed anti-dumping duties on imports from Pakistan after an investigation that found that cement imports from the South Asian country were causing material injury to the local cement industry. Itac had imposed duties as high as 77% on Pakistani cement, which has eased some pressure on South African cement producers. The institute says although the intervention by Itac levelled the playing field between local cement producers and Pakistani producers, China and Vietnam have stepped into the gap. “The cement, concrete and affiliated industries employ thousands of South Africans whose jobs would be on the line if the government does not step in to protect local cement production,” says Bryan Perrie, managing director at Trade Conferences International. The institute’s figures show that the sector already faces a supply and demand mismatch. Local producers can manufacture about 19- to 20-million tonnes of cement annually, while demand stands at 13-million tonnes a year.

Apart from supply and demand dynamics, local manufacturers are also subject to rigorous regulations, including environmental impact assessments, strict quality controls, and labour and employment regulations. “Such processes are not always required with products manufactured outside of South Africa. While we do not view these regulations as problems, and we are supportive of their objectives, they do add to the cost of doing business and, in turn, to the price the end user pays,” Perrie says. Other factors that have had significant effect on the overall cost of producing cement include slow economic growth, which has put added pressure on the country’s construction, cement and concrete industries. The rolling electricity cuts in the first quarter of the 2019 have also increased the cost of production. Azar Jammine, the chief economist at Econometrix, says that imposing tariffs in the short term could provide some relief for local cement producers but that for the industry to be protected, huge investment in the country’s infrastructure is needed.

“The cement industry is [having] a hard time because of low levels of demand because of very weak levels of activity in construction,” he says “But from a long-term point of view the solution to the problem is to increase investment.” The economy shrunk more than 3% in the first quarter of 2019 as strikes in the gold sector, load-shedding and limited investment hampered growth. The sharpest declines were in the mining (-10.8%), manufacturing (-8.8%) and agriculture, forestry and fisheries (-13.2%) industries. The data from Statistics South Africa also showed that construction sector remains in the doldrums, decreasing 2.2%.

The dismal performance of the construction sector is a far cry from the highs it experienced before the Fifa World Cup in 2010, when there was major spending on infrastructure such as new stadiums. Fast-forward nine years and one of the country’s biggest construction firms, Group Five, had its stock suspended in March after the company filed for bankruptcy protection. Basil Read is another one of the five giants in the construction industry that has barely kept its head above water. It began a business rescue process in June last year.  And in June this year, the company retrenched all staff who were not working on specific projects. The company also moved its headquarters to smaller offices in Johannesburg. The majority of the 20 construction contracts the company was working on at the beginning of the business-rescue process have been completed or terminated.

As part of his plan to fix the country’s sluggish economic growth, in February President Cyril Ramaphosa announced the government’s plans to inject R100-billion into the Infrastructure Fund over the next decade. Ramaphosa said the plan includes a “special package of financial and institutional measures to boost construction”. Jammine has questioned the government’s plan, saying, “I’m waiting to see the R100-billion. We’ve been hearing about it for a long time and there are very few signs of it actually manifesting ... as yet.” Perrie says the investment in the construction sector is a step in the right direction, adding that, “The key to future growth lies in achieving greater efficiencies within the country’s relevant manufacturing sectors. The cement industry needs to compete on a level playing field and not be scrambling to survive against under-priced imports.”

Stanlib analyst Kobus Nell says local producers should ensure that consumers understand that South African cement is of a higher quality than the cheaper imports to encourage increased demand for local products. Nell adds that the imposition of tariffs could be a “double-edged sword” for local cement producers. “If you put up some tariffs, you increase your costs for the people who are buying cement and you make it expensive for them but you may protect some of the industry.”
Thando Maeko is an Adamela Trust business reporter at the Mail & Guardian.