Minister of Trade, Industry and Competition Ebrahim Patel has reportedly asked South Africa’s cement producers to commit to “no price increases” in return for government approval of “safeguard action” against cheap cement imports, particularly from China and Vietnam.
This has raised serious doubts about the success of the application by several cement producers to the International Trade Administration Commission (Itac) for “safeguard action”.
The cement industry first submitted the application to Itac in August 2019.
Neil Crafford-Lazarus, CEO of JSE-listed Sephaku Holdings (SepHold), said on Thursday the “safeguard action” application has been going on for much longer than anticipated and “there is a big question mark about whether the industry will be assisted in this way at all”.
SepHold’s building and construction materials asset portfolio comprises subsidiary Métier Mixed Concrete and associate Dangote Cement South Africa (SepCem).
“There is a requirement from government that the industry should commit to no increases on prices as a quid pro quo,” said Crafford-Lazarus.
“But industry’s argument has always been that our quid pro quo is really already included in our full cost of production … This is not a tariff that is required for protection. It’s purely safeguarding the industry against the cost of doing business in South Africa,” he added.
He complained that the cost of doing business in South Africa is much higher than other countries, due to emission control regulations, broad-based black economic empowerment ownership rules and “everything else it costs a company producing goods in South Africa” as opposed to the cost of landing imported cement.
Crafford-Lazarus said cement imports into South Africa increased by 9% year-on-year to almost 1.1 million tons in the 2021 calendar year.
He noted that cement imports have increased by more than 100% since the 2017 calendar year, with most of this cement being imported from Pakistan and Vietnam.
The “safeguard action” application is for a flat, non-country-specific tariff. Anti-dumping duties previously imposed on cement imported from Pakistan were earlier this month extended by five years from June 2022.
This follows National Treasury designating cement from 4 November 2021, which means the use of imported cement on all government-funded projects has been prohibited from that date.
Sephaku Cement CEO Duan Claassen said there has been a 26% year-on-year reduction in cement imports in the first four months of this year because of a number of factors, including disruptions to the global supply chain and shipping container and vessel availability.
“In the absence of the safeguard – which has not been finalised, and we are not holding our breath at the moment that [it] will be forthcoming any time soon – that is one factor to consider in terms of the overall competitive landscape,” he said.
“But most incumbents [cement producers] are operating for now with uncertainty on energy costs, imports and infrastructure development. It’s business as usual compared to last year but it’s a very tough trading environment and survival of the fittest.”
Claassen confirmed that some of SepCem’s competitors have introduced an energy surcharge to the price of their cement, without identifying these producers.
He said SepCem decided against introducing a surcharge and to rather look at movements in energy costs and then engage with its customer base when needed “in terms of price increases and the like”.
Rowan Goeller, an analyst at Chronux Research, said he had heard snippets from various industries that government wants a commitment to no price increases in return for safeguard measures.
“It’s quite a tricky thing for the private sector to commit to and I’m not sure they can commit to those sorts of things because price is a consequence of your input costs and there are many moving things in there that you cannot control,” Goeller told Moneyweb.
He said PPC has spoken about an energy surcharge on the price of cement but has indicated it does not want to do it.
“PPC recognises that if 25% of your cost is effectively logistics and transport, with the fuel price doing what it is, it is going to cause quite significant cost increases.
“So it’s something that all producers are looking at and it depends how long high fuel prices last. They might have to look at a surcharge at some stage,” he said.
SepHold on Thursday reported a 24% increase in group consolidated revenue to R786 million in the year to end-March 2022, from R634 million in the previous year.
Net profit after tax improved by 125% to R45 million from R20 million, while headline earnings per share grew by 190% to 17.67 cents (2021: 6.09c).
Métier contributed net profit after tax of R30 million and SepCem R82 million.
Crafford-Lazarus said construction has been the worst performing sector since the Covid-19 lockdown.
“The contractionary economic policies being implemented by the Reserve Bank to combat rising inflation will inevitably further reduce building materials demand, barring the implementation of the proposed government infrastructure projects,” he said.
Listen to Fifi Peters speaking to Old Mutual economist Johann Els on SA’s latest inflation data (or read the transcript):
“Due to the cyclicality of the construction industry, the demand for building materials will remain low or decline depending on the magnitude of economic contraction,” warned Crafford-Lazarus.
“Specifically, on mixed concrete demand, the government’s high debt levels seem to have limited its ability to implement the planned infrastructure projects. In addition, the private infrastructure investors’ confidence in South Africa’s economic growth and business prospects continues to ebb,” he said.
Crafford-Lazarus added that the excess supply of non-residential properties and the reintroduction of rotational load shedding since November 2021 have further entrenched the apathy towards private construction projects, as reflected in the decline in non-residential building plans.
“These factors are expected to impact the mixed-concrete sector’s future performance negatively,” he said.
Goeller said SepHold produced decent financial results and is slowing reducing its large debt burden.
SepHold’s share price fell 4.83% on Thursday, to close at R1.38.