Understanding the cement oligopoly

The acute shortage of cement has seen dealers in the commodity capitalising on the dire situation.

CEMENT prices in Zimbabwe have increased by more than 100% in the last two months from between US$8 to US$11 per 50kg bag to around US$18 to US$20, currently prevailing in the capital Harare.

Prices across the country vary with some as high as US$23 per bag due to haulage cost. Prices are beginning to fall gradually after the government intervened and liberalised the importation of cement into the country to avert the prevailing shortages in the market.

Currently, individuals can import up to five tonnes of cement per person, while corporates can import 30 tonnes per firm until the end of December 2023.

However, the increase in prices can be explained by key aspects of the oligopolistic market structure and the peculiar nature of demand in the Zimbabwean economy.

Market structure

Zimbabwe has three major cement producers, who account for over 75% of the market share. The other two smaller players (Diamond and Pacstar) account for less than 5%.

The major producers are Pretoria Portland Cement (PPC), Khaya Cement (formerly Lafarge-Holcim) and Zino Zimbabwe Cement Company. The three firms have competed in the local market for close to over 50 years.

PPC has plants in Colleen Bawn (Gwanda), Bulawayo and Harare, while Khaya has a plant in Harare and Sino Zimbabwe in Gweru. Imports account for less than 20% of the market share as importers need government permits to import the key commodity.

The market has various intermediaries, which are hardwares, retailers and container shops, which fulfil the place utility to the downstream consumers.

These intermediaries maximise their profits only to a level that keeps them competitive against rivals since the product is the same.

One key feature of the market is that the producers have power to determine selling prices for the cement they sell to intermediaries considering the fact that imports are limited and suppliers are few.

Growth in demand

Demand for cement at household and business level has been growing annually in the past 10 years, with demand just below two million tonnes per year (up from less than one million in 2015).

Since 2017, the government and various bilateral partners have channelled millions to infrastructure projects, such as the Harare-Beitbridge Highway, New Parliament Building in Mt Hampden, modernisation of the Beitbridge Border Post, expansion of the Robert Gabriel Mugabe (RGM) International Airport, Hwange 7 and 8 Power expansion, Gwayi-Shangani Dam, Mbudzi Interchange among others.

Similarly, corporates have also doubled up in real estate projects with college accommodation, shopping malls, cluster housing units, new mines, hotels and offices being constructed.

At household level, demand for cement is at record levels as the collapse of the local currency has narrowed investment choices in the capital markets.

The real estate sector has become the only viable and stable platform to hedge against loss of value induced by inflation. This has also resulted in astronomical rise in the price of residential property in the market.

Investment by producers

So strong was the demand that PPC Zimbabwe invested US$82 million into a third plant in Harare to take the company’s capacity to 1,8 million tonnes per year.

Its rival, Lafarge (Now Khaya Cement) followed suit and invested US$5,2million in 2021 to build a vertical plant, which increased production capacity to one million tonnes per year.

Sino Zimbabwe also invested in facelift for its cement mill and rotary kiln to take capacity to 200 000 tonnes per year. The country’s three major cement manufacturers now have a combined milling capacity of slightly over three million tonnes a year, well above the national demand.

As such, local production can meet demand, with at least one million tonnes of capacity to spare. However, local producers rarely operate at full capacity due to the oligopolistic nature of the market.

Entrenched oligopoly

An oligopoly is a market structure in which a few firms dominate the market. When a market is shared between a few firms, it is said to be highly concentrated, as is the case in the cement manufacturing sector where two biggest producers account for over 75% of the market share.

Oligopolies frequently maintain their position of dominance in a market because it is too costly for potential rivals to enter the market.

A key feature of oligopolistic market is that firms may implicitly collude to fix or set prices, rather than compete.

Oligopolists prefer non-price competition in order to avoid price wars.

Thus competition can be on advertising, sponsorship and product placement close to each other or setting shop close to each other in various markets.

If colluding, producers set profit maximising levels of output without utilising all the installed capacity.

 This may result in periodic shortages of the product in the market or upsurge in prices, which still benefit the producers.

This may partially explain shortages that followed plant maintenance, breakdown or stoppages at different intervals for the three suppliers.

Oligopolists possess immense bargaining power in the market as is the case locally where consumers prepay (supply backlog) for the product in hard currency due to rampant shortages.

Industry regulation

Oligopolists also wield lobbying muscle due to the nature of the market structure and their interdependence forged over years of rivalry. In 2021, the players convinced the government to promulgate Statutory Instrument (SI) 89 of 2021, which sought to limit the importation of cement into the country.

As such, the government has been providing special import licences for cement firms to import cement to fill the production shortfall.

The producers have also utilised the same licences to import raw materials or cement from affiliate companies in Zambia and South Africa.

Limited threat of new entrants

In 2016, Dangote Cement announced plans to invest US$400 million into the Zimbabwean market. However, the deal did not materialise due to rumored bureaucratic reasons.

The move to pause investment could have been necessitated by the fact that the current suppliers have idle capacity and demand falls below their capacity.

Thus, it may take years before there is formidable competition to challenge the top three producers in order to force prices down or disrupt the entrenched oligopoly. This may be a result of natural or man-made barriers to entry.

Imports price parity

The withdrawal or lapse of import licences has had considerable impact on the shortages prevailing in the market as informal traders have been recording huge sales for imported cement from Zambia, Mozambique, Botswana and South Africa.

Traders in Harare have been stocking brands from Lafarge in Zambia and Surecast based in South Africa. Zimbabwe’s use of the stronger United States dollar and informalisation has also turned the country into an attractive market for regional countries, who sell on cash basis to local importers.

Similar cement brands made in Zambia and South Africa retails around US$5,50 per 50kg in their markers and can be transported and sold on the local market at US$9 per bag or cheaper.

This means that traders can make more profits by selling smuggled cement if the tax component is removed from the importation matrix.  By smuggling from South Africa or Zambia, the traders avoid paying a surcharge tax of US$100 per tonne.

This means that the cost of production in Zimbabwe is high (if paired to regional peers).

This is caused by the high cost of haulage for bulky raw materials, cost of fuel (highest in the region), alternative power, tax regime and other costs involved.

It may take a few years before consumers get another market entrant in the cement production sector due to entrenched nature of the oligopoly, which poses barriers to entry.

This means that local producers have very limited capacity to innovate, automate their production lines to reduce production cost or outdo each other through pricing discounts.

The oligopolists are sitting pretty on months long backlog and not taking any new orders. However, they are supplying informal traders where prices have skyrocketed to over US$20 per bag.

It may be difficult to ascertain whether the commercial benefits of the shortages are being passed on to the producers or if there is collusion with the intermediaries.

However, it is certain that the expiration of import permits and plant breakdown (capacity constraints) have exacerbated the current shortages.

Nevertheless, demand has been rising exponentially due to uptick in infrastructure and real estate projects.

Hence, the shortages have been sustained for a long time. The government made the right call to liberalise imports to reduce prices and improve supply.

However, more needs to be done from a policy point of view to  address the cost of production considering the fact that tariff barriers will no longer work once the African Continental Free Trade Area (AfCFTA) rolls into full force.

The starting point being the cost of fuel and the need to rehabilitate the country’s rail network to address transportation of bulky raw materials or commodities.

Without regulation or protectionism, the entrenched oligopolists may lose to regional suppliers and thousands of direct and indirect jobs will be on the line.

For the players, it may be high time they invest in production automation to maximise on economies of scale and prepare for open borders.

  • Bhoroma is an economic analyst. He holds an MBA. — [email protected] or Twitter @VictorBhoroma1.

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