The cement industry

Background

The cement industry in Kenya consists of two firms: the Bamburi Portland Cement Company (BPCC) and East African Portland Cement Company (EAPC). BPCC, the larger and older of the two, was established in 1954 to produce for local and export markets. EAPC was established four years later in 1958 and produces primarily for the domestic market. Of the two, BPCC has a competitive edge due to its more efficient technological process and more

experienced management. It uses a dry process and operates the cheaper coal kilns. EAPC on the other hand had not shifted away from the traditional wet process technology, which is older, inefficient and uses expensive kilns.

History of firms in the sample

Origins, ownership and structure

BPCC and its subsidiaries are incorporated in Kenya. The cement plant is strategically located about 15 km north of the Mombasa harbour, the main exporting outlet. The principal activity of the parent company is the manufacture of clinker and cement derived from coral rock. One of its subsidiaries is engaged in agriculture and the environmental restoration of areas from which coral rock has been excavated. This includes land rehabilitation fish farming and landscape consultancy. Another subsidiary, though not operational, owned valuable coral land which serves as a reserve of raw materials. This land is expected to provide the major source of limestone for BPCC in the next 20 years.

BPCC started as a joint venture between the Kenyan government and Bamsem Ltd. By 1988, Bamsem held 74 per cent of the shares and the Kenyan government held 16 per cent. The remaining 10 per cent was held by the public through the Nairobi Stock Exchange. In 1990 the foreign investors increased their shareholding. In 1992, the Kenyan government indicated its intention to sell its shareholding in BPCC as part of the privatization programme being undertaken under the structural adjustment programme (SAP). The firm has been operating under a management contract with Cementia A.G. from Switzerland.

EAPC started operations in 1958 and was incorporated in 1963. It has a majority government shareholding (50 per cent). Another 28 per cent was shared between investors in the UK and Switzerland, while local private investors held 22 per cent. The management of the enterprise is, however, wholly local. The plant is located about 30 km east of Nairobi, at Athi River, where it extracts its main raw material. In 1992, EAPC was also listed among the companies to he privatized.

Export history

The cement industry in Kenya is an example of an industry which has substantially lost its export share due to its inability to keep up with technological advances in a highly competitive international market. Cement exports declined in the mid-1980s (see Table 10.6) due to the near collapse of the international cement market. Prices fell below levels that could sustain BPCC's cost structure. In 1985, BPCC's export price was $34 per tonne, which was quite close to the economic price of about $36 per tonne, landed at Mombasa.

Table 10.6 Production and exports of cement for BPCC

Table 10.7 Basic data for the two cement-industry firms 1990

The main inputs used by BPCC are oil, coal, hydro-electric power, fluorspar, iron ore, gypsum and pozzuolana. Production costs increased in the 1980s by an average of 20 per cent per annum, partly due to the persistent depreciation of the Kenyan Shilling. The firm had loans denominated in foreign currencies. This could have been counterbalanced by export sales, but the foreign exchange policies pursued by the government did not facilitate this. The recently introduced retention accounts scheme for exporters is expected to change the firm's position radically for the better. Bamsem's increased shareholding in BPCC brought benefits to the local firm as more capital was injected into the company. Bamsem also drew up an extensive training programme for professionals in the firm. Bamsem initiated further technology improvements using its wide experience in the cement industry in Europe. These positive developments were yielding results by 1991/92. The declining trend in exports was reversed as BPCC once more became competitive in the market.

Between 1980 and 1987 export sales were adversely affected by BPCC's inability to compete internationally, especially when the international prices of cement collapsed. This considerably reduced export volume during the period. BPCC was forced to continue exporting at a loss in order to maintain some of its market share while it awaited improvements in international prices and its own technology. In 1991/92, international prices picked up, domestic prices were decontrolled and technology was upgraded. This boosted exports and improved the firm's profitability.

Technology, productivity and human resources

Technology and productivity

EAPC used a relatively inefficient wet process and relied on the more expensive fuel oil kilns. The company's expansion and conversion to a more efficient process has been constrained by lack of raw materials (limestone and clinker). The firm also suffered from bureaucratic delays in decision-making from the government, its principal shareholder.

Cementia A.G. (Switzerland), which runs BPCC under a management contract, had, on the other hand, quickly taken a number of decisions to ensure that BPCC remain competitive in the export market (Table 10.7). The first was the conversion from fuel oil to coal firing in the early 1980s, the second was the implementation of an energy efficiency programme in 1985. Thirdly, and more significantly, the technological process was improved using an IFC loan and later a Japanese government credit. Lastly, after a protracted tussle with the government over restrictive price controls on cement, BPCC finally benefited from price deregulation in 1992. This enabled it to adjust domestic prices to economic levels to compensate for higher production costs and the depreciating Shilling. These factors played a significant role in BPCC's increasing its export levels from 316 330 tonnes in 1990 to 451 300 tonnes in 1991.

Impact of government policies

The poor performance of BPCC illustrates how inappropriate government policies can run down an otherwise profitable private company to near collapse. Two policies in particular were responsible: the rigid price control on cement sold locally and the failure of the government to remove or at least reduce import duties on coal following the firm's decision to shift to coal firing. Prior to that, BPCC had been using fuel oil, which was costing large amounts of scarce foreign exchange. Coal was cheaper on the world market. For over eight years the government failed to adjust prices to levels that would turn around the firm's performance. As a result, it became difficult for BPCC to secure financial assistance to refurbish the plant. It was alleged that the firm's inability to win the government's favours was because the management was aligned to the wrong political faction. Continuing under-capitalization of the firm placed it in an increasingly poor position. This threatened to wipe out its exports and even made the country a net importer of cement in the late 1 980s.