Lafarge 2016 Half Year Review

When we reviewed the 2015 annual performance of the only cement player on the LUSE, we indicated that they were in a price war with a player who had aggressive intentions of growing market share through using low prices and controlling or incorporating components of the vertical chain of cement distribution unlike incumbent competitors.

As at mid-year review, the story this year for Lafarge is that of 42% drop in revenue compared to its first half year performance in 2015 with investors high by a drop in dividend of 63%. Ironically, domestic volume are down 42% but exports are up by 22% for the same period.

With a 6% increase in its investment in property plant and equipment, the management note that there has been a margin decline despite cost reduction due to increased power costs and exceptional restructuring costs. Furthermore, the macro environment continued to be difficult for the manufacturer with tight liquidity (affecting working capital) and the proverbial price war. This inevitably led to the 89% fall in earnings despite efforts according to its Emmanuel Rigaux (CEO Lafarge Zambia) of continued cost base adjustment in order to remain competitive. However, exports are now their key value generator. Furthermore, are they are looking to key huge contracts with the construction of the Kenneth Kaunda International Airport, Kafue Gorge Lower project among others that will help to mitigate the difficult market.

It is not the Lafarge management teams’ fault that they are currently engaged in a price war. However, the behavior of players that have entered their market is synonymous to entrants in a market whether they believe that there are huge profits to be made. In a case like this, it is best of understand how the company found itself in a price war in the first place. The next approach, as Lafarge has rightly done is to compete on economies of quality and product scope. At the moment, they offer a dynamic range of product compared to their competitor. However, with the end of rational economics at play, most consumers will look at price before quality as the product cement has price elasticity when it comes to demand. With this in mind, we believe that the game cement may be won through standards. When more players enter the market, the chances are that barriers to entry when issues of regulation and product standards are left unchecked, the dominant players may have to consider pushing of ubiquity in product standard in the market. The player with the largest investment in research, patents and development eventually wins.