Martin Nyanjom
26 January 2010
opinion
The Kenya gas market has been dominated by BOC Kenya Limited (BOC) over the years, mainly due to historical reasons. But with recent technological advancements, smaller and efficient plants mainly from India and China have entered the market. The other players include Nairobi's Chemigas, Noble Gases, Welgas, Carbacid and Crown Gases and Mombasa's Synergy Gas.
Twiga chemicals deals in one product line, Ammonia, while Kisumu's Spectre International, have the capability of producing Carbon dioxide, as a by-product in the production process.
Heavy consumers such as hospitals and institutions have installed production units and may be considered as competitors, especially in bulk oxygen and nitrogen supply. They may be considered direct competitors if they start selling directly to the end user, or other competitors. But for now they are indirect competitors since they are major producers and consumers of the product.
Examples of institutions with own oxygen production units are Steel Makers in Mombasa, Prime Steel, MP Shah and Nairobi hospitals, as well as the Central Artificial Insemination Station that has installed a nitrogen plant.
Delivery of products to the market is either through bulk supply especially to major consumers with installed tanks in their premises or through compressed and portable cylinders for smaller consumers. The consumer market segments can be broadly segmented, based on usage, into two distinct categories-- the large and medium sized companies and the lower end market, commonly referred to as the Jua Kali sector.
The market is further distinctly divided into industrial and the medical gases market, whose major consumers' are hospitals.
Thus, the industrial market is dominated by Compressed Oxygen and Dissolved Acetylene, mainly used for welding applications. The two which are produced locally are a cash cow in terms of sales volumes and revenue generation. Other gases in this category include Liquid Oxygen and Nitrogen, Argon, Ammonia, Freon and Industrial Liquefied Petroleum Gas (LPG).
On the other hand, the medical gases include liquid oxygen, medical compressed oxygen, nitrous oxide, and medical carbon dioxide.
Geographically, the total Kenya market can be divided into four major regions; Nairobi, Coastal region (Mombasa), Western Kenya region (Kisumu, Eldoret, Nakuru and South Nyanza) and Mt Kenya region (Nyeri, Embu, Meru). The gases market has in the recent years gone through major transformation making it very competitive with the entry of new players, Own generation of product by major consumers of gases, and reduced barriers to entry. The use of alternative methods in surgical operations using cater mine has reduced demand for nitrous oxide gas.
But the notable change in the industry is the failed attempt by BOC to merge/acquire Carbacid Investments Ltd (CIL). The Capital Markets Authority (CMA) declined to sanction the transaction since BOC did not achieve the required 80 per cent approval by CIL shareholders. Against the back drop of the failed merger/acquisition, the fundamentals have changed drastically in CIL's favour. The terms laid out four years ago were unfavourable to CIL but their results in terms of turnover and profitability have been consistently better than for BOC during the period (2005-2009).The sales turnover for Carbacid from 2006-2009 has been higher than BOC.
This is the same case with profit before tax. BOC appears to have suffered at the top-line level, with lost market share. This is important when one considers that the reduction in sales turnover growth is coupled by annual price increases averaging 4-10 per cent. CIL is riding on strong financial results, a hefty final dividend of Sh 10.00 per share, and a bonus of two shares for every one share held. In contrast, BOC has been left providing the market with historical performance and a promise to enter the CO2 business.
BOC, being aware of the likely consequences, has announced it will develop its well in the Rift Valley (Koibatek). The strategy of acquiring CIL as an entry point into the CO2 business was definitely a sensible thing to do. Overnight it would have had access to a developed market, valuable customers and developed distribution channel.
Given the failed marriage due to lack of "consummation" to quote the BOC chairperson, one needs to look at the current market dynamics to understand the tall order BOC faces as it tries to break into the lucrative CO2 business.First, one needs to look at the changes in shareholding structure in CIL in the last one year. The entry of Centum Investments complicates matters for BOC. Centum is one of the most diversified investment companies in the country.
Secondly, CO2 is a food item. CIL has been certified to supply the local soft drink bottling units. The certification process is vigorous as it has to guarantee the highest product quality in line with international standards. Though the soft drinks company may be willing to consider diversified suppliers for strategic inputs, the high quality service assurances in supply may mitigate against this move.
Thirdly, whereas CIL is about 50 kilometres away from Nairobi, BOC's well is about 250 kilometres away from the main market. The location factor may provide a logistical advantage with the current road infrastructure development across the country.
Fourthly, CIL has an enviable distribution infrastructure including storage tanks and reliable distribution trucks. BOC would require huge resources and time to build up a competitive structure.
Lastly, CIL has built a strong customer loyalty which includes soft drinks companies in Kenya, Uganda, Rwanda and Tanzania and a number of brewing entities in the region. It is imperative to note the loyalty has been built over a long period of time and for BOC to convince the customers to switch, it would take a very attractive value proposition.
Based on the above factors, one would wonder the kind of business case the BOC management would present to justify investment in the CO2 business which, by my estimation, could be anything between Shs 500 million and Sh700 million.
To throw a spanner into the works, CIL on its part may be looking at diversifying their portfolio beyond CO2 business. The barriers to entry into the BOC lines of business for CIL are minimal and with a localised decision making body, CIL will need probably six months at most to acquire a good plant.
It may be wise for BOC to concentrate on its core business, where it is currently facing increased competition by improving service delivery to key customers.
As new and existing players chew into the market, coupled with the declining sales volume for BOC, it is worthwhile to ask the question: Is competition actually slowly unmasking the business oxygen mask from the market leader?
Mr Nyanjom is a business strategy and management consultant with Gem International Limited