Cement makers in Nigeria should brace up for intense completion following the recent price cut by the largest producer of the building material, Dangote Cement.
Analysts however say the lower price may not achieve the desired result of boosting consumption, as the country continues to grapple with slow economic growth and regulatory headwinds.
“We expect the other cement producers such as WAPCO, UNICEM and AshakaCem in the Lafarge Africa Group and Cement Company of Northern Nigeria, to cut cement prices, being price-takers in the industry,” said Tajudeen Ibrahim, team head, Chapel Denham, in a September 8 note to BusinessDay.
“The sales volumes of the cement industry may however not rise on the back of the price cut, as the relationship between price and consumption is weak,” said Ibrahim.
In a related development, Nigerian conglomerate BUA Group has signed $600m worth of contracts with China’s Sinoma International Engineering to double capacity at its flagship cement plant as it seeks to expand market share in Africa’s biggest economy.
BUA group, with interests in cement, pasta, steel and real estate, said it expected to double capacity at its Obu cement plant, which currently produces 3.5-million tonnes.
It expects to complete the expansion by 2017, BUA’s executive chairman, Abdulsamad Rabiu, said at the signing ceremony held at Sinoma’s offices in China.
“BUA has less than 10% of market share now, after expansion we should go to about 20%,” he said.
The drags in infrastructure developments due to government’s weakening fiscal strength and pressured consumer wallets will slowdown the demand for building materials, industry watchers say.
Recall that growth in the Nigerian economy slowed in the second quarter, due to the slump in oil prices and a weak naira.
Gross domestic product expanded 2.35 percent on an annual basis, compared with 3.96 percent a quarter earlier, according to data from the National Bureau of Statistics, (NBS).
Analysts are saying there is likelihood that another round of devaluation of the naira may force firms to increase the price of cement in order to protect profit margins.
The Central Bank of Nigeria (CBN) has devalued the naira twice since November last year, in order to protect the currency from continued fall, due to a 50 percent drop in the price of oil.
The naira plummeted 21 percent to a record low of 206.32 per dollar between the end of June and February 12 while inflation rate was 9.20 percent for the month of July, according to the NBS data.
“We believe that in the event of a further devaluation of the naira, companies may be compelled to pass on higher production costs to consumers, in a bid to protect margins,” said Saheed Bashir, an analyst at Meristem Securities Ltd, in a September 4 report to BusinessDay.
The latest earnings update showed the four major players in the industry are in a growth spurt, despite the economic doldrums bedevilling consumer goods firms.
The cumulative revenues of the four dominant cement makers (Dangote, Lafarge, Ashaka and Cement Company of Northern Nigeria), as reported in their (H1) 2015 results, rose by 13.02 percent, to N378.40 billion, from N334.79 billion last year.
The cumulative net profit of these firms increased by 24 percent to N156.94 billion in June 2015 as against N126.17 billion last year, as alternative cheap source of energy continues to cut costs and bolster bottom line.
Industry players expect the rapid urbanisation to increase the demand for building materials.
Dangote Cement has announced its intention to increase its cement production capacity in Nigeria by c.20% to 35.25mn tonnes per annum from 29.25mn tonnes per annum currently. The new fully integrated plant, which will be completed within the next 30 months, will be located in Itori, Ogun State, close to Lafarge Africa’s cement plant at Ewekoro. The plant will have two lines each of 3.0mn tonnes capacity.
“Economic factors such as increased consumer spending power, improved employment rate, increased population of middle class, and importantly, government expenditure on infrastructure projects such as bridges, housing, schools, hospitals, and stadia are more compelling drivers of cement consumption than prices,” said Ibrahim.
BALA AUGIE
