The persistent fall in oil prices which has cut government’s proposed capital expenditure for 2015 and slowed consumer spending continues cause cement makers near term headwinds.
“We expect deteriorating macro conditions in Nigeria to lead to a reduction in government’s capital expenditure and declines in consumer spend. We believe both forces will constitute a drag on sector sales growth in the near term,” said Tunde Abidoye, analyst with FBN Capital, in a January 23 note.
Capital expenditure is projected at N634 billion for 2015, down from N1.12 trillion in 2014 and N1.63 trillion in 2013, as the slide in oil prices reduces funds available to finance infrastructure projects needed to unlock growth.
Oil price have slumped over 45 percent in the past six months, eroding foreign-currency reserves and forcing the central bank to devalue the Naira currency for the first time in three years.
Inflation rate stood at 8.0 per cent as at December 2014, 0.1 per cent higher than 7.9 per cent earlier recorded in November, according to the National Bureau of Statistics (NBS).
“Once you have less money, you think of food and less of housing,” said Abiola Rasaq, team lead, Associated Discount House Limited (ADHL), in a telephone interview with BusinessDay.
“Which is why we may not see growth in cement volume,” added Rasaq.
The uncertainties could further debilitate a sector where firms grappled with weak sales due to the rainy season, slow construction activities and increased tax liabilities that slowed third quarter (Q3) 2014 growth.
The cumulative revenues of the four dominant cement makers (Dangote, Lafarge, Ashaka and Cement Company of Northern Nigeria), as reported in their Q3 2014 results, rose by 6 percent to N499.17 billion, from N472.04 billion.
This is less than the 29 percent growth in revenues recorded in the third quarter of 2013.
Dangote Cement, which controls over 64 percent of the market, has been facing production challenges and huge tax liability which led to the cumulative net income of the four firms dipping by 15.20 percent to N178.04 billion from N209.96 billion in the preceding year.
“When government allocation reduces, the demand for cement will drop and if government builds more schools more cement will be needed,” said Rasaq.
Over 70 percent of the country’s budget is funded through oil receipts and the shortfall in revenue projections means big construction firms will suffer, according to ADHL.
However, some these firms are aggressively expanding production and also using a string of mergers and acquisition to tap into the country’s economy.
These strategies according to analysts are bold. For instance last year, Lafarge South Africa consolidated its Nigerian and South African business holdings in a deal valued at $1.4bn.
Lafarge Africa and UniCem (an associate) now have a combined capacity of 12 mmt and a market share of 29 percent in Nigeria, according to FBN Capital Jan.23 report.
“We expect that synergies realized from a larger balance sheet and improved flexibility to deploy resources across subsidiaries will provide enhanced capacity to fund future growth opportunities,” said Abidoye.
Dangote, Lafarge and Cement Company of Northern Nigeria share price are down -30.70 percent, -30.48 percent and -7.39 percent respectively in the past year while Ashaka’s one year return was up +9.40.
BALA AUGIE
