Tunde Abidoye & Oludare Fajimolu
Nigeria's cement industry is experiencing increasing operating difficulties.
Nigeria's cement consumption should have grown by 13% y/y to 15.1 million tonnes in 2009, following increased public sector spending on infrastructure in the first half of the year. New installed capacity by local manufacturers should have replaced imports as the larger share of supply for the first time since 1998. Regardless of the improvement in terms of long-term growth potential, we have become more cautious on the sector as operating difficulties continue to impact the performance of some of the better-known names.
Aggregate output of the sector increased significantly in first half of 2009, due to increased expenditure on public infrastructure by the Federal Government and by some states (particularly Lagos, Rivers and Cross River). However, tightness in the operating environment, which prevailed in 2009, compounded by slack demand and led to a drop in overall cement dispatches.
Some of the key factors that impacted the operations of local cement producers are discussed below:
Energy costs
Adequate power supply remains the most significant challenge faced by local cement manufacturers given that about 40% of operating costs are expended on energy. The disruptions in gas supplies, occasioned by militant activities in the Niger Delta resulted in production losses for most plants in the country. Most plants had to be run on very expensive low-pour fuel oil (LPFO).
Volumes and demand
Owing to the deficit in physical infrastructure, demand for cement in Nigeria is led by the public sector, with all tiers of government accounting for about 70% of total demand. However, the pressure on government spending due to lower oil receipts and the instability in the Niger Delta negatively impacted on demand from the public sector. Industry operators indicated that there was a noticeable reduction in cement dispatches following deceleration in the execution of capital projects in 2009.
Demand from the private sector also manifested some weakness due to the reluctance of commercial banks to extend loans as they focused on improving their internal liquidity positions after the domestic credit crunch and the ongoing banking reforms.
Nevertheless, we expect aggregate cement consumption to have grown by about 13% y/y to 15.1 million tonnes in 2009 following additional capacity (from BCC and Unicem). We estimate that products from local manufacturers should account for 51% or 7.7 million tonnes.
Pricing
We estimate that the price of imported cement is about US$149 per tonne while cost of locally produced cement is between US$130 and US$140 per tonne, depending on the plant. Cement prices in Nigeria remain among the highest in the world. Prices rose as high as US$193 per tonne during 2009.
Changes to government policy
Following the recommendations of a special committee on the cement industry, President Yar’Adua in 2009 approved a series of measures aimed at bringing down the high cost of production and developing local production capacity.
The main measures are:
The federal government also reinstated the policy ban on the importation of bagged cement and announced plans to restrict the issuance of cement import licenses to existing cement manufacturers and other players with commitments to develop local capacity. The president also stated that all cement imports would be subject to a special levy of N500 (US$3.3) per tonne.
Outlook
We expect that the measures announced by the federal government will significantly reduce costs and raise local output. Specifically, we foresee production plants running at higher utilisation rates on the back of subsidised pricing regime and special allocation of LPFO.
In addition, the three-year duty free period for imported machines and equipment to cover the plant construction phase will help to speed up ongoing works on greenfield developments (such as Dangote's Ibese) and improvement works on existing cement plants across the country.
However, gas supply disruptions for cement manufacturers connected to the gas grid remain a major issue to be addressed as it hinges on the level of success of the government's amnesty programme in the Niger Delta.
The restoration of a ban on the importation of bagged cement and the restriction of import licenses to the cement manufacturers should improve local capacity in the medium term. Nevertheless, we think there is a risk that cement prices may rise further in the short term if local producers are unable to fill the supply vacuum.
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