Sunday, Jun 13th 2021 5:28 AM

Market Digest Nigeria


Weak consumer protection keeps cement prices high


While costs of input appear a good alibi for cement manufacturers and dealers to justify high costs of the commodity, regulatory lapses in checking price gouging in the value chain, costly logistics drove by inflation and cyclic demand for real estate, fuelled by currency weakness and low yields from financial instruments are factors aggravating cement prices nationwide.

Although the demand for residential properties, particularly from the low-and-middle-income earners, is expected to remain weak due to rising inflation, according to a recent CBN survey, many investors continue to push funds to real estate businesses to hide unexplained wealth and conserve value for the local currency. Already, the logistics arm of the cement business has already been outsourced by some of the players to avoid recurring issues on safety and fleet maintenance.

Checks shows that despite cement manufacturers recording N121.22 billion profit in the first quarter, due to sales volume and price hike, affordability of the commodity remains challenging, haven rose from N2,600 last November to about N4,000 per 50kg bag in many parts of the country. In their unaudited first-quarter results, the three major players, Dangote Cement, BUA and Lafarge retained profits of N89.7 billion, N22.37 billion and N9.14 billion respectively. Performance in the companies was hinged on the increase in sales volume and price per tonne.

While the costs of other building materials have also skyrocketed due to currency devaluation that has made importation costs rise, concerns about cement bother on the fact that it accounts for at least 45 per cent of building materials’ input.
Specifically, local cement prices are also influenced by input costs, particularly energy and distribution costs. On the one hand, energy prices are affected mainly by the local currency’s devaluation as gas contracts are denominated in U.S. Dollars. On the other hand, distribution cost is affected by the price of petroleum products and the country’s poor road infrastructure.

The Lagos Chamber of Commerce and Industry (LCCI) also confirmed input costs concerns in the manufacturing sector owing to access to foreign exchange for raw materials and inflationary trend in the country.

While efforts have been towards increasing the use of locally-sourced coal due to its cost-efficiency compared to gas and LPFO by firms, cost optimisation among the producers showed that Dangote Cement (51.2 per cent as of 2020) leads the industry in terms of earnings before interest, taxes, depreciation and amortization (EBITDA) margins due to scale economies associated with its large size amid the continued drive in optimising its energy mix.

BUA Cement (46.6 per cent as of 2020) occupies the second position due to efficiencies associated with its modern plants in Edo State, which offset cost pressures related to the use of expensive LPFO in its Kalambiana plant. Although Lafarge’s EBITDA margin of 32.7 per cent in 2020 is well below the industry average (51.2 per cent), the company has made some strides in increasing the use of alternative fuels (biomass).

The cement manufacturers had earlier claimed that their ex-factory prices remained static, attributing the over N1,000 hike in prices to activities of retailers.

According to the operators, the huge difference in the ex-factory prices of the commodity and the retail market prices of cement is mostly because of retailers taking advantage of increased cement demand to make maximum profits.

This is the rationale for the establishment of the Federal Competition and Consumer Protection Commission (FCCPC), the apex consumer protection agency in the country, set up to promote and maintain competitive markets in the Nigerian economy, by prohibiting restrictive and unfair business practices, which prevent, restrict or distort competition or constitute an abuse of a dominant position of the market power in Nigeria. Years after, consumers are yet to feel the impact of the regulator.

Despite numerous complaints, however, the FCCPC has remained silent, shifting concerns to international comparisons, even when local manufacturers allege distortions and price gouging by distributors.

Efforts to reach the Executive Vice Chairman/CEO, Babatunde Irukera, have remained unsuccessful, as calls to his number were not returned despite initial acknowledgement of receipt of the sent message.

Analysts note that cement prices in Nigeria are higher than the global average despite the domestic availability of limestone, the critical raw material used in cement production.

According to them, import restriction on the commodity and the industry’s oligopolistic structure confers the industry players’ premium pricing advantage, as the absence of competition from foreign suppliers has made it possible for the industry players to shun undercutting prices to boost revenue even when demand is weak, given that consumer choices are limited.

Director-General of the LCCI, Dr Muda Yusuf, urged caution in blaming manufacturers for the high cost of cement, noting that there is a limit to which cement producers can interfere in regulating costs from the retail and distribution value-chain.

According to him, a shortfall in supply must be established to push the blame on manufacturers, considering that supply saturation is key to lower cement prices.

The industry’s installed production capacity at 50.9 million metric tonnes is far more than domestic demand of an estimated 23.5 million tonnes pre-COVID-19, but capacity utilisation remains at about 51 per cent going by claims of poor domestic demand from industry players.

“You cannot hold manufacturers responsible for whatever happens in the distribution value-chain, rather you look at consumers that are being exploited. Input costs are affecting a lot of things and this is becoming evident in prices of commodities in the Fast Moving Consumer Goods (FMCG) sector. You also need to consider the cost of logistics, especially now that diesel prices have increased. Once there is distortion in the value chain, costs are naturally passed to the end-users. All the dimensions need to be examined,” he added.

An insider in the industry who craved anonymity told The Guardian that the ex-factory price of the commodity is not the same across different distributors, as the value-chain operators get different prices based on the volume of investment and commitment they are able to make to the manufacturer.

The insider alleged that illicit funds were being invested in real estate businesses, hence driving the demand for the commodity, especially at the retail level. According to him, other commodities in the real estate sector are import-dependent and account for why steel prices have skyrocketed.

With a slump in earnings of many states, the level of commitment to infrastructural development and projects has however dwindled. Analysts at Cordros Securities noted that the products of the three major producers in the country are not evenly distributed and easily accessible across the country’s geographical locations, resulting in high switching costs to the consumer. High switching cost to the consumer has been amplified by the industry’s oligopolistic structure, enabling industry players to dictate prices collectively.

“An oligopolistic market structure’s key feature is that the firms are usually interdependent, implying they cannot act independently of one another. Given the inelastic demand facing industry players amid high switching cost to consumers, the industry players can quickly raise prices to counteract cost pressures that will dampen margins,” they added.

Further analysis of the financial standings of the cement firms showed that Dangote ramped up production capacity in the Obajana Line 5 and resumed production at the Gboko plant to meet increased demand for its products.

Dangote Cement also increased the total volume of cement sold in the first three months of the year from its Nigerian operations to 4.9Mt compared to the 4.0Mt sold in the first quarter of 2020. Pan-African operations sold 2.6Mt of cement in the period under review compared to 2.3Mt sold in the corresponding period in 2020.
he cement maker said it was making efforts to start the Okpella Plant before the end of June to meet the increasing demand for cement in the country and help to moderate prices in the market.

Commenting on the financial result, Dangote Cement GMD/Chief Executive Officer, Michel Puchercos, said that the company started the first quarter of 2021 on a positive note and recorded increases in revenue and profitability.

He stated that the cement company posted a profit after tax of N89.7 billion, saying: “We took the strategic decision to pause our clinker exports to ensure we meet the rapid volume growth in the Nigerian domestic market. We are improving the output of our existing and new assets and aim to recommence clinker exports in the second quarter.”

For BUA, its revenue grew by 13.4% y/y to NGN61.19 billion in Q1-21, driven by the combination of increases in sales volumes (+3.5% y/y) and price per tonne (+9.6% y/y). Indeed, the double-digit revenue growth is consistent with results from the other players in the industry – DANGCEM (+33.5% y/y) and LAFARGE (+12.2% y/y).

EBITDA grew by 21.0% y/y in Q1-21, as the price-led increase in revenue was strong enough to offset the increase in operating expenses ex-depreciation (+15.2% y/y) amidst the single-digit growth in the cost of sales ex-depreciation (+6.3% y/y). Similarly, the EBITDA margin rose strongly by 3.0ppts to 47.6% in Q1-21. Energy cost per tonne (+8.2% y/y) grew faster than the increase in volumes (+3.5% y/y), reflecting the pass-through impact of the local currency devaluation.

For Lafarge, revenue grew by 12.2% y/y in Q1-2021, on the back of improvement in cement sales (+12.3% y/y) and aggregate and concrete sales (+7.9% y/y).

However, gross margin weakened by 224bps in Q1-2021, as the increase of 16.3% y/y in cost of sales (excluding depreciation) outpaced the top-line growth (+12.2% y/y). The rise in the cost of sales was driven mainly by the variable cost component (+14.5% y/y), likely due to the pass-through impact of the local currency’s devaluation on gas contracts.

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