CEMENT: Demand soars amidst price hikes, declining purchasing power

By Nkiruka Nnorom

Cement producers are still smiling to the banks despite the harsh operating environment and decline in purchasing power of consumers.

Recent operational results of leading companies in the sector indicated that volume of sales has increased as well as sales revenue and profits.

Also investors have sustained bullish positions on the stocks just as investment analysts have given mouth-watering forecasts on 2024 year-end financial positions of the cement companies quoted on the equities board of the Nigerian Exchange Limited, NGX.

Financial Vanguard findings on the operating environment of the companies indicated that macroeconomic headwinds such as inflationary pressures, foreign exchange volatility, rising cost of production, and declines in purchasing power, have escalated since the beginning of this year.

But the cement producers have recorded superlative financial performance within the same period, indicating that a section of the consumers are still retaining strong purchasing power enabling them to spend beyond basic necessities of life such as food.

Domestic prices of cement have remained elevated with retail price ranging between N7,400 and N8,000 per 50 kg bag up from about N6,000 market average a year ago, reflecting the broader macroeconomic challenges.

But at the backdrop of the challenges demand for the product considered non-essential for the larger populace in Nigeria, has continued to rise.

Volume of products sold recorded significant increases across all the leading producers with the sector leader, Dangote Cement Plc, already growing volume by 3.8 percent in the six month period.

The combined outcome of the rising volume of sales and the product price increases during the period was a massive growth in net sales revenue for the major cement producers which rose by 76.6 percent in the first half of the year (H1’24).

The companies, which include Dangote Cement Plc,  BUA Cement Plc and Lafarge Africa Plc, recorded N2.419 trillion in sales revenue in H1’24 rising from N1.049 trillion recorded in the corresponding period of 2023.

Investment analysts attributed these developments to volume growth and higher revenue per tonne.

They anticipate impressive results for the full year.

Analysts at CardinalStone Finance, a Lagos based investment house, is projecting a 14.6 percent Year-on-Year, YoY, rebound in combined volumes for the three key players to 32.8 million metric tones, MMT, with capacity utilisation projected to hit 52.2 percent as against 50.4 percent in full year 2023.

Cement industry output volume recorded a 3.5 percent YoY decline to 28.6 MMT in 2023, but industry experts attributed the development to the cash crunch resulting from the poorly implemented Naira redesign policy as well as the drag from the election cycle.

All the three leading producers including BUA Cement and Lafarge Africa are also optimistic of delivering impressive volume growth.

Changes in net sales

Financial Vanguard’s check showed that Dangote Cement achieved the highest net sales of N1.76 trillion, an 85.1 percent increase compared to N950.83 billion in H1’23.

This was followed by BUA Cement with N363.94 billion total sales, which represents a 64.6 percent increase from N221.07 billion achieved in the same period in 2023, while Lafarge Africa Plc sales revenue jumped to N295.58 billion from N197.68 billion in 2023, indicating a 45 percent increase.

Sales volume rises Dangote Cement

The biggest industry player, Dangote Cement Plc, recorded overall sales volume increase of 3.8 percent to 13.934 MMt in H1’24 from 13.420mmt in the corresponding period of 2023.

But its Nigeria operation saw a huge 10.93 percent volume increase to 8.994MMT from 8.108mmts in H1 2023.

Arvind Pathak, Chief Executive Officer of the company, said: “We effectively navigated macroeconomic headwinds to deliver positive results in the first half of the year. Group volumes were up 3.8%, with our Nigeria operations achieving double-digit volume growth of 10.9%. 

“This growth was driven by improved efficiency across our operations and supported by increased market activity levels compared to the election year and cash crunch in 2023.

“Despite the challenges of elevated inflation, high borrowing cost and a further weakening of the currency in the first six months of the year, our business demonstrated strong resilience. This was due to our rigorous focus on cost minimisation and our diversified business model.

“Group revenue and earnings before income tax, depreciation and amortisation, EBITDA, rose 85.1% and 50.3% to N1.760 trillion and N666.2 billion, respectively.”

BUA Cement

BUA Cement with capacity expansion from its 6.0 MT newly commissioned plants, expects a material increase in sales volume within the year.

The company had reported a 4.8% increase in sales volume to 6.6MT in 2023, a consequence of the slash in the ex-factory price, while projecting a further increase in 2024.

Lafarge Africa

Speaking on the outlook for the cement sector, Lolu Alade-Akinyemi, GMD/CEO of Lafarge Africa, said: “The Nigerian infrastructure and construction sector is expected to continue to grow despite inflationary pressure on purchasing power. As a result, we maintain our positive outlook, with market recovery expected in the second half of the year.

“We will continue to maximize volume opportunities across our markets and actively manage our costs. The company remains committed to its sustainability ambitions and strategy of ‘Accelerating Green Growth’ through innovative building solutions and delivery of stakeholder value,” he added.

Investors bullish on stocks

Meanwhile, investors are reacting favourably to the shares of the companies given expectations of increased capacity, strong volumes, and favourable prices, which are expected to boost earnings with the industry returns averaging 51 percent in the second half of this year.

Breakdown of the return on investment, RoI, for the players shows that Dangote Cement recorded 105.3 percent returns as its share price advanced to N656.70 per share at the end of transactions on Friday, September 27, 2024, from N319.90 per share at the beginning of the year.

BUA Cement Plc on the other hand, recorded 40.4 percent returns, while Lafarge Africa delivered 8.1 percent returns.

Analysts’ comments

Meanwhile, financial analysts have attributed the positive net sales and volume growth recorded by the players to increase in construction activities by both the private and public sector operators, especially increased capital expenditure (CapEx) by the federal government.

According to analysts at Cordros Capital, an investment banking firm, demand for the product was bolstered by FG’s increased capital expenditure allocation of N13.77 trillion, with an anticipated implementation rate of 37.8 percent.

They said: “We believe the strong rebound in sales volume witnessed in H1-24 indicates a full recovery from last year’s downturn.

“The local cement market continues to exhibit robust demand, fueled by increased construction activities from ongoing housing developments and road infrastructure projects, driven by significant public and private sector investments.”

Going forward, they said: “Our outlook on domestic demand remains buoyant, bolstered by the FG’s increased capital expenditure allocation of N13.77 trillion, with an anticipated implementation rate of 37.8%. “Consequently, we project sales volume growth of 3.1% y/y for Dangote Cement, 10.4% y/y for Lafarge Africa, and 21.7% y/y for BUA Cement in 2024.”

They stated that the producers would take advantage of the anticipated ramp-up in the FG’s capital expenditure allocation from the various ongoing construction projects nationwide and investments in private construction activities, especially in urban areas, to grow sales volume coupled with an upward revision in prices.

Chinazom Izuorah, Senior Associate, Parthian Partners, said: “Looking at recent developments, policy pronouncements and government initiatives, even without insight into partnerships or collaborations between these firms and contractors, we can ascribe these volume increases among the cement manufacturers to the present administration’s capital projects. 

“There’s been news of several construction related contracts being awarded and the transition to utilizing cement in the construction of roads in Nigeria. These all support the the noted sales growth.”

Also, Victor Chiazor, Head, Research at FSL Securities, attributed the increase to “higher activity level compared to the previous year when election and cash crunch stifled businesses.”

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