The New Front In The War For Cement Manufacturers Is Pricing
When BUA Cement announced a decrease in the ex-factory pricing of their cement from N5,500 to N3,500, it made headlines first. The company cited the need to promote development in the nation's building materials and infrastructure sectors.
According to BusinessDay's research, the decision has prompted emergency board meetings at other cement manufacturers who are currently debating whether to respond with price reductions or keep things as they are.
“If a pricing war eventually occurs, we expect a contraction in Earnings Before Interest, Taxes, Depreciation, and Amortisation (EBITDA) margin and lower profitability for all three manufacturers, given that energy costs will remain elevated over the next two quarters,” Uwadiae Osadiaye, a researcher at FBNQuest Capital, said.
“In our view, the price reduction by BUA Cement is necessary to increase its local penetration because of the (temporary) loss of market opportunities in Niger and Burkina Faso. We note that BUA Cement’s Sokoto plants’ proximity to neighbouring countries helped distribution across the border,” Osadiaye added.
According to Femi Awofeso, a research analyst with one of Nigeria's consulting firms, BUA's most recent cement price adjustment is either a niche repair strategy to make up for a potential loss in market volume due to the geopolitical trade challenges brought on by the decisions regarding, among other things, the Niger Republic or a strategic attempt at cost leadership to outcompete rivals.
“Time will also tell if BUA’s price-cutting action represents a break from what analysts have suspected to be a ‘collusive’ price-setting arrangement by dominant cement manufacturers in Nigeria,” he said.
Beyond price, research revealed that Nigerian cement producers were cementing expansion with fresh investment since capital expenditures to expand capacity had increased borrowing costs.
“The recent changes in business strategy and accounting policies of industry players have changed the dynamic of finance cost accounting,” CardinalStone said in its latest report about the cement industry.
For instance, Dangote Cement issued N263 billion in bonds as of March 2023 and N138.2 billion in series 4, 5, 6, and 7 commercial paper in the first quarter of 2023 for working capital needs.
The largest cement manufacturer in the nation also issued a N116 billion ($280 million) series 2 fixed-rate senior unsecured bond in May 2022, making it the largest corporate bond issuance in Nigeria's capital markets to that point. The bond's revenues would be utilised to help fund the company's domestic expansion plans.
As part of its N200 billion bond issuing programme in 2020, BUA Cement also issued its first N115 billion series 1 fixed rate senior unsecured bond.
The business declared in 2021 that it was collaborating with the International Finance Corporation to finance the construction of two energy-efficient cement factories in Sokoto, which would increase its capacity. The $500 million transaction, which was completed in June 2023 with the help of European and African development finance agencies, will increase local cement supplies in addition to supplying adjacent nations.
By the first quarter of 2024, the company's overall cement capacity is anticipated to expand to 17 million metric tonnes per year thanks to a new project in Guyuk and expansion work in Obu.
Another prominent competitor, Lafarge Africa, has concentrated on debottling its current plants while maintaining a balance sheet deleveraging posture, "indicating no need for any significant borrowing to fund any capacity-related CAPEX while relying on its strong positive cashflows," CardinalStone added.
According to data from data management firm Asoko Insight, Dangote Cement currently controls 60% of the local market. Lafarge (a member of the Holcim Group) comes in second with 19.5 percent, closely followed by BUA Cement (the product of the merger of CCCN and Obu Cement in January 2020), at 20.4 percent.
“Ever-increasing demand and current production gaps have led to new, smaller players entering the market,” Asoko Insight said.
It added: “A few examples include Mangal Industries Ltd and Mandugu Cement, which have plans underway for 3-Mt/a cement and 5-Mt/cement plants, respectively, along with IBETO Group (in partnership with Sinomas), which is building two greenfield projects in Effium (1 Mt/a) and Enugu (2.2 Mt/a), plus a 3-Mt/a expansion project at its Nkalagu plant.”
According to research, Dangote Cement's manufacturing facilities are strategically situated close to significant limestone deposits and transportation hubs, which gives them a competitive advantage in terms of production and logistical costs.
According to specialists, BUA Cement has a sizable portion of the North-West and North Central markets thanks to its leading position in Sokoto, the youngest of the top three clinker producers.
“BUA Cement’s plants in Edo and Sokoto states are close to significant limestone quarries, creating a nearness to the ‘factor of production’ advantage in Northern markets and across Northern country borders,” Tunde Adeniran, a research analyst based in Lagos, said.
“The BUA factory locations lower the cost of supply chains and support price competitiveness. Its Northwestern dominance gives it access to markets outside Nigeria, including the Niger Republic and Burkina Faso,” he added.
Lafarge Africa, a global cement company, has a significant business in Nigeria. Lafarge is a significant player in the worldwide construction materials market and a member of the LafargeHolcim Group.
Cement manufacturing facilities are run by Lafarge in several parts of Nigeria, including the South-South and South-West.
“Despite fierce competition, the company’s wide local distribution network assures a stable supply chain to multiple distribution nodes while lowering transportation expenses,” Adeniran said.
