Just as power families in George Martins’ ‘A Song of Ice and Fire’ locked horns in a battle over who sat on the Iron Throne, cement makers in Nigeria are intensifying efforts to increase their share of the market.
BUA Cement drew first blood when it announced a reduction in the ex-factory price of its cement from N5,500 to N3,500, citing the need to spur development in the country’s building materials and infrastructural sectors.
BusinessDay’s findings showed the move has spurred emergency board meetings in other cement makers who are currently in a dilemma on whether to react with price cuts or maintain the status quo.
“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.
For Femi Awofeso, a research analyst with one of Nigeria’s consulting firms, BUA’s latest cement price adjustment is either a strategic attempt at cost leadership to out-compete rivals or a niche repair strategy to compensate for a potential loss in market volume because of the geopolitical trade challenges arising from the decisions on Niger Republic, among others.
“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 pricing, findings showed Nigerian cement makers are cementing growth with new investment as capital expenditure spending to drive additional capacity has led to a surge in 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 N138.2 billion series 4, 5, 6 and 7 commercial paper in the first quarter of 2023 for working capital purposes and N263 billion worth of bonds as of March 2023.
In May 2022, the country’s biggest cement maker also issued a N116 billion ($280 million) series 2 fixed-rate senior unsecured bond – the largest corporate bond issuance in Nigeria’s capital markets to date – with proceeds to be used in part to finance its domestic expansion projects.
BUA Cement also issued its first N115 billion series 1 fixed rate senior unsecured bond under its N200bn bond issuance programme in 2020.
In 2021, the company announced it was working with the International Finance Corporation to finance the expansion of its capacity with two energy-efficient cement plants in Sokoto. The $500 million deal was closed in June 2023 with participation from European and African development finance institutions and will supply cement to neighbouring countries as well as bolster local supplies.
The company’s new project in Guyuk and expansion works in Obu are expected to increase its overall cement capacity to 17 million metric tonnes per annum by the first quarter of 2024.
Lafarge Africa, another major player, has maintained a balance sheet deleveraging position and focused on debottlenecking its existing plants, “indicating no need for any significant borrowing to fund any capacity-related CAPEX while relying on its strong positive cashflows,” CardinalStone said.
Data from Asoko Insight, a data management company showed Dangote Cement currently holds 60 percent of the domestic market. BUA Cement (resulting from merger of CCCN and Obu Cement in January 2020) is second with 20.4 percent; it is closely followed by Lafarge (part of the Holcim Group) with 19.5 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.”
Findings showed Dangote Cement’s plants are strategically located close to large limestone deposits and transportation hubs, a proximity that gives it comparative advantages in production and logistics costs.
For BUA Cement, experts said its dominant presence in Sokoto gives the youngest of the big three clinker makers a large chunk of the North-West and North Central markets.
“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.
Nigeria is also an important market for the multinational cement firm Lafarge Africa. Lafarge is a member of the LafargeHolcim Group, a major player in the global construction materials industry.
Lafarge operates cement plants in various regions 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.