On Thursday 9th January, Abdul Samad Rabiu, chairman, Cement Company of Northern Nigeria, CCNN and Founder/CEO of BUA Cement rang the traditional closing gong on the floor of the Nigerian Stock Exchange to mark the end of trading for that day and also signals the successful completion of the scheme of merger CCNN/Kalambaina Cement and listing of the shares of the expanded entity.
By implication, the entire 13.14billion ordinary shares of CCNN was delisted from the daily official list of the nation’s bourse, while the entire 33.86 billion ordinary shares of 50 kobo each of BUA Cement Plc was listed. With a merger deal size of about N1.185trillion, BUA Cement becomes the third most capitalized stock on the bourse, displacing consumer goods giant, Nestle.
The new entity, BUA Cement, becomes the second-largest producer of cement in Nigeria by volume with factories in Sokoto State, (2million mtpa) and Okpella Edo State, (6million mtpa), leaving the total volume production at 8mtpa with a new 3million mtpa plant which it started constructing in 2018 worth $450 million Sokoto Kalambaina II currently being constructed in Sokoto State is scheduled to become operational in the second half of the year.
This is expected to takeoff alongside another 48MW power plant to complement the existing assets and take advantage of a growing cement market in Northern Nigeria and the West African region.
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Industry analysis
In the past, Nigeria’s cement demand outstripped available installed capacity, and the market relied heavily on importation. In recent times, with the advent of favorable policies such as tax relief programs, indigenous cement companies have risen to the challenge of meeting the deficit.
Currently, the sector has grown from just an import-dependent to a growing hub for cement export on the continent. Since the ban on importation of bagged cement into the country, cement makers have double down on their various expansion plans aimed at capturing the huge market available in the country.
Cement remains at the core of infrastructural development across the world, and the Nigerian cement market continues to offer room for growth into the nearest future this with the level of infrastructure and housing deficit in the country, especially in terms of demand for roads, real estate and construction activities, the headroom for growth is clearly compelling.
The competitive structure in the cement industry has allowed for a non-aggressive rivalry as each cement maker appears to serve distinct market as the Nigerian market is big enough to accommodate the three players. While BUA cement is focused on the Northern market, the other two cement makers serve the Southern part of the country.
Public sector demand is perhaps one of the strongest drivers of cement consumption in Nigeria. However, in the face of shrinking revenue generation keeping revenues below budgeted figures making the implementation of budgeted capital expenditure to lag that of recurrent expenditure.
Analysis of performance in 2019 shows surge in cement demand in Q1 on the back of increased pre-election CAPEX spending in a bid to woo electorates. However, demand tanked in Q2 caused by the prolonged 2019 general elections postponements, together with the raining season in the country.
Consequently, performance improved markedly in Q3 even as the double whammy hammer of heavy rainfall in the period and land border closure, had put a cap on sales uptrend. Intense competition in the cement industry means that producers remain price-sensitive as they struggle to maintain market share. With cement makers such as Dangote Cement introducing promotional launch during the period in a bid to drive sales volume in the country.
Already reaping fruits of increased volumes
Figures from its nine months result for the period ended 30th September shows that its net profit ballooned 118.3percent to N8.76bn from 4.01bn the same period in 2018.
CCNN recorded strong growth in revenue in Q3’19 up 38.5percent, buoyed by a ramp-up in volumes as capacity utilization increased at the Kalambiana plant.
However, energy cost almost doubled from N7.45bn in third quarter 2018 to N13.65bn the same period this year. Kalambaina Cement plant uses primary fuels such as coal, heavy oils and AGO, which helps to solve the power problem with limited downtime and further opportunities for growth and expansion.
According to Mustapha Wahab, an analyst at Cordros Securities the upside risk for the industry in 2020 is a stronger demand growth, with average cement prices to rise by 1bp to NGN2,197/bag.
“While we acknowledge the significant shortfall from the NGN2.93 trillion budgeted in the prior year, our optimistic view hangs solely on a higher implementation rate, given better revenue prospects,”
“However, the downside risk to our prognosis remains the possibility of significant cost pressure occasioned by currency devaluation, which would force players to re-think their pricing strategies,” he said.
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Cement demand holds many opportunities
Over the long term, the potential for cement demand growth is hinged on economic prosperity, political stability, increasing investment in housing and infrastructure
The good news is that the early signing of 2020 budget into law by President Muhammadu Buhari would eliminate slow-down in government spending on critical infrastructure across the country. In the 2020 budget, a total of N2.14 trillion has been earmarked for Capital Expenditure (CAPEX) spending, excluding CAPEX components of statutory transfers. The government has also vowed to prioritise in favour of critical ongoing infrastructural projects in the power, roads, rail and agricultural sectors.
If the government could keep to his promise, it could further spur the growth of cement makers in the country.
Notable projects in 2020 budget which would be heavy cement consuming projects include the National housing program which is expected to gulp N17.5billion while the social housing scheme (family homes fund) would cost N30billion.
While over N210 billion has been earmarked for the construction and rehabilitation of roads across the country. Interestingly, there is a growing preference for cement paved roads by the government as evident in the 28km Itori-Ibese road in Ogun State which was commissioned in 2016 and the 43km long Obajana-Kabba road in Kogi State, the 32km Apapa-Oshodi-Oworonshoki-Ojota road in Lagos State is almost done.
In aviation, N1 billion has been set aside for the construction of terminal building at Enugu Airport and N10 billion for the construction of the second run-way at the Nnamdi Azikwe International Airport in Abuja. N67.17 billion is also set aside for the counterpart funding for new and ongoing railway projects
Also, in the 2020 budget, N2billion has been set aside for the Mambila hydropower project, a 3.05GW hydroelectric facility being developed on the Dongo River near Baruf, in Kakara Village of Taraba State. The project is being undertaken by Nigeria’s Federal Ministry of Power, Construction and Housing, with the help of Chinese investments
The new entity is expected to benefit from its current market leadership positions in its key regional markets of the North West, South-South and SouthEast Nigeria due to its location and proximity to those markets and a huge export market in Western Africa.
