• Wednesday, December 06, 2023
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Inside details of cement makers’ struggle to sustain profits

Snapshot of cement makers’ H1 performance

Despite having a strong balance sheet that provides them the firepower to ward off macroeconomic headwinds, Nigeria’s largest cement makers, Dangote Cement Plc, Lafarge Africa Plc and BUA Cement Plc are struggling to declare profits, according to findings by BusinessDay.

In Africa’s biggest economy, cement makers whose top lines (revenue) growth have been driven by upward adjustment in the price of key products are able to deploy their fixed assets in generating higher sales, but cost pressures whipsaw profit.

Data gleaned from the Nigerian Exchange Group showed Nigeria’s biggest cement makers which include Dangote cement, Lafarge Cement and BUA Cement experienced a slight growth in cumulative revenue, reaching N604.89 billion in the first quarter of 2023.

This represents a marginal increase from the N600.78 billion recorded in the same period of 2022, reflecting a 0.68 percent rise. The growth can be attributed to an increase in cement purchases during this period.

BusinessDay’s findings showed there has been a slew of hikes in the price of cement by sector players who control price because of the oligopolistic structure of the market and need to shed themselves from inflationary pressures, currency devaluations, and a challenging operating environment.

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An improvement in export sales due to the closure of land borders and broader economic recovery from the pandemic that reinvigorated construction activities also helped underpin sales, and there is room for more improvement infrastructure deficit, government capital expenditure spend, and private sector investment are expected to accelerate the demand for building materials.

However, rising input costs prevented the top-line growth of companies from translating into double-digit bottom-line growth.

“Beyond the top line, cost pressures overshadowed revenue growth, eventually slowing profitability growth due to persistent inflationary pressures. More significantly, cement players suffered the impact of higher energy costs following the spike in selling and distribution costs,’’ said analysts at Cordros Securities.

For instance, the three-cement maker’s profitability faced a decline of 3.39 percent, with profits decreasing to N151.23 billion in the first quarter of 2023 from N156.55 billion in the same quarter of 2022.

The main factor contributing to this decline was the impact of finance costs, which decreased profits by 23.69 percent.

Further findings showed the three cement makers faced significant setbacks in the first quarter of 2023, primarily due to the surge in finance costs, which increased by 4.3 percent to N35.83 billion from the N37.44 billion recorded in the same quarter of 2022.

The increase in finance costs was driven by higher interest expenses on borrowing, as the Central Bank of Nigeria continuously adjusted interest rates. The higher interest rates resulted in elevated expenses for cement makers, leading to a substantial increase in finance costs.

Operating expenses rose by 19.2 percent in the first quarter of 2023, reaching N123.85 billion compared to N103.88 billion in the same quarter of 2022.

Other income witnessed a growth of 28.87 percent in the first quarter of 2023, totalling N1.696 billion.

This represents an increase from the N1.316 billion recorded in the same period of 2022. The growth in other income was primarily generated from insurance claims, government grants, and sundry income sources.

Experts said it appears rising interest rates stoked by central bank aggressive stance in the face of red-hot inflation discouragingly undermines private investment and it is also a stumbling block for sector players who will be paying more to service debt in their books.