Dangote Cement resort to coal shores up capacity by 54%

… Cuts power costs by 75%

 

The move by Dangote Cement manufacturing company to turn to coal to power its plants due to disruptions to gas supplies is proving a game changer as the company ramped up capacity by 54 per cent and cuts costs by 75 percent in the 2016 financial year.

“We have been working on a strategy to reduce our cost, we have now converted our kilns in Nigeria, all 10 kilns to use coal as fuel and we have been able to run all our kilns all the time on coal that replaces the much more expensive LPFO which is about three times more expensive,” says Onne van der Weijde, the company’s Chief Executive Officer in an interview with CNBC Africa.

The impact of this that the company saw a 25.1 per cent rise in sales revenue from N491.7 billion in 2015 to N615.1 billion last year.

“It was a challenging year for many African economies but we achieved sales and revenue growth of 25 per cent and consolidated our position as Africa’s leading producer of cement,” said Weijde.

The results are in line with analysts’ expectations for the company.

“We estimate a 26 percent 2016 return on equity (RoE) for Dangote, at a premium to the frontier market peer RoE of 15 percent. Dangote is the dominant player in Nigeria, with a 60 percent market share, and remains the lowest-cost producer in Sub-Saharan Africa (SSA), with the power to move prices,” according to February 9 note by Temilade Aduroja; analyst, Sub-Saharan Africa Materials Oil & Gas and Adedayo Ayeni; Sub-Saharan Africa, Consumer and Industrial analyst both of Renaissance Capital.

Analysts note that much of Dangote Cement’s success comes from a decision announced in September last year to convert all of the company’s cement plants to coal to use 12,000 metric tonnes of coal daily, a move seen as unusual but now looks strategic.

“We exported nearly 0.4Mt into neighbouring countries and in doing so, we achieved a great milestone by transforming Nigeria into a net exporter of cement,” said Onne van der Weijde.

He further said, “Sales from Nigerian operations increased by 13.8 per cent to nearly 15.1Mt, at a growth rate far higher than the country’s GDP, which fell in 2016.

“This is a remarkable achievement, given that only five years ago, in 2011, Nigeria was one of the world’s largest importers, buying 5.1Mt of foreign cement at huge expense to our balance of payments.’’

Dangote Cement, Africa’s biggest cement producer sold nearly 8.6Mt of cement outside of Nigeria, which accounted for 54 per cent more than 2015. The company targets output of between 74 million and 77 million tonnes by the end of 2019 and 100 million tonnes of capacity by 2020.

The company plans to begin operations in Congo and Sierra Leone, widening its footprint to 10 countries. In the few years of its operation, the company has invested more than $5 billion to expand outside its home market.

Dangote Cement invested over $250million in its coal fired plants and began importing three 30-tonne vessels of coal from South Africa to serve as fuel for the coal thermal plants.

Analysts are optimistic Pan African growth strategy is a winning one.

“There is no question that the Dangotean strategy of development capacitation through local resource exploitation, mass industrial production and domestic prosperity-generation is what Africa requires to become the self-actuated mover of its own development,” writes Ehiedu Iweriebor, a professor and former Chair of the Department of Africana and Puerto Rican Latino Studies, Hunter College, City University of New York, USA.

Nigeria with proven coal reserves of over 639 million metric tonnes and unproven reserves estimated 2.75 billion metric tonnes requires better policies to make it the next investment frontier for companies looking for energy security for their operations.

Many industries in Nigeria still rely on gas and Low Pour Fuel Oil (LPFO), or black oil mainly used in industries as fuel for generation of power or for firing their heaters to power their plants. However, a militancy-induced scarcity has seen them produce far below capacity.

“The big difference is in LPFO which is a factor of 2 and half or 250-300 per cent more expensive when you are using gas,” says Weijde.