Gas supply to determine cement firms’ profitability

The availability of gas supplies at factories will to a very large extent determine cement makers’ profitability in 2016 as huge energy costs that disrupted operations dampened margins in the first quarter in an environment hard hit by economic downturn.

This means investors should gauge the performance of these firms in the subsequent quarters on the availability of cheap source of energy given the spiralling cash cost per ton of production.

Cash cost is a cash basis accounting cost recognition process that classifies costs as they are paid for in cash, and is recognised in the general ledger at the point of sale.

“From a cash-cost perspective and its inevitable impact on EBITDA margins, we believe the key to the remainder of the year will be managing the fuel mix for Dangcem and managing volumes for Lafarge Africa,” said Seki Mutukwu, equity research analyst at Renaissance Capital, in a note to investors.

“Given the well flagged effective 7% increase in realised cement prices at the end of March 2016, EBITDA margins are likely to be higher QoQ assuming no change in the naira/dollar exchange rate and no QoQ cost inflation greater than 7%,” said Mutukwu.

The cumulative operating margins of Dangote Cement, Lafarge Africa, Ashaka and Cement Company of northern Nigeria (CCNN) dipped to 28.46 percent in the first quarter of 2016 as against 35.05 percent in the previous period.

Also, combined net income was down by 32.40 percent to N51.37 billion in the period under review, while cumulative cost of sales jumped to 18.81 percent as production costs beat down bottom lines.

A lot firms in the building material industry are increasingly seeking alternative source of energy in order to minimise costs, improve margins and maximise shareholder’s value.

Dangote cement expects its coal mining plant to become operational this year, as it will also reconvert trucks to be able to run on gas.

Profit in the period “was affected by manufacturing and operating costs that rose significantly” due to gas shortages, said Philip Anagbe, an analyst at Lagos-based Asset & Resource Management Coy. “It is an area the company has to work on.”

Industry experts are of the view that aside from the economic slowdown caused by a significant drop in the price of oil by more than 60 percent to $42 a barrel, the foreign exchange restrictions imposed by the Central Bank impacted on the operations of most companies.

The apex bank of top crude producer has pegged the naira at 197-199 per dollar since March 2015 to stem its slide amid a rout in oil prices.

The policy has been widely criticised by investors and manufacturers as stifling growth and causing capital flight.

Economic growth has slowed to 2.8 percent, the lowest in a decade, while inflation jumped to 13.80 percent in April from 12.80 percent in March, according to National Bureau of Statistics (NBS).

There is light at the end of the tunnel for cement makers in Africa’s largest economy as the full implementation of the N6.06 trillion 2016 expansionary budget is expected to kick start construction activities and bolster the top lines.

Government intends to spend more than N200 billion on road construction; this represents 1001 percent increase from last year’s N18 billion. A total of N350 billion was allocated to capital projects.

“We opine that increased capital expenditures from government will have a two-fold impact.  First we anticipate increase in demand for cement, as the government embarks on infrastructural development. This will directly affect the top line of key cement producers like DANGCEM and WAPCO,” said Adetutu Adegbayibi, equity analyst with Meristem Securities Limited.

Despite the economic downturn in home markets, competition in the cement industry has heightened, given the spate of mergers and acquisitions among firms, carried out with a view to bolster production and increase market share.

The board of Lafarge Africa (Lafarge) approved the acquisition of the balance of 50 percent equity interest in United Cement Company (UNICEM) from Egyptian Cement Holdings BV, a company indirectly held by Lafarge SA.

To conclude the acquisition, Lafarge would have to issue about 413.2 million additional shares to bring its share count to almost 5.0 billion shares.

Dangote has added new factories in Cameroon, Ethiopia, Senegal, South Africa, Tanzania and Zambia in the past two years and will open a plant in the Republic of Congo later this year.

BALA AUGIE