• Monday, June 24, 2024
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Cement makers surmount Covid-19 headwinds as profit spikes

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Cement makers in Nigeria have ridden out of the economic tenterhooks brought on by the coronavirus (Covid-19) pandemic that forced workers and engineers to jettison construction sites as their second quarter earnings spike.

Before the virus that emanated from Wuhan City in China disrupted economics across the globe and distorted demand and supply chain, analysts had betted that the country’s huge infrastructure deficit and burgeoning population that crave for consumption would spur the industry to growth.

For companies in the cement industry, the pains of a slowing economy have been devastating. The steep currency devaluation recorded between 2014 and 2017 led to an increase in costs, given the exposure of energy costs and debt to foreign currency risk.

On top of that, the weak purchasing power of consumers that damps real estate business is antithetical to acceleration in the turnover of cement volumes. The combination of rainy season and a budget impasse since Muhammadu Buhari became president in 2015 are enough drawbacks to a sector that is proxy for growth.

Between 2000 and 2014, the cement sector expanded at a robust CAGR of 13.70 percent. However, growth has averaged -1.0 percent between 2015 and 2018, with only a marginal recovery in growth to 4.5 percent in 2018.

As a result of the social distancing and lockdown policy imposed by government to curb the spread of the virus, the industrial sector slowed to 2.26 percent year-on-year (yoy) from 2.75 percent yoy in the fourth quarter of (Q4-2018), but stronger than 0.42 percent yoy in the first quarter (Q1-2019).

Despite the myriad of challenges hobnobbing growth of companies across the sector of the economy, the three dominant cement makers – Dangote Cement, BUA Cement and Lafarge Africa, saw combined net income increased by 16 percent to N184.29 billion from N158.86 billion the previous year.

A breakdown of the figure shows Lafarge Africa was the major driver of industry growth, as the bottom line as net income surged by 158.95 percent to N23.32 billion, thanks to the sale of a beleaguered subsidiary a few years ago that led to a reduction in interest expenses or leverage.

BUA Cement has been delivering value to shareholders since it merged two subsidiaries – OBU Cement and Cement Company of Northern Nigeria – into a single entity to become fourth most capitalised company in Nigeria.

BUA Cement saw a 13.73 percent increase in net income to N34.81 billion as at June 2020, as cement volume dispatched followed the same growth trajectory.

To boost energy efficiency and reduce energy costs, BUA entered into strategic alliances for the supply of Liquefied Natural Gas (LNG) for the Kalambaina operations and management of its mining operations.
Dangote Cement, the largest producer of the building material and the most capitalised company in Nigeria, also recorded 5.78 percent to N126.14 billion in the period under review.

The outbreak of Covid-19 and the sudden crash in oil price mean bleak outlook for the Nigerian economy and the cement industry.

Generally, the domestic economic growth in Q1 2020 slowed to 1.87 percent and the figure for the Q2 2020 is set to come in negative.

The International Monetary Fund (IMF) has announced that the Nigerian economy would witness a deeper contraction of 5.4 percent and not the 3.4 percent it projected in April 2020.

The latest official job figures put the second-quarter unemployment rate at 27.1 percent, the highest in a decade. Inflation, meanwhile, accelerated to 12.8 percent in the year through July, from 12.6 percent the previous month, as prices of imports including food surged.

However, Gbolahan Ologunro, equity analyst at CSL Stockbrokers Limited, says there is light at end of the tunnel for operators in the industry as a favourable weather conditions, especially in the South West, and government proposed aggressive infrastructure spending could support demand for cement.

“Federal Government has obtained additional funding from the IMF to plunge the budget deficit and shrink the infrastructure gap,” states Ologunro.

Analysts at United Capital in a latest report echo Ologunro’s view as they are optimistic that the recently submitted Economic Sustainability Plan (ESP) by Vice President-led committee on economic sustainability could invigorate the industry.

The government plans to shift attention to the usage of locally available materials like limestone, cement and granite for road construction in a bid to save cost from the importation of bitumen.

“The unrelenting effort of the Federal Government toward infrastructural development in the country appears like a plus for the cement industry,” note analysts at United Capital Limited.