The devaluation of the currency by the central bank to protect the external reserves led to spiralling cost of production for cement makers who are already grappling with the wrought caused by the coronavirus pandemic.
The pass-through effect of a weak Naira on gypsum-raw material component in the manufacture of cement- and gas prices, combined in tepid revenue growth, contributed to a reduction in profit margins.
Data gathered by BusinessDay shows the three dominant producers in the industry-Dangote Cement, Lafarge Africa, BUA Cement- that have released half year results saw cumulative average revenue grow by 5.63 percent, which is lower than the 8.31 percent increase in cost of sales of sales.
That’s responsible for a decline in combined average profit to 46.17 percent in June 2020 from 47.15 percent the previous year.
“Currency crisis would affect their operations so long as they require foreign exchange to import raw material. Since they are unable to get foreign currency from the central bank, they will get it at higher rate,” said Adedayo Bakare, equity research analyst at Afrinvest Securities limited.
But Bakara said the current crisis will not be as insidious as the 2016 because cement makers have started optimizing fuel mix, and this gave them upper hand to benefit from cheap fuels such as coal.
Going forward, 0ptimizing fuel mix is expected to spike earnings on the back of reduced energy cost.
Before the outbreak of the coronavirus pandemic from Wuhang City of China, analysts had betted that the country’s huge infrastructure deficit and low cement consumption per capital would spur the industry to growth.
The COVID-19 crisis and the crash in crude oil price combined with rain falls caught the cement makers off guard just as the lockdown imposed by government to curb the spread of the virus paralyzed construction activities in the three major commercial cities (Lagos, Abjua, Ogun).
Another downsize to earnings is the reduction in capital spending by 20 percent by government in the 2020 budget as COVID-19 crisis has put the economy in tenterhooks.
Dangote Cement, the largest producer of the building material recorded a decline of 15 percent in sales volume in its Nigerian operations, as operating profit by a mere 1.97 percent in June 2020, which compares with 66.76 growths in 2017 financial year.
BUA Cement’s operating income was up 7.0 percent to N40.80 billion as at June 2020, and because the company was went public last year, there were no available historical data to carry out a trend analysis.
Analysts at CSL Stock Brokers Limited said their our outlook for the cement industry is mixed due to a plethora of factors ranging from subdued private investment in gross fixed capital formation, rising inflationary pressures on essential food items.
“Although, we expect pressure on volume growth to persist in the short term until there is a significant pick-up in economic activities, we note that the relaxation of lockdown measures and the low interest rate environment are positive factors that will support the earnings of industry players,” said the analysts.
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 domestic economic growth had slowed to 1.87 percent in the first quarter, and the current market realities could tip the country into another recession.
There is light at the end of the tunnel for operators in the cement industry as the recently submitted Economic Sustainability Plan (ESP) by Vice President led committee on economic sustainability are expected to accelerate demand for building material.
Based on the ESP report, the FG 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.
Lafarge Africa’s reported decline 10 percent in sales volume and operating profit increased by 17.84 percent to N32.81 billion in 2020, but lower than the 210 percent surge in 2017 when it turned a profit.
