Update on Developments within the Nigerian Cement Industry

Proshare

July 4, 2014 2.44 PM / WSTC Financial Services

 

The House of Representatives on Wednesday, July 2, 2014 recommended the use of the 42.5mpa grade cement for standard construction work in the country. The recommendation of the House was in line with the position of the Standards Organisation of Nigeria (SON) that the 32.5mpa grade cement should be restricted to rendering (i.e. plastering) only while it certified the 42.5mpa grade as suitable for general purpose construction.

 

The recommendation of the House was based on the following premises:

(1)  The 42.5mpa grade is less susceptible to misapplication by builders, 90% of which are non-professionals.

(2)  Most stakeholders will prefer the 42.5mpa grade if they have to choose between the two cement grades.

(Please note that wehave not been able to establish the veracity of these premises)

 

The position of industry stakeholders - Professionals and regulators within the construction industry (including the SON itself) have unequivocally asserted that there is no empirical evidence linking cement grade to building collapse. Rather, they have attributed factors like misapplication of building materials and the use of expired cement as factors that can be responsible for construction failure. The Standards Organisation of Nigeria also clearly stated that there are no substandard cements produced within the country.

 

Although no direct correlation has been drawn between cement grade and construction failure, the SON has, however, explicitly recommended the phasing-out of the production of the 32.5mpa grade cement.

 

Our Views

Implication of the announcement on players in the Cement Industry Although the position of the House of Representatives was only passed as a recommendation and not a law, we believe that the declaration might have far-reaching effects on public perception about cement grades and their usage. We believe the position of the House of Representatives

is a positive one for Dangote Cement Plc – which is the only quoted company in the Nigerian Cement Industry that produces the 42.5mpa grade a s its minimum production standard.

 

We foresee that this might further affect the concentration of market share in the industry, which is already skewed in favour of Dangote Cement Plc . In our opinion, this poses significant earnings implication for the non 42.5mpa grade players in the industry.

 

Given the appeal by the House that the SON should ensure that all cement manufacturers upgrade their production lines to commence the

 

production of the 42.5 grade within a reasonable time, and the leaning of the SON towards the phasing-out of the 32.5mpa grade, we envisage that industry regulators will, sooner than later, compel cement manufacturers to make the 42.5mpa grade their minimum production standard.




Implications of the new development on performance

Although it has been established that a cement factory can easily swing from the production of the 32.5mpa grade to the 42.5mpa grade within one day, the process of manufacturing the 42.5mpa grade, however, does not come without additional cost implications. It involves the use of more clinker and less additives. Also, aside the fact that the production of the 42.5mpa grade will lead to additional fuel cost, it will require the use of gypsum in grinding the clinker into finer particles.

 

Given this, we expect the swing in the minimum production standard to the 42.5mpa grade to lead to additional cost for other manufacturers apart from Dangote Cement Plc. We envisage three scenarios for these manufacturers:

(i)           They solely bear the additional production cost without passing any portion of it to customers (this carries significant earnings per share implication).

(ii)          (ii)They pass all the additional production cost to customers (although we consider this scenario very

(iii)         unlikely given the level of competition within the industry).

(iv)         They bear the additional production cost alongside with customers.

 

We expect the outcome of these scenarios to either affect the per unit price of these manufacturers (and consequently sales volume) and/or to constitute pressure on their margins.

 

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