16, 2022, 07:30 AM / by CardinalStone Research / Header Image
We envisage another solid year for cement manufacturers, with private and public demand set to be major fulcrums. This prognosis on cement consumption is likely to reflect the knock-on effect of increased government spending and greater Public-Private Projects (PPPs) by institutions like RITC and INFRACO.
Despite our broadly positive view on the sector, likely temperance in CAPEX implementation (as is often the case in most pre-election years), possible increase in market competition, and FX devaluation are likely to be of concern in the current financial year. Investors are, however, likely to remain excited about prospects for better near-term rewards from cement players, with DANGCEM set to lead the way with the second tranche of its buy-back program and WAPCO likely to further reward shareholders, after the well-received interim dividend payment.
Cement demand to grow by 6.0% YoY in 2022
The domestic cement sector looks set to extend its positive demand traction into 2022. Precisely, we see legroom for a 6.0% YoY growth in cement volumes, aided by a projected rise in overall budget implementation. Historical precedence suggests that this rise in budget implementation may primarily be driven by higher recurrent expenditure, with CAPEX implementation likely to follow the historical path of notable moderations in pre-election years.
The view on recurrent expenditure points to potential gains in the real estate sector. In addition, PPPs, including the Road Infrastructure Development and Refurbishment Investment Tax Credit Scheme (RITC) and the newly launched Infrastructural Corporation of Nigeria Limited (INFRACO), are likely to provide relatively milder support to cement demand. Our review of this potential driver is as shown below:
I. Under the RITC, the government grants income tax credit to companies and individuals that provide funding for the refurbishment and rehabilitation of roads. We have seen several companies, including Dangote Group Plc, MTN Nigeria Plc, and Flour Mills of Nigeria Plc, take advantage of this initiative, embarking on road construction projects in several parts of the country.
II. The recently launched Infrastructural Corporation of Nigeria Limited (INFRACO) - conceptualized by the CBN alongside the African Finance Corporation (AFC) and the Nigerian Sovereign Investment Authority (NSIA) - is targeted at funding public projects like roads, rails and power infrastructure across the country. Its initial seed capital of N1.0 trillion ($2.4 billion) is expected to grow to N15.0 trillion over time.
Price increases may slowdown in 2022
Wholesale cement prices have risen by an average of 15.0% since the start of 2020 as marketers transferred some raw materials cost burden to consumers. Manufacturers believe elevated demand levels aided this cost burden transfer. Our lower demand growth expectation (6.0% YoY in 2022 vs 13.0% YoY in 2021) could therefore suggest that the ability to pass on cost worries may slightly weaken in 2022. This premise and a potentially tighter competitive landscape inform our 8.9% YoY estimated increase in average cement prices for 2022.
Competition to go up a notch in 2022
We envisage a tighter competitive landscape in 2022, as manufacturers look to build on their 2021 performance. Our analysis suggests that the market share dynamic of 2021 was largely influenced by DANGCEM's introduction of its new 3Mt line at Okpella and WAPCO's production struggles in H1'21. These events, consequently, enabled DANGCEM to deepen market presence at the expense of its peers. Per our estimate, DANGCEM expanded its domestic market share by 2.5 ppts YoY to 62.5% while BUACEMENT and WAPCO's market share contracted by 1.0 ppt YoY and 1.5 ppts YoY to 19.2% and 18.4%, respectively.
In 2022, market share dynamics could change slightly, with WAPCO and BUACEMENT likely to tune up the competitive landscape. Specifically, the return of WAPCO's Ewekoro Line 1 in September 2021, after being shut down for most of the year due to prolonged maintenance, and BUACEMENT's expected commissioning of a new 3mta in Kalambaina could support both companies' market share.
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