Cold Wars: Dissecting The Weak Underbelly of Nigeria's Cement Market

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Friday, June 19, 2020 / 07:30PM / Adaeze Nwachukwu, Proshare research/Header Image Credit:EcoGraphics


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Nigeria's cement business has moved into a new strategic phase, gone is the unspoken gentleman's code of competitive cooperation, gone is the mutually comfortable market slices, and certainly gone is the desire not to shake tables, as the novel coronavirus pandemic takes a toll on corporate revenues, the playfield has become less friendly and less certain. Nigeria's three largest cement companies, Dangote, Lafarge-Africa and BUA are circling one another like Alpha wolves in a battle for supremacy, and as far as industry observers are concerned the outcome may not be pretty.

 

In 2019 Dangote Cement snatched Lafarge-Africa's immediate past managing director, Michel Purchercos, to replace the retiring Joseph Makoju, in what industry observers saw as a punch to the gut of its local rival, while BUA came into a stronger market position with the merger between CCNN and Obu cement and the subsequent listing of the new entity on the Nigerian Stock Exchange (NSE), thereby establishing the local cement business as a three-horse race for market dominance.  The old Dangote, Lafarge and BUA 'family' rule of 60%:30%:10% market share no longer holds, as the "honour amongst confederates" understanding begins to unravel.   

 

The Battle for Clinker

Over the last week, both Dangote cement and BUA have gone toe-to-toe in a battle to affirm ownership of the Obu-Okpella cement mines in Edo state. While Dangote insists that it is the rightful owner of the mines BUA has countered the claim and defended its ongoing operations at the sites. The arm-wrestling between the two organizations has led to both companies releasing press statements on June 17th, 2020 concerning the superiority of their respective claims. The battle for the Okpella mines continues in courts of competent jurisdictions but the atmosphere for the production and sale of cement in Nigeria has become uncharacteristically charged, representing an aberration from events of just two years ago.

 

For investors in the two companies, these could prove to be uncertain times as share prices may begin to slide as investors become panicky and decide to short their cement stocks. Since the beginning of 2020 Dangote Cement's stock has trended downwards as the company gradually lost market capitalization (see chart 1). 

 

 

Chart 1 Dangote Cement's Year-to-Date Share Price Movement (Jan-June 2020)

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Source: Nigeria Stock Exchange (NSE)

 

BUA has had its challenges but its share price has generally traded within a flat trading channel and has weathered the more severe aspects of investor pessimism (see chart 2)

 

Chart 2 BUA Cement's Year-to-Date Share Price Movement (Jan-June 2020)

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Source: Nigeria Stock Exchange (NSE)

 

 

COVID, Construction, and The Cement Games

The spread of the COVID-19 pandemic has altered the global and Nigerian economic outlook. The International Monetary Fund (IMF) revised the outlook for the Nigerian economy to Negative, as the economy is expected to contract by -3.4% at the end of the year 2020 A contraction in GDP would negatively impact the construction sector as there would be a reduction in government capital expenditure.

 

The outbreak of COVID-19 led to border closures and restrictions on construction work and other non-essential business activities. The cement market was likely to be hard hit by the impact of the virus as road and building construction, and other cement-related activities became unstuck. Disruption of supply chains globally led to restricted importation of materials used in clinker processing.

 

Looking at the quarterly growth performance of the construction sector, the sector recorded an increase of +28.94% Q-on-Q, that is the growth performance between Q1 2020 and Q1 2019, however, looking at Q1 2020 performance against the corresponding quarter of the previous year, the sector recorded a decline of -46.84% Y-on-Y performance.

 

One may seem to ask if the quarterly growth performance of the sector also reflects the growth of revenue for the major players in the cement market. Q1 results of these companies, that is, Dangote cement Plc, BUA Cement Plc and Lafarge Africa Plc, shows an increase in revenue and profitability. Although the Nigerian economy had not felt the impact of the COVID-19 pandemic at the end of Q1 2020, just as it shows in the economy's GDP for Q1 2020 of +1.87%, analysts expect to see a decline in the cement market in FY2020.

 

Considering the relationship between GDP growth and the construction sector expansion, the cement business is expected to bounce back in 2021 as GDP rises to a consensus forecast of between +2.2% and +2.4% in 2021

 

Cement Warriors Fiscal Profiles -Of Davids and Goliath

 

Dangote Cement Plc

Africa's leading cement producer and 10th largest cement producer in the world according to the 2018 Global Cement Directory. It is one of the largest companies traded on the Nigerian Stock Exchange with a market capitalization of N2.37 trillion as of 10th June 2020. With a production capacity of 45.6Mta per annum as of 2017 of which 29.3Mta is from Nigeria. 

 

 

Profitability

 

Dangote's Gross Revenue

In Q1 2020, Dangote cement recorded N249.2bn in gross revenue against N240bn recorded in Q1 2019, that is, gross revenue grew by 3.76% Y-on-Y, this was despite the COVID-19 pandemic and the restrictions that followed.

 

Historically, Dangote cement has recorded steady growth in gross earnings except for a slight decline of -1.1% recorded in 2019, which is N891.7 bn recorded in FY2019 against N901.2 bn recorded in FY 2018. The fall was the result of a reduction in finance income and an increase in selling and distribution costs (see chart 3).

 

Chart 3: Dangote's Gross Revenue 2015 - 2020 (N'bn)

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Source: Dangote Financial Statement, Proshare Research

 

 

Profit Before Tax

Dangote Cement recorded an 11.52% increase in profit before tax, that is, profit before tax was N88.1bn in Q1 2020 against N78.9bn recorded in the corresponding quarter. The increase in PBT was driven by a reduction in finance cost, despite the macroeconomic challenges caused by the spread of the virus.

 

However, FY 2019, the company saw a reduction -16.73% in profitability, N250.5bn was recorded in FY 2019 against N300.8bn recorded in FY2018, this was driven by a reduction in finance income, an increase in finance cost and an increase in selling and distribution expense by -32.79%, 15.86% and 17.32% respectively (see chart 4).

 

Chart 4 Dangote's Profit before Tax 2015 - 2020 (N'bn)

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Source: Dangote Financial Statement, Proshare Research

 

 

 

Asset Quality

 

Current Ratio

 

 

The company recorded 0.65 in the current ratio Q1 2020; this is a decline from 0.89 recorded in the corresponding quarter of the previous year. The current ratio indicates if a company has enough assets to pay off its liability. From the performance of the current ratio of the company, it shows that current liability is way higher than the current asset, ideally, the reverse should be the case, that is Dangote cement has liquidity challenges.

 

For FY 2019, the current ratio declined to 0.64 as against 0.87 recorded in 2018, the figure in 2018 is the highest recorded by the company during the period under review (see chart 5).

 

Chart 5 Dangote's Current Ratio 2015 - 2020

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Source: Dangote Financial Statement, Proshare Research 

 

 

Acid Test Ratio

The acid test ratio for Dangote cement in Q1 2020 stood at 0.48 against 0.69 recorded in Q1 2019. FY 2019, also recorded a decline in acid test ratio, from 0.65 recorded in 2018 to 0.46 recorded in 2019 (see chart 6).

 

Chart 6 Dangote Acid Test Ratio 2015-2020

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Source: Dangote Financial Statement, Proshare Research 

 

 

The liquidity ratio for Q1 2020 was 5.67% as against 9.97% recorded in Q1 2019, this suggests the company recorded lower liquidity. The higher the liquidity ratio the higher the percentage of the liquid assets over total assets. The result in Q1 2020 shows that 5.67% of total assets makeup the liquid assets, this is not so surprising as the company has factories and heavy machinery that make up a large percentage of its total assets.

 

In FY 2019, Dangote Cement recorded a decline in their liquidity ratio, from 9.85% recorded in 2018 to 7.12% recorded in 2019, this could be attributed to the increase of 40.82% recorded in prepayments for property, plant and equipment (see chart 7).

 

Chart 7 Dangote Liquidity Ratio 2015-2020 (%)

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Source: Dangote Financial Statement, Proshare Research

 

Leverage

 

In Q1 2020 leverage ratio stood at 30.91% against 21.7% recorded in the corresponding quarter of the previous year. A higher leverage ratio usually indicates higher debt, in other words, the company used more debt to finance its assets and operations in Q1 2020 than in Q1 2019. FY 2019 also recorded an increase in the company's leverage ratio from 33.99% recorded in 2018, to 39.14% recorded in 2019 (see chart 8).

 

Chart 8 Dangote Leverage Ratio 2015-2020 (%)

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Source: Dangote Financial Statement, Proshare Research

 

 

 

Lafarge Africa Plc

 

Lafarge Africa Plc is majorly controlled by LafargeHolcim, it is traded on the Nigerian Stock Market with a market capitalization of N182.02 as of 11th June 2020. With a production capacity of 10.5MT per annum. Previously trading under the name of Lafarge Wapco Plc, the merger of Lafarge and Holcim and the resulting consolidation of Lafarge's assets in Nigeria and South Africa led to the name change to Lafarge Africa.

 

 

Profitability

 

Lafarge's Revenue

 

Revenue stood at N63.69 bn in Q1 2020 against N78.51 recorded in Q1 2019, that is, revenue increased by 9.77% Y-on-Y, this was driven a decline in selling and marketing expenses, administrative expenses and impairment on trade receivables by -8.52%, -3.34% and -54.75% respectively, this was achieved despite the macroeconomic challenges caused by the COVID-19 pandemic.

 

However, the company recorded a -2.21% decline in revenue in FY 2019 against N299.15bn recorded in 2018, this was on the backdrop of a 30.73% increase in selling and marketing expenses (see chart 9).

 

Chart 9 Lafarge's Revenue 2015-2020 (N'bn)

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Source: Lafarge Africa Financial Statement, Proshare Research

 

 

 

Lafarge's Profit before Tax

 

The company recorded N9.38bn in profit before tax in Q1 2020, that is, a 104.36% increase from N4.59 bn recorded in Q1 2019, this was achieved majorly by a decline in finance cost by -69.05%.

 

Also, FY2019 Lafarge recorded an increase in PBT by 191.70% against the loss of -N19.51 bn recorded in 2018, this was driven by a decline in finance cost by -51.46% and an increase in finance income by 107.15% (see chart 10).

 

Chart 10: Lafarge's Profit before Tax 2015-2020 (N'bn)

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Source: Lafarge Africa Financial Statement, Proshare Research


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Asset Quality

 

Lafarge's Current Ratio

 

 

Lafarge Africa's current ratio has been steady except in 2017 and 2018 where it recorded a decline. For the full year 2019, the company recorded a rise in the current ratio to 0.89 from 0.43 recorded in 2018, this means the company's asset to liability ratio was high.


Q1 2020 also recorded an increase in the current ratio of 0.92 from 0.76 recorded in the corresponding quarter of the previous year (see chart 11).

 

Chart 11 Lafarge's Current Ratio 2015 - 2020

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Source: Lafarge Africa Financial Statement, Proshare Research

 

 

Acid Test Ratio

 

Chart 12 Lafarge's Acid Test Ratio 2015 - 2020

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Source: Lafarge Africa Financial Statement, Proshare Research


 

The higher the acid test ratio the better the liquidity position of the company and vice versa, in Q1 2020, the company recorded 0.46 in its acid-test ratio a decline from 0.49 recorded in Q1 2019.

 

FY 2019, the acid test ratio of the company spiked to 0.5 form 0.25 recorded in 2018 (see chart 12).

 

 

Liquidity Ratio

 

Chart 13 Lafarge's Liquidity Ratio 2015 - 2020 (%) 

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Source: Lafarge Africa Financial Statement, Proshare Research


 

The higher the liquidity ratio the higher the percentage of the liquid assets over total assets and the liquidity position of the company, for Lafarge Africa, its liquidity ratio declined to 4.25% in Q1 2020 from 8.00% recorded in the corresponding quarter of the previous year.

 

FY 2019, liquidity also recorded a decline to 5.45% from 6.41% recorded in 2018, this means that the company faced liquidity challenges in 2019 and Q1 2020 (see chart 11).

 

 

Leverage

 

Chart 12 Lafarge's Leverage Ratio 2017 - 2020 (%)

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Source: Lafarge Africa Financial Statement, Proshare Research

 

In Q1 2020 Lafarge recorded a major decline in its leverage ratio of 17.02% from 103.53% recorded in the corresponding quarter of the previous year. The decline could be attributed to the sell-off of the company's loss-leading South African operations. A higher leverage ratio indicates the higher the debt-size. In Q1 2020, the result shows a huge decline in the company's debt size.

 

FY 2019 also recorded a huge decline in the leverage ratio of the company, from 160.14% recorded in 2018, to 18.61% recorded in 2019 (see chart 12).

 

 

BUA Cement Plc

 

The company was formed through the consolidation of the Obu Cement Company and Cement Company of Northern Nigeria, it was listed on the Nigerian Stock Exchange in January 2020 with 33.9billion units of share. With a market capitalization of N1.41 trillion as of 11th June 2020 and production capacity of 5.5Mt per annum according to Global Cement. 

 

 

Profitability

 

Chart 13 BUA Gross Revenue 2018 - 2020 (%)

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Source: BUA Cement Financial Statement, Proshare Research

 

BUA Cement Plc recorded a 47.48% increase in revenue for FY 2019 against N119.01 bn recorded in 2018.  The company recorded a strong 2019 result, the growth in revenue was driven by cost synergy and increased revenue as a result of the merger between CCNN Plc and Obu Cement Company Limited.

 

For Q1 2020, it recorded N53.97 bn in revenues, revenues were up by 25.13% from N43.13 recorded in the corresponding quarter of the previous year (see chart 13).

 

Profit before Tax

 

The company recorded N20.13 bn in profit before tax that is the figure remained unchanged from what was recorded in the corresponding quarter of the previous year.


FY 2019, PBT stood at N66.24 bn, it increased by 69.11% Y-on-Y, this was majorly driven by a 109.17% increase in finance income (see chart 14).

 

Chart 14 BUA Profit before Tax 2018 - 2020 (%)

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Source: BUA Cement Financial Statement, Proshare Research

 

Current Ratio

BUA Cement Plc.'s current ratio for Q1 2020 stood at 0.86, higher than 0.64 recorded for FY 2019, this was major driven by the increase in trade and receivables by 182.46%

 

FY 2019 also recorded an increase in current ratio, from 0.5 in 2018 to 0.64, this was driven by an increase in inventories and cash and cash equivalents by 29.94% and 453.68%.

 

The increase in liquidity is largely due to the merger between CCNN and Obu Cement Company Limited (see chart 15).

 

Chart 15 BUA Current Ratio 2018 - 2020

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Source: BUA Cement Financial Statement, Proshare Research

 

Acid Test Ratio

Chart 16 BUA Acid Test Ratio 2018 - 2020

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Source: BUA Cement Financial Statement, Proshare Research

 

The Y-on-Y performance of the company shows liquidity challenges, the company was not able to meet short-term obligations using its most liquid assets during the period.


Q1 2020 acid test ratio for the company stood at 0.56 an increase from 0.36 recorded in FY 2019, although borrowing increased by 32%, there was a slight reduction in property, plant and equipment figures by -0.32%.

 

FY 2019, the company recorded a decline in its acid-test ratio to 0.36 from 0.38 recorded in 2018(see chart 16).

 

Liquidity Ratio

Chart 17 BUA Liquidity 2018 - 2020 (%)

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Source: BUA Cement Financial Statement, Proshare Research

 

BUA Cement Plc has seen a steady rise in its liquidity ratio, Q1 2020 recorded the liquidity ratio since the merger and it's listing on the Nigerian Stock Exchange. In Q1 2020, the liquidity ratio of the company stood at 3.62%, higher than 3.31% recorded in 2018. This means that 3.62% of the total assets of the company are liquid or can be easily converted to liquidity.

 

FY 2019 recorded an increase in liquidity ratio, from 0.48% recorded in 2018 to 3.31% recorded in 2019 (see chart 17).

 

Leverage

Chart 18 BUA Liquidity 2018 - 2020 (%)

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Source: BUA Cement Financial Statement, Proshare Research

 

The company recorded 7.37% in its leverage ratio for Q1 2020, this means that the debt to equity size of the company is low.

 

For FY 2019, the company recorded a significant decline in its leverage ratio, from 39.54% in 2018 to 5.74% in 2019 (see chart 18). 

 

Illustration 1 Understanding Nigeria's Cement Market

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The Nigerian cement market can be said to be oligopolistic with three major players dominating the market, with Dangote Cement Plc being the leader of the market wielding 60.6% of the market share with a local installed capacity of 29.3 million MT, Lafarge Africa Plc having 21.8% market share with a production capacity of 10.5million MT and BUA Group accounts for 17.6% market share and production capacity of 8.0million MT per annum. There are also small players in the market like the PureChem Industries based in Ogun state with 900.000MT.


  • Entry Barriers:  The requirements for setting up a factory are the major barriers to entry, these costs provide a natural barrier to entry and these barriers have led to few players in the cement market, thereby favouring the price structures in the cement market. Several entry barriers make the market a natural oligopoly, such as the cost of machinery, getting labour of the right expertise to operate the machines. During this COVID-19 period, getting these machines will prove even more difficult, creating even barriers in the cement market
  • Supplier power: Manufacturers have a strong influence over the prices they pay to their suppliers reflecting the oligopolistic nature of the market. According to World Bank reports, the price of cement in Africa was on average 183% higher than the global average in 2016.
  • Substitutes: The dominant material for building in Nigeria is cement, for practical purposes, no substitute in Nigeria. Cement substitutes are materials that may be substituted to some degree such as fly ash, prefabricated although, these substitutes may not be able to be done at a competitive price. The fact that no clear substitute exists in the Nigerian market, makes demand relatively inelastic resulting in a rise in cement prices being unaccompanied by commensurate fall in demand.
  • Buyer power: This refers to effect buyers exert in a particular market, in the cement market, it is very minimal, due to lack of clear and close substitute making the demand of cement relatively inelastic in Nigeria. Inelastic demand enables cement manufacturers to increase prices with minimal adverse market consequences. The major problem with demand would be a cyclical reduction in economic activities, especially during this COVID-19 period, forcing the construction business to slow down, which translates into lower sales volumes.
  • Internal rivalry: The rivalry within the cement industry is moderate, reflecting the oligopolistic nature of the industry, however, cement products are not differentiated, this means that consumers do not bear the cost of switching from one firm to another, this can create room for competition and rivalry. The Nigerian cement industry's structure is clear and simple, Dangote the market leader by asset size and sales volumes, Lafarge Africa comes second and BUA trails to a decent third being the 'King of the North', however, BUA has recently released strategies for expansion emphasizing its target as 'King of Strength'.