Nigeria Cement Market's New Chess Play; Understanding The Market Dynamics

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Friday, January 31, 2020  / 06.00PM / Managing Editor, Teslim Shitta-Bey, Header Image Credit: The Spark

 

As cement marketers reposition to face likely increases in their costs in 2020, cement makers themselves are reacting to several moving competitive parts. The retirement of Mr. Joseph Makoju, Managing Director, Dangote Cement in Q4 2019 saw the recruitment of Mr.  Michel Purchercos of Lafarge Africa, Dangote's largest local competitor as his replacement as chief executive officer (CEO). The move was a coup.

 

The appointment of Puchercos stunned industry analysts and was interpreted as a swift manoeuvre to weaken an already slightly embattled Lafarge which was facing operational difficulties as it went into defence of its market share (estimated at 30%)  by accepting a lower operating margin (a fate that to a milder degree equally befell Dangote as BUA continued to put pressure on market prices with its newly commissioned Kalambaina plant in Sokoto, Sokoto State). Dangote's gross profit margin was 57.34% in Q3 2019 on a sales value of N679.79bn as against Lafarge's profit margin of 31.44% in Q3 2019 on a sales value of N163.06bn (Dangote's gross profit figure was 7.6 times that of Lafarge in Q3 2019 despite Dangote's gross revenue being only four (4) times Lafarge's). Dangote Cement operates at a more efficient level than Lafarge Africa. But BUA (with a recent market share of 10%) appears to be pushing competitive efficiency higher with the commissioning of its Kalambaina plant last year. The efficiency play may become vital between 2020 and 2021 as gross domestic product (GDP) growth remains weak at between +2.1 and 2.4%.  

 


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Dipping Margins-Breast Strokes Against The Tide

 

Lower margins across cement companies may have noticeable consequences for the bottom-line earnings of the industry's actors, as evidenced by the Q3 2019 results of both Dangote Cement and Lafarge Africa. The two companies saw their margins take a knock in the third quarter of 2019. Dangote's earnings before interest depreciation and amortization (EBITDA) margin slipped from 64% in Q3 2018 to 59% in Q3 2019 for the local Nigerian market. On a continental level, the EBITDA margin fell from 18.30% in Q3 2018 to 17.70% in Q3 2019 (see table 1 below). An interesting operating detail is that the operating margin in Nigeria is several times higher than on the continent; this speaks to the domestic cost and revenue structures in the local Nigerian environment. With BUA becoming an efficient market participant, the margins of cement manufacturers may begin to thin down, but Dangote's dominant position still allows it to operate as a price leader, informing its capacity to generate larger business margins than its rivals.


 

Table 1 Dangote Cement EBITDA Margin Q3 2018-Q3 2019

 

Dangote Cement Plc

EBIDTA Margin (%)

2019

2018

Diff (%)

Nigeria

59.00%

64.00%

-6.00%

Pan Africa

17.70%

18.30%

-0.60%

Source: Dangote Cement Plc Quarterly Result Q3 2019

 

However, Lafarge Africa was able to improve gross margins in Q3 2019 relative to Q3 2018 by dragging gross margin up from 23.94% in Q3 2018 to 31.44% in Q3 2019. With revenues down by -69.59% between Q3 2018 and Q3 2019 (from N234.3bn in Q3 2018 to N163.06bn in Q3 2019), analysts are doubtful that Lafarge will sustain the stronger gross margins in 2020, despite cutting direct sales cost by -62.92% between Q3 2018 and Q3 2019 (from N178.21bn in Q3 2018 to N111.78bn in Q3 2019). Lafarge seems to have benefitted from a 'low base' effect caused by loss leading activities of its South African operations.

 


Lafarge Africa Gross Profit Margin Q3 2018-Q3 2019

 

Lafarge Africa Plc

Gross Profit Margin (%)

2019

2018

Diff (%)

Nigeria

31.44%

23.94%

+7.5%

 

 

 

 

Source: Lafarge Africa Plc Quarterly Result Q3 2019

 

The Lafarge potential margin problem is perhaps less severe than its lower gross earnings challenge, which appears to be the result of a gradual concession of market share to competitors. The local Nigerian market shows Lafarge Africa and Dangote Cement taking a firm grip of the Southwestern market with Dangote dominating the Southeastern and South southern markets while BUA makes a strong showing in the Northwestern and North Central markets. The battle for a bigger piece of the market pie has become a strategic imperative as the three cement manufacturers wrestle for business sustainability against falling operating margins.  

 

While Lafarge Africa has seen gross profit margin go up between Q3 2018 and Q3 2019, BUA, like Dangote, saw a decline in pre-tax margins. The company's earnings before tax margin went down by -9.39% from 29.27% in Q 2018 to 27.48% in Q3 2019. The Lafarge Africa exception to the industry's margin decline may be the consequence of the company selling off its loss-leading South African operations in the year and the company reverting to a more favourable profit situation after the unbundling. BUA's margin may have slipped, but between Q3 2018 and Q3 2019, the company's turnover rose from N19.57bn in Q3 2018 to N42.51bn in Q3 2019, representing a year-on-year (Y-0-Y) growth of +117.23%. Profit before tax for the manufacturer rose from N5.73bn in Q3 2018 to N11.68bn in Q3 2019, or what came to a Y-o-Y growth of +103.98% (See table 3 below).


 

Table 3 BUA Cement Plc Pre-tax Profit Margin Q3 2018-Q3 2019

 

        BUA Cement Plc

Profit and Operating Margin   

        (Q3 2018-Q3 2019)

     2019

          2018

       Diff (%)

Profit Before Tax (PBT)

N11.68bn

N5.73bn

      +103.98%

PBT Margin

27.48%

29.27%

-9.39%

 

 

 

 

Source: BUA Cement Plc Quarterly Result Q3 2019



Of particular note is that despite falling sales by Lafarge and Dangote in Q3 2019 (Dangote sales fell by -9.92% and Lafarge's sales dropped by -69.6%), BUA sales more than doubled (+117.23%). The implications are that if the trend continues, BUA could acquire more market share from its bigger rivals.

 


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The Art of Competition

 

BUA recently listed 33bn units of shares on the floor of the Nigerian Stock Exchange (NSE) after the former CCNN and OBU merged ownership and operations to form the new Cement company. The new company quickly became the third-largest capitalized stock on the NSE after Dangote Cement and MTN. The elevated market positioning of BUA has created opportunities for the company to raise fresh capital to expand operations and inch out of its Northern niche market and challenge for at least a second position in the clinker business. Analysts estimate that a potential expansion will mean that BUA would increase its market share from its recent 10% to between 12 and 15% (still much lower than Lafarge Africa's recent 30%), the additional market slice would come out of the consumer wallet held by Dangote Cement and Lafarge (see illustration 1 showing cement market share in 2019).

 


Illustration 1 Nigeria's Cement Market By Company Share 2019

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The nature of the local cement market suggests the following:

  • Weak supplier power. Manufacturers have a strong influence over the prices they pay to their suppliers, reflecting the oligopolistic (i.e. few buyers) market structure, allowing manufacturers to reasonable muscle down costs.
  • Modest buyer power. Patrons of the cement product have limited choices, the demand for cement is relatively inelastic, meaning that if prices go up by 10%, the market demand for the product may not fall lower than 2%. 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 forcing construction businesses to slow down, which translates into lower cement sales volumes. Dangote Cement has been a price leader for several years, and rival products have followed the rise in its price. The price discovery process indicates that the local cement market operates under a 'collusive' gentleman's arrangement where the rising tide (i.e. prices) lifts all boats (i.e. company profits). Collusion remains a market "perception," but the strong correlation among rival product prices hints at a consensus of mutual self-interest.
  • Substitutes. The dominant material for building in Nigeria is cement and, therefore, for practical purposes, no real substitute exists. The prefabricated building model has not caught on in Nigeria after a few housing estates such as the Dolphin Housing Estate in Ikoyi, Lagos, was built. The fact that no clear substitute exists for cement makes demand relatively inelastic and results in a significant rise in cement prices being unaccompanied by a commensurate fall in demand.
  • Entry barriers. The barrier to entry of the Nigerian cement business is high as start-up costs can be prohibitive. These costs provide a "natural" barrier to easy entry and have favoured the price structures that prevail in the local cement market relative to similar markets in other African countries (see comparative Africa and Nigeria EBITDA margins in table 1 above).
  • Internal Rivalry. The rivalry amongst local cement makers is fairly weak. The industry structure is clear and simple; Dangote Company is the biggest company in the business by asset size and sales volume and is the natural market leader, Lafarge Africa comes second and hustles mainly in the Southwest and BUA trails at a decent third with a concentration in the North. The structure has been respected and quietly understood right up until 2019. In 2019 with the completion of its Kalambaina plant, BUA has shown aspirations of being a bigger market player and the gentleman's club agreement on holding relative market share constant has become increasingly fragile.  The dynamics of competitive advantage and market structure are shifting, creating more aggressive approaches to corporate longevity (Dangote recently poached Lafarge Africa;s Nigeria CEO on the retirement of its former boss, Joseph Makoju).

 

 

Illustration Adapting Michael Porters Five Competitive Forces To Nigeria's Cement Market



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Let The Games Begin

 

With Nigeria's construction sector showing extremely variable low growth rate on a quarter-on-quarter (Q-o-Q) basis in 2019, the cement business may see a flattening of its Turnover and bottom-line margins in 2020 and a growing intensity in the battle for market share.

 

In Q1 2018 the construction sector grew at -1.54% before rising to +7.8% in Q2 2018 and +0.54% in Q3 2018. By year-end the sector had grown by +2.05% in Q4 2018. Construction started the year 2019 on a relatively strong note growing by +3.18% in Q1 2019. The sector, however, saw a large decline in Q2 2019 with a growth rate of +0.67% before bouncing back to a growth of 2.37% in Q3 2019 (see chart 1 below for construction sector growth in 2019).

 

 

Chart 1 GDP Report Q3 2019-Construction Sector Growth

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The struggle to stay competitive in 2020 will mean that the price of cement may slide marginally as the sector's competitors try to keep a hold on their relative market size. With lower operating margins than Dangote Cement,  Lafarge Africa may experience a greater market incursion as both Dangote and BUA attempt to either increase market size or hold their current positions.


BUA has a greater incentive to increase its market size to improve economies of scale and reduce the company's operational or breakeven margins. BUA aspirational intent may put a cap over Dangote Cement and Lafarge Africa's ability to increase product prices in the year. BUA's stronger entry into the cement market means a rise in what competitive market economists call a “consumer surplus”. Consumer surpluses occur where consumers do not pay the maximum price chargeable for a good or service in the prevailing market structure. In the oligopolistic domestic cement market consumers would likely have had to pay higher prices for a kilogramme of cement but with market share becoming increasingly important in corporate strategy, the subtle BUA presence may have prompted a less aggressive price regime.

 

Dangote's snatching of Purchercos from its local nemesis, Lafarge, may have been a brilliant competition-busting manoeuvre, but how this works out for the market will be seen in the coming months as cement manufacturers start reporting their Q1 and later Q2 2020 financial statements.    

 

Table 4 Q3 2019 CCNN Plc. Report

28th Oct 2019: CEMENT CO. OF NORTHERN NIGERIA PLC

Q3 REPORT FOR THE PERIOD ENDED 30 SEP

 

2019 N'm

2018 N'm

% Change

 

SEP

SEP

 

Revenue

        42,514

19,572

117.2%

Profit/Loss Before Tax

        11,684

5,729

103.9%

Taxation

         (2,921)

   (1,719.000)

69.9%

Profit/Loss After Tax

        8,763

            4,010

118.5%

Basic Earnings per share(k)

               67

            319

-79.0%

Balance Sheet Information

Net Assets

      336,994

     333,488

1.05%

https://theanalystng.com/nse/ir.php?ref=CCNN

Source: Nigerian Stock Exchange (NSE)

Corporate Declaration

Proposed Dividend

Nil

Proposed Bonus

Nil

Qualification Date:

Nil

Payment Date

Nil

Closure Date

Nil

AGM Date

Nil

AGM Venue

Nil

Title: CCNN Declares N8.8bn PAT in Q3 2019 Results,(SP: N15.00k)

Short Description: Cement Co. of Northern Nigeria Plc, Building materials company in the Industrial goods sector announced 117.2% Revenue growth in Q3 2019 Result.



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4.     Lafarge Africa Plc Notifies of Court Ordered Meeting with Lafarge Ready Mix

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6.     Lafarge's U-turn on LSAH and Valuation Implications

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8.     Lafarge Africa Plc: Equity Update

9.     Lafarge Africa Plc Redeemed Its N26.4 Billion Series 1 Bond Due On June 15, 2019

10.  Lafarge Africa Releases Q1 2019 and Q4 2018 Results; Declares N3.15bn PAT in Q1,(SP:N9.55k)

11.   NSE Identifies Lafarge, Conoil, 32 Others As Companies That Fell Short of Minimum Listing Standard

12.  Lafarge Africa Notifies of Further Delay in Filing of Its 2018 AFS

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16.  WAPCO Declares N19.73bn PAT in Q2 2017 Result,(SP:N54.60k)

17.  WAPCO Declares N5.16bn PAT in Q1 2017 Result,(SP:N46.00k)

18.  WAPCO Declares N16.9bn PAT in 2016 Audited Result,(SP:N37.80k)

19.  WAPCO Declares N37.41bn Loss in Q3 2016 Result,(SP:N47.50k)

 

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