Five-year high consumption seen for cement, but manufacturers Dangote, LafargeHolcim, BUA to go head to head in places
Chukwuemeka Obioma is Businessamlive Reporter.
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2018 may trigger a return to growth cycle for cement producers in Nigeria as cement consumption is likely to see a rebound of seven percent in the year compared with a 17 percent decline the previous year.
Cement consumption drivers, from the emergence of concrete roads and housing deficit could unlock 53 metric tonnes and 24 metric tonnes respectively by 2020, analysts covering manufacturing have told business a.m.
There are indications that improving government capex commitment and implementation, as well as ongoing pub- lic-private partnership infrastructure financing initiatives, may drive cement demand. Industry sources project stronger consumption growth at 12 percent Compound Annual Growth Rate over a five-year period that spans 2018 through 2023.
According to a report by RMBNS, a leading research organisation, “The key risk for Nigeria’s cement sector in 2018, is the possibility of a price cut based on RMBNS in-house FCF margin-cement price parity model.”
Cement prices are also an- ticipated to decline by about 12 percent in 2018 triggering higher demand after almost 60 percent increase in 2017.
The forecast is also hinged on the likelihood of BUA’s 3mt p.a. OBU II plant starting oper- ations in 2018; since price cuts are usually implemented when smaller players announce new capacity, a strategy which often gives rise to higher consumption rate.
The cement subsector would also leverage a moderate rise in cement volumes, bolstered by the recovery in the economy, and further sup- ported by government-led infrastructure spend in 2018, business a.m. has also been told.
In a market dominated by Dangote and Lafarge, analysts project an interesting competition from underdog BUA, which appears to be gaining
traction. However, there is a growing concern about the sustainability of cement prices at $137 per tonne.
Dangote will leverage on its quality brand name but down- grade to SELL (from Hold) on a one-year view, based on market valuation. Market dynamics provide profit making opportunity for the cement giant, following a strong share price run, analysts covering manufacturing have told business a.m.
Projected target price (TP) increases to N214 from N201. Lafarge, will be waiting in the wings, with its pending rights issue approval from the Secu- rities and Exchange Commis- sion and completion details, even though analysts project a N48 target price and SELL rating.
Available information as it relates to GDP suggests a 9- to15-month in the subsector.
And given that Nigeria’s economy exited recession in late 2Q17, industry sources gave a hint that the cement market has hit rock- bottom but would recover in 2018.
Though some industry sources argue that only a fraction of proposed capex spend is ultimately executed each fiscal year, analysts predict a turn around in the subsector’s fortunes this year given the release of the N100 billion sukuk bond for the construction of 25 major roads as well as the release of N2 billion towards the construction of the 44km second Niger bridge; and government’s efforts at securing $12 billion to fund major capital expenditure projects.
BUA, a fledgling operator in the industry, may slowly be joining the exclusive cement party dominated by Dangote
and Lafarge. The third-largest cement player by market share is bringing some competition, following the commissioning of its three million tonnes per annum plant in Okpella, Edo State, close to Dangote’s Obajana plant. And with a further 2.5mn tpa plant scheduled to come on line by year end, analysts say the cement company may soon be gaining a strong hold on Nigeria’s cement market.
Following clashes between Dangote and BUA on lime- stone rights, as well as Dangote’s planned 6mn tpa plant in Okpella, expectations are high as regards strategies that will be adopted by both players to increase market share. And the latest merger talks with Cement Company of Northern Nigeria may be part of BUA’s strategy to increase its market share.
Again, BUA’s plant proximity to Dangote’s plant, is believed to have given BUA an advantage as analysts say the company may have coveted some of the market leader’s volumes. However, while BUA may be gaining momentum, with just a 10 percent market share, it cannot move prices or the market significantly, business a.m. has learnt.
Dangote’s export strategy provides a competitive ad- vantage for the giant cement producer. Analysts expect a positive impact from its sea- based export strategy and tax incentives (from constructing federal roads at a discount).
There is a projected in- crease in Dangote’s target price to N214 on rolling forward valuation model but downgrade to SELL on a one-year view based on valuation. A rebound is also expected for Lafarge following a stronger balance sheet from the rights issue.