H2’23 SSA Industrials Outlook – Steering towards a robust future
What shaped the past week?
Global: Global markets traded with a bearish undertone, as investors reacted to the latest economic data and the release of the FOMC minutes of the U.S. FED. In Europe, the manufacturing activity continues to contract, as Eurozone manufacturing PMI fell to 43.4 in June y/y, marking a twelfth consecutive contraction. Demand has fallen sharply in the region, some of which can be attributed to the impact of higher interest rates on the region’s manufacturing industry. The German Dax and London FTSE-100 closed in the red w/w, with the latest data dimming the outlook on the region’s economy. Meanwhile, in the U.S., investors digested the latest FOMC minutes from the U.S. FED. It is anticipated that the Federal Reserve will push rates higher at subsequent meetings; the bank highlighted that inflation is not falling at the rate they would like, further suggesting that future rate hikes would be appropriate. The Nasdaq Composite and Dow Jones traded in the red as well, with investors unnerved by the prospects of further rate hikes. Finally, key Asian-Pacific markets closed in the red, as regional economies came into focus this. Manufacturing activity fell across board, with China being the lone exception, as their PMI printed at 50.5 in June, on the back of stronger domestic demand. Furthermore, the prospects of future rate hikes from the U.S. FED, unnerved investors in the region as well. The Nikkei-225 and Shanghai composite lost 0.17% and 2.41% w/w respectively.
Domestic Economy: In a bid to curb multiple taxations as complained by a cross-section of Nigerians and the business community, President Bola Tinubu has signed four Executive Orders, which include the suspension of the five per cent Excise Tax on telecommunication services as well as the Excise Duty escalation on locally manufactured products. The President also suspended the 2023 Finance Act 2023 deferring the date of its commencement from 28th May, 2023 to 1st of September, 2023. Some of the suspended taxes were issued through Executive Orders by former President Muhammadu Buhari at the twilight of his administration. They include Corporate Income tax, Import duties, Export duties, Excise duties, Rents, Capital Gains tax, Personal Income tax, Value Added tax, Stamp duties, Property tax, Licenses, Motor Parking fee, Motor Vehicle fee, Withholding tax, Land tax, Market License fee, Road tax, Business Premises, dividend tax, NHIS levy, Advert fee, Regulation fees, the new NYSC levy.
Equities: Local investors remain bullish on local equities, as we anticipate that the latest tax policy from the administration will be a positive one for investors’ outlook on the economy. President Tinubu signed executive orders suspending a green tax on single-use plastics, including plastic containers and bottles. The orders also suspended implementation of 5% telecoms tax and stopped an increase in car import duty and excise duty on some locally manufactured goods. We believe local investors anticipate that the administration will pursue business friendly policies to boost the economy. The ASI rose 3.40% w/w, with the Banking sector emerging as the best performing, gaining 9.82% w/w. The Oil and Gas and Industrial Goods sectors, gained 7.18% and 2.22% respectively, whereas the Consumer Goods sector recorded moderate losses falling 0.22% w/w.
Fixed Income: The secondary market has benefited from the latest policies from the administration, as it has provided new liquidity to the market, prompting buying activity from local investors. Yields across benchmark bonds fell 10bps w/w on average, in what was a mixed week of activity in space; investors took profit in four out of the five sessions, seeking to lock in profits recorded in previous sessions. In the NTB segment, it was a positive one overall, as stop rate guidance yield a positive outlook from investors on rate trajectory in the space. However, we note that the fresh supply of new NTB papers coming at the end of the week dented the positive sentiment slightly.
What will shape markets in the coming week?
Equity market: The local equities market should trade in the positive manner, as investor optimism stemming for the latest policy drive dictates market to start the week.
Fixed Income: With liquidity levels in excess of N800 billion, we anticipate that investors will remain bullish as they pursue attractive offers across the secondary market.
H2’23 SSA Industrials Outlook – Steering towards a robust future
Cement – Still on track for long term growth
In 2022, cement producers recorded weak volumes impacted by energy constraints, particularly with gas supply shortages prevalent in the first half of the year. However, this decline was masked by higher cement prices during the period. Volumes continued to contract further in the first quarter of 2023, impacted by a nationwide cash shortage and weak capital expenditure resulting from the general elections. Despite the challenging operating environment, the total revenue of key players in the cement industry saw a marginal increase of 1% y/y to N604.8 billion. This was further evinced by GDP figures for Q1’23, as the cement sector recorded slower growth in Q1’23, 8ppts lower than the corresponding year. This deceleration in growth was also reflected in the Real Estate and Construction sector, as they similarly recorded slower growth due to economic headwinds.
On the flip side, the cement industry has been grappling with persistently high input costs, primarily driven by elevated inflation and gas prices and further exacerbated by the volatility in the local currency. Likewise, distribution costs across the sector remained a pain point due to the rising prices of AGO, culminating in weaker profitability margins across the industry. For context, diesel prices have surged by 56% y/y for the Q1’23 period. With gas and imported coal costs rising due to the gradual FX depreciation, cement players are proactively improving their energy mixes by adopting the use of alternative fuels and multi-fuel systems in the plants. In line with this, Lafarge and Dangote Cement have announced their intentions to replace diesel with the more cost-effective Compressed Natural Gas (CNG) for their cement distribution operations. These strategic shifts aim to mitigate the impact of escalating energy costs and improve the overall cost-efficiency of the industry.
In 2022, there were increased infrastructure investments by the previous administration as they aimed to wrap up all outstanding projects before the coming election. However, as the elections approached, there was a slowdown in capex disbursement and construction activities in Q1’23 due to political uncertainties. Looking ahead to the second half of 2023, we anticipate a better rollout of capex following the conclusion of major political events. However, we maintain a cautious outlook regarding strong cement demand from the public sector as there are several risks such as a slowdown in budget implementation, which could have a ripple effect on capex spending and the awarding of construction contracts. To provide context, we draw comparisons from 2015, a previous election year with keen competition, where capex disbursement fell below the 70% threshold. Considering this historical precedent, there are risks that a similar scenario could unfold in H2’23. This, in turn, could restrict revenue growth for cement players and dampen overall demand from the public sector.
Renewed capital projects reaffirm strong outlook
In 2022, the Kenya cement industry suffered a slowdown in capital projects, due to political uncertainties of the general elections which stalled projects by the incumbent administration. The performance of the sector was relatively slower in the third quarter of 2022 compared to the corresponding quarter of 2021. This sluggish growth was reflected in reduced cement consumption and a decline in imports of construction materials. During the period, cement consumption declined by 14.6% to 2.2 million metric tons.
Looking ahead, our outlook for H2’23 is strong, as the newly elected administration restarted several road construction projects from the previous administration and began the construction of new motorways. The current administration is also very keen on its plan to build affordable houses through Public-Private Partnerships. Currently, Kenya’s PPPs have 45 projects under implementation. Furthermore, the World Bank has pledged a total of $2.5 billion (Sh306.6 billion) earmarked for completing various PPP projects between 2023 and 2027.
On the other hand, the 15% hike in electricity tariff following the removal of fuel subsidy in August 2022 put more pressure on pricing across the sector as the players had to factor in the higher cost of energy in cement prices and other building materials.
Additionally, the global rise in commodity prices has contributed to inflationary pressures, affecting the costs of imported raw materials and inputs such as coal, and further eroding profit margins for industry players. To mitigate this, the Kenyan government has implemented various initiatives such as the construction of geothermal plants to encourage the use of renewable energy with the aim of reducing the country’s reliance on fossil fuels and promoting the adoption of renewable energy.