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Tuesday, June 6, 2023

Cement Makers Succumb to Inflationary Pressures, Gas Shortages as Earnings Slump

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Cement makers in Africa’s largest economy capitulated to aggressive inflationary pressures, gas shortages and currency devaluation that balloon dollar denominated operating costs, leading to a drop in earnings.

The dominant players in the industry are struggling to contain operating expenses for the first time in seven years, which underscores the plight of manufacturers who can no longer deliver returns to shareholders by way of bumper dividend or share appreciation.

The combined net income of Dangote Cement, BUA Cement, and Lafarge Africa reduced by 20.67 percent to N270.65 billion as at September 2022, according to data gathered by MoneyCentral.

Their cumulative total cost of production spiked by 22.85 percent to N761.73 billion in the period under review from N620.12 billion the previous year.

Dangote Cement saw net margin reduced by 23.14 percent to N213.10 billion as at September 2022; while BUA Cement’s net income fell by 43.80 percent to N119.78 billion.

While an aggressive price increment helped strengthen sales value, there was a slump in volumes due to severe gas shortages and heavy rainfall in the third quarter of the year.

“We understand that only about half of the gas needed in Dangote Cement Obajana (installed capacity: 16.25mmt) was supplied in Q3-22, the impact of which disrupted production. Beyond that, we do not rule out the impact of a higher-than-usual rainfall in Q3-22 as another driver of the volume compression,” said analysts at Chapel Hill Denham Limited.

“That said, while we believe volume will improve qoq since Q3 is traditionally a weak quarter, the group will likely report its first yoy volume growth in Q4-22. For one, we understand that the Obajana plant can run on multiple energy sources and can quickly switch to coal/AF amid the current gas shortages,” add the analysts.

The NGX Industrial Goods index has shed 1.86 percent so far this year, underperforming the NGX ASI index 2.56 percent year to date.

Analysts at Chapel Hill Denham have cut their earnings per share (EPS) forecast for Dangote Cement by 23.2 percent to capture the sharper-than-expected growth in OPEX and higher taxes.

These firms are efficient in energy transitions that enable them to save costs and strengthen margins, but a combination of global macroeconomic uncertainties stokes imported inflation.

Analysts are sanguine that the government proposed aggressive capital expenditure spending will accelerate demand for building materials that is expected to galvanize cement makers to growth,

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