Cement makers will continue to increase the price of key products to at least break even if the government fails to create a conducive environment for business to thrive as rising cost of production squeezes profit margins.
A sharp depreciation in the value of the Naira since the sudden devaluation of the currency and the unification of the exchange rate are significantly responsible for the disappointing results.
Of course, these firms were ingenious to have opted for alternative power supply such as coal and gas, but the current challenging environment seems overwhelming.
Dangote Cement Plc, BUA Cement Plc, and Lafarge Africa cumulatively incurred N917.65 billion on raw material and fuel costs as at June 2024, according to data gathered by MoneyCentral.
The spiraling cost of production means the combined average net profit margin of the three dominant producers of the building material in Africa’s most populous nation fell to 10.04 percent in June 2024 from 21.83 percent as at June 2023 (see chart).
Average industry operating profit margin reduced to 26.85 percent in the period under review from 35.24 percent the previous year.
It is obvious that consumers always bear the brunt of higher cost of production brought on imported inflation and weak Naira as cement makers have been passing higher on rising cost of production to consumers in the form of higher prices.
Such a hike is inevitable given the tough and unpredictable macroeconomic environment and the need to remain in business.
The average price of cement increased by about 50.5 percent to N7,750/bag in the first quarter of 2024 from N5,150/bag in the first quarter of 2023, according to data from Greenwich Merchant Bank Plc.
The Naira has lost about 68 percent of its, marking a profound downturn since the implementation of the foreign exchange unification policy.
Nigeria’s inflation rate increased to 34.19 percent in June 2024, according to data released by the National Bureau of Statistics on Monday, July 15, 2024.This represents an increase of 0.24 per cent points from the previous headline inflation rate of 33.95 per cent in May.
In a pessimistic tone, analysts at Greenwich Merchant Bank said they expect the currency and inflationary pressures to impact on cement maker’s’ logistics and key raw materials cost (such as limestone and gypsum) which could lead to a further reduction in profit margin and earnings growth.
“The significant increase in net finance cost owing to the high interest environment and foreign exchange loss could subsequently impact on its bottom-line growth,” said analysts at Greenwich Merchant Bank.
Despite all these challenges, Dangote Cement, BUA Cement, and Lafare Africa remain a buy as they are expected to gain from the Federal government’s initiatives aimed at reducing the huge infrastructure deficits across all critical sectors of the economy.
As contained in the 2024 budget, allocation to capital projects was increased by 26.37 percent to N6.23 trillion from the N4.93 trillion allotted in 2023.
“Hence, with the 5 percent (i.e., N1.32trillion) of the 2024 budget allocated to improving infrastructure in the critical sectors, we believe that most players in the construction industry will record an uptick in total demand at the end of 2024,” said summed analysts at Greenwich Merchant Bank.
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