After three consecutive quarters of negative growth caused by the coronavirus pandemic and structural bottlenecks, the manufacturing sector GDP turned positive in the first quarter of 2021, thanks to the contributions of Dangote Cement, Lafarge Africa, and BUA Cement.
According to the latest GDP report by the National Bureau of Statistics (NBS), the fortune of the sector reversed with a growth rate of 3.40 percent in real terms, compared with a previous quarter contraction of 1.51 percent.
The improvement was largely supported by the cement sub-sector, which expanded by 11.20 percent, the highest growth in the entire economy; and the three dominant producers of the building materials who have been investing copious amounts on backward integration while creating jobs are the brains behind the grandiose performance.
Dangote Cement, Lafarge Africa and BUA Cement control over 98 percent of the market share of the cement industry.
Interestingly, these cement makers are bellwether firms, as they are worth watching closely by investors because their earnings logically suggests a larger economic trend.
While other manufacturers are capitulating to currency devaluations, inflationary pressures, and decrepit infrastructures that balloon cost making it practically impossible for them to breakeven, the three musketeers have been maintaining robust profit margins.
Turning top line (revenue) impressive performance into bottom line growth is made possible by the savvy owners of cement companies who were nimble enough to source cheaper alternative energy.
In 2019, Dangote Cement, the leading producer of the building material with 48.60 Mta across Africa, signed an agreement with American multinational conglomerate (General Electric) to deploy GE’s Asset Performance Management (APM) digital solution to reduce unplanned downtime and enhance performance at its two cement plants in Obajana and Ibese, Nigeria.
“Power supply is both a key input and a major cost in our manufacturing process,” said Ravi Sood, Operations Director, Dangote Cement Plc. “Operational performance is crucial to our cement plant’s overall productivity, directly affecting end products.
Lafarge Africa alternative fuels sources include locally sourced palm kernel shells, woodchips, tyres and refuse.
BUA Cement uses technologies to supply power to its cement plant and communities where it operates.
Little wonder they are spending less to produce each unit of product in the among manufacturers as the combined average cost of sales ratio for (Dangote Cement, BUA, and Lafarge Africa) stood at 54.71 percent as at March 2021.
That compares with flour millers who are spending nearly 90 percent on input cost to produce each unit of product, which leaves them with very slim profit margins, according to data gathered by MoneyCentral.
Because the major cement players are well capitalised and have strong cash flow positions, they were able to take advantage of the gradual relaxation of social distancing measures to underpin earnings.
Dangote Cement, BUA Cement, and Lafarge Africa saw combined net income spike by 37.04 percent to N121.21 billion as at March 2021 from N88.44 billion the previous year.
The average net margin, a measure of how a firm is able to turn each money invested in sales into higher profit, increased to 25.43 percent in March 2021 from 24.55 percent the previous year.
Notably, Dangote Cement’s Nigerian business recorded volume growth of 22.22 percent in the first quarter at 4.90 Mta, with record Earnings before interest depreciation and amortization (EBITDA) of N157.90 billion. The strong performance was buoyed by ramp up of its new and efficient 3Mt Obajana line 5.
The largest company by market capitalization said its Pan Africa business reached heights, with an EBITDA margin of 25.50 percent and volume growth of 12.80 percent reported during the quarter.
Dangote Cement is planning to expand capacity from about 50,000 tons a day at the beginning of the year to 70,000 tons a day at the end of the year.
Cement makers are at the forefront of the government’s backward integration policy aimed at making the country self-reliant in cement production and saving the country dollar revenue, hence shrinking the balance of payment deficit.
The backward integration policy of the Federal Government in the cement industry saves Nigeria N240 billion yearly, Lafarge Africa Plc said.
Analysts expect further improvement in the purchasing managers index (PMI) reading, but they added that foreign exchange constraint, supply chain disruptions and weak disposable income are all factors that will continue to undermine growth in the sector.
The need to boost the manufacturing sector is pertinent to achieving the country’s output projection and if structural constraints remain unaddressed, achieving self-sufficiency in local production will remain a mirage in our view, according to analysts at CSL Stock Brokers Limited.