The ability of the owners of the three dominant Nigeria cement makers to think outside of the box and build a strong diversification energy base has made them impervious to the current energy crisis undermining businesses across the country.
The benign position means Dangote Cement, BUA Cement, and Lafarge Africa will emerge profit margins winners in 2022 amid geopolitical macroeconomic uncertainties aggravated by the war in eastern Europe that has forced central bankers to adopt monetary policy tightening to rein in on spiraling inflation.
This makes their stocks hot cake at a time investor(s) are looking for where to pack their money and generate reasonable returns that magnifies their earnings.
A recent report by Chapel Hill Denham stated that the shortage of Low Pour Fuel Oil (LPFO) in 2017 birthed a new era of energy diversification drive that makes the cement sector energy efficient and insusceptible.
Cement makers use alternative energy fuel sources such as coal and liquified natural gas to run plants across the continent, and the strategy has helped them reduce the amount spent on input cost to produce each unit of product.
For instance, on average Dangote Cement, BUA Cement, and Lafarge Africa spent an average of N0.48 on input cost to produce each of product based audited 2021 results, according to MoneyCentral calculations.
That compares with N74.15 for consumer goods firms. A breakdown of consumer goods cost structure shows the largest flour mills: Flour Mills of Nigeria, HoneyWell, and Northern Nigeria Flour Mills spent on average N0.91 to produce every N1 of product, leaving them with very slim margins.
Analysts at Chapel Hill Denham are on point as first quarter 2022 results shows cement makers recorded robust earnings and strong profit margin expansion.
Lafarge Africa’s net income surged by 92.20 percent to N17.55 billion in March 2022 from N9.13 billion as at March 2021. Its EBIT margin increased to 24.40 percent in March 2021 from 20.57 percent as at March 2021.
BUA Cement’s net income spiked by 48.20 percent to N33.14 billion in March 2022 from N22.36 billion ad at March 2021. Its EBIT margin moved to 43.70 percent in the period under review from 40.50 percent the previous year.
“Lafarge Africa, for instance, is ahead of its peers with the integration of alternative fuels into its energy mix (c.18% in FY-21),” said analysts at Chapel Hill Denham.
“Management is also keen on raising its Alternative Fuel (AF) usage to c.50% of its energy mix since AF is the cheapest thermal energy for kiln. Its planned Captive Power Plant (CPP) in Ashaka can deliver up to a 30% reduction in energy cost,” said the analysts.
BUA currently has c.48MW of electricity generator, which previously ran on liquid fuel (diesel); and a good portion of it has been replaced by liquified natural gas.
All of DANGCEM’s cement plants run on multiple fuel sources, including imported coal, locally mined coal, and gas.
“Even at that, the group’ Ethiopian business had previously employed bags, tyres, and plastics as part of its energy mix, while also substituting some sawdust for coal at its power station in Zambia,” said the analysts.
Companies who are already struggling with foreign exchange scarcity and port logjam have to contend with a spike in diesel price stoked by the rally in crude oil price as the product (unlike the premium motor spirit) has been deregulated.
Factories use diesel oil to run generator plants since electricity from the grid is erratically unreliable.
Crude oil price has been rising since February 24 when Russia invaded Ukraine and that elicited sanctions from Europe and the United States.
Brent crude was trading up on Wednesday, at $108.25 a barrel. But it could soar to $185 if the European Union (EU) abruptly bans Russian crude from its energy markets, JPMorgan said in a recent note.
Lanre Popoola, Chairman, Manufacturers Association of Nigeria (MAN), Oyo, Osun, Ekiti and Ondo, said businesses are finding it difficult meeting production as the price of diesel hovers between N620 and N720.
“It is getting extremely difficult to produce and I don’t know how we are going to cope because 70% of industries are running on diesel, there is no light,” said Popoola.
“There is no power supply, we are having 30 percent of what it used to be, whereas the disposable income of people is not increasing and the cost of products are going up.Even in my factory now, we are only running one shift instead of three shifts of eight hours each,” he said.
Diesel prices will close 2022 at an average of N556/litre (+123% yoy), according to Chapel Hill Denham Limited.
“Overall, we found that a N1.0 increase in diesel price can potentially trigger a 43bps expansion in headline inflation, a test that is significant at 5% level,” said the analysts.