Cement makers in Africa’s most populous nation have rebound to growth after a torrid 2016 as first quarter margins spiked on the back of energy savings and higher pricing.
Many operators in the industry had hiked the price of the building material after a devaluation of the naira and disruption of gas supply that jerked up operating costs.
“There were minimal disruption to oil pipelines in the first quarter and virtually all the manufacturers enjoyed lower energy costs, “said Johnson Chukwu, managing director of Cowry Assets Management Limited.
“While the impressive performance can also the attributed to higher pricing, I think in the third quarter we may see a moderation in price because construction activities are usually slow in this period,” said Chukwu.
The cumulative net income of the four dominant producers of the building material soared by 52.82 per cent to N78.40 billion in March 2017 from N51.30 billion the previous year.
Cumulative sales spiked by 51.23 per cent to N302.66 billion, higher than the 25.15 per cent figure of 2015.
In spite of the fact these firms are slogging through a tough operating environment, they remain efficient.
Lafarge Africa’s net profit margin was up 9.92 per cent in the first quarter while return on equity (ROE) jumped 2.71 per cent. Ashaka cement’s profit margin was up 20.13 percent; gross profit margin rose 37.45 per cent as ROE rose to 3.51 per cent.
Sokoto cement’s gross profit margin increased 65.98 per cent; net profit margin was up 73.63 per cent; ROE jumped 66.79 per cent. Dangote Cement Nigeria’s net margins went up 20.88 per cent as ROE increased 21.77 per cent.
Analysts say beside rising sales, margins were bolstered by favourable fuel mix in coal and gas compared to the Low Pour Fuel Oil (LPFO) previously used.
In the first quarter of the year, Dangote cement’s ratio of gas to other fuel sources was 18.60 per cent: 81.40 per cent compared to 6.2 per cent: 93.8 percent the previous quarter, according to analysts at FBNQuest Limited.
There was improvement in gas supply at Lafage Africa’s UNICEM and Ewekoro plant stations.
Nigeria companies are struggling with a downturn in an economy that slumped 1.50 percent, the worst in 25 years. A militant attack on gas facility stoked gas shortages at factories while power cuts worsen.
The cumulative cost of sales or production costs of the four firms increased 51.69 per cent to N156.46 billion, more than double the 17.24 per cent April inflation figure.
Nigeria’s currency lost about a third of its value against the greenback after the central bank removed a 197-199 naira to dollar peg in June.
The introduction of a new window called NAFEX saw naira weaken to N378.19 per dollar, close to the black market rate of N400 per dollar.
The aforementioned de facto devaluation as anticipated by experts could reignite the foreign exchange losses of Lafarge Africa due to a debt burden that has risen to $108 million.
Lafarge Africa plans to raise capital through N140 billion rights issue as it seeks to shore up finance, deleverage the balance sheet, and boost growth.
For companies, a rights issue is a means to raise equity funding from existing shareholders by offering them the right to buy more shares at a discount to the market price.
Experts have highlighted the risk areas for the cement industry.
Analysts at ARM Research Limited said that the anticipated naira devaluation could significantly impact input prices of gypsum or gas while dollar-denominated debt could spiral up.
“While this risk could partially be offset by another price response, we highlight the potential for a boomerang effect on price sensitive cement demand,” said analysts at ARM Research.
However, Johnson Chukwu said he doesn’t think a weak currency will affects the price of the raw material component like gypsum because it is not a major cost component.
“I think there is a positive outlook for the industry given the massive construction going on across the country. Such works will increase the demand for building materials,” said Chukwu.