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Raising Cement price as buffer to Forex, production cost

By Femi Adekoya
13 November 2016   |   3:11 am
Except for a modest improvement in March this year, Nigeria’s Purchasing Managers Index – which measures the health of the manufacturing sector – has fallen consistently since December 2015.
Dangote Cement factory

Dangote Cement factory

For many manufacturers, transferring rising production costs to consumers seem rational considering the present state of the economy and the need to break even. With capacity utilisation declining across the productive sector, cement and other commodities manufacturers have had to raise their prices to mitigate foreign exchange losses. FEMI ADEKOYA writes of activities in the sector and why cement prices have remained high.

Except for a modest improvement in March this year, Nigeria’s Purchasing Managers Index – which measures the health of the manufacturing sector – has fallen consistently since December 2015.

At 44.1 index points in October, the industrial and consumer sectors need to be stimulated, considering rising inflation and weakened purchasing power of consumers that threatens the sector’s survival.

To sustain operations, some manufacturers, especially operators in the consumer and industrial goods, as well as, conglomerates sectors have had to increase prices of their goods, to buffer the shock of foreign exchange,

Indeed, dreams of lower construction costs by prospective homeowners might have become a nightmare, going by recent increase in the price of cement products by manufacturers.

The development triggered a ripple effect in the open market, with prices going up by about 44 per cent in few days.

Investigations revealed that operators under the Cement Manufacturers Association of Nigeria (CMAN) have raised prices of brands by N600 per bag in factories, including additional N100 cost for haulage. This has increased retail prices from N1, 600 to N2, 300 depending on location. In some areas, prices have risen to N2, 350 or higher.

Members of the CMAN include Dangote Cement Plc, which has emerged as a market leader and has factories in Gboko, Benue State; Obajana, Kogi State; and Ibeshe, Ogun State.

Other are: Lafarge Cement WAPCO Plc; Cement Company of Northern Nigeria Plc; Ashakacem Plc and Cross-River based United Cement Company.

Vice President, Nigerian Institute of Building, Kunle Awobodu, had told The Guardian: “This is going to create crisis in the construction sector and bad blood between clients and contractors, as developers will make claims for fluctuations.

“Invariably, it will lead to upward reviews of contract sums. New and on-going projects will be delayed until there is agreement on the contract variations. It can also expedite construction activities because of the anticipation of further increase.”

According to an official in one of the cement manufacturing companies, the hike is not unconnected to difficult operating environment.

Many manufacturers have had to contend with dwindling capacity utilisation of their plants, due to disruptions in gas supply, while the high cost of Automotive Gasoline Oil (AGO), known as diesel, which used to sell between N110 to N130 per litre (now N200 per litre), has made alternative power supply unbearable.

The power sector in the second quarter had also been at the mercy of militants who blew up gas facilities and jeopardised supply to industrial layouts from the Transmission Company of Nigeria, undermining Federal Government’s plan to add another 6000mw.

Furthermore, a review of unaudited financial reports of many of the firms for the third quarter of 2016 revealed a struggle between balancing rising input cost pressures and passing the inflationary pressures on already constrained consumers by raising prices of some products during the period.

Some of the input cost pressures being encountered by many manufacturers border on foreign exchange losses on dollar loans, inability to access foreign exchange, high cost of production, as well as, poor electricity supply and tariff hike.

Others are prolonged gas supply shortages, which forced companies to rely on more expensive backup, monetary policies and constrained consumer purchasing power.

According to the reports filed with the Nigerian Stock Exchange (NSE), Dangote Cement Plc’s profit after tax for the third quarter was affected by its cost of sales it declined from N157.993 billion it made in the comparable period of 2015, to end the current period with N133.521 billion.

The report indicated that Dangote Cement increased the revenue by N76.642 billion from N365.450 billion it made during the same period in 2015.

Indeed, the foreign exchange crisis gulped a huge amount of its revenue, as it spent N231.684 billion on cost of sales between January and September 2016, as against N138.694 billion spent on the same purpose during the first nine months in 2015.

The company also explained that with the foreign exchange constraints in the country, it has had to reconsider the pace of its expansion. It now believes a five-year building programme is more appropriate.

Reflecting on its outlook, the Managing Director of the company, Onne Van der Weijde said the management is confident of delivering strong growth this year despite the challenging economic conditions facing Nigeria and the rest of Africa.

He said: “This price increase will have an immediate and positive impact on margins in Q4, as will the elimination of LPFO (diesel) from our fuel mix, as we increase our use of coal and as higher gas levels return. We do not expect to use LPFO again this year. From January 2017, our use of own-mined coal, sourced in Nigeria and paid for in Naira, will further improve margins and significantly reduce our need for foreign currency.

“As we have previously made clear, our focus will be to improve margins through cost controls and the adjustment of prices. We have new capacity coming on-stream in Congo and Sierra Leone and expect Tanzania to increase its market share in the coming months.

“Foreign exchange constraints in Nigeria have made us reconsider the pace of our expansion and we now believe that a longer-term building programme will enable a more measured approach that balances our ambition for growth with the realities of obtaining foreign currency in this difficult environment.”

For Lafarge Africa Plc, the firm reported a loss after tax of N37.4 billion for the nine-month period ended September 30, 2016. The loss represents a 215 per cent decline from a profit after tax of N32.4 billion recorded in the corresponding period of 2015.

The cement manufacturing group’s results showed net sales for the period reduced by 25 per cent to N161 billion in 2016 from N215 billion recorded in 2015. Cost of sales declined marginally to N142.9 billion from N143.3 billion, as selling and marketing expenses grew by 18 per cent to N3.9 billion from N3.3 billion. However, administration expenses was reduced by 14 per cent to N16.3 billion in 2016 from N19.1 billion expended one year ago.

Commenting on the group’s performance, Michel Puchercos, CEO of Lafarge Africa said: “Our focus on volume and prices started to deliver during the third quarter. In September, all our plants were running at record performance level, Mfamosing Line 2 started its operation on August 28 (clinker) and prices increased by N650 per bag in September representing about 40 per cent price change.

“In spite of the recessionary economic environment and market uncertainties, our company is positioned to deliver improved performance going forward. Our immediate objective is to optimize our processes, reduce operational costs and deliver strong EBITDA margins.

“However, uncertainty remains on the macroeconomic environment and its effect on the cement market. 2016 outlook in the light of development in Nigeria, we expect a soft landing of the cement demand in Nigeria in the low range of 7-10 per cent for the full year.”

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