Market analysts see more reasons for BUA Cement price reduction
Beyond the need to spur development in the building materials and infrastructure sectors which BUA Cement cited as the reason for reducing the ex-factory price of its product, those who watch and analyse the cement market closely say it may here are other reasons for the company’s action.
The market watchers who took a critical look at this narrow product market which is struggling with unfavourable economic conditions, especially at the macro level, note that all has not been well for cement manufacturers, particularly in the areas of sales.
FBNQuest Capital Research, in a recent statement obtained by Businessday, highlighted some of the implications of BUA Cement price reduction, pointing out that lower cement prices would provide a boost for cement volume sales which have slowed in recent quarters.
According to the research, in Q2 2023, industry unit volumes contracted by c.-0.4 percent y/y to 7.5mmt, pointing out however that price reductions by BUA Cement alone are insufficient to adequately influence industry pricing given the dominance of Dangote Cement (Dangcem) which dominate the market with about 59 percent share as against BUA’s 22 percent.
“If a pricing war eventually occurs, we expect a contraction in Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) margin and lower profitability for all three manufacturers given that energy costs will remain elevated over the next two quarters,” Uwadiae Osadiaye, a researcher at FBNQuest Capital, posited.
“In our view, the price reduction by BUA Cement is necessary to increase its local penetration because of the (temporary) loss of market opportunities in Niger and Burkina Faso. We note that BUA Cement’s Sokoto plants’ proximity to neighbouring countries helped distribution across the border,” she added.
He noted, however, that Nigeria’s northern border is now closed following the military coup in Niger and the resulting diplomatic disputes between both countries, hoping that easing of tensions between Niger and Nigeria could see a return to a more export-orientated approach.
Placing in context BUA’s announced N3,500 ex-factory price for its product, Osadiaye recalled that ex-factory prices for BUA Cement for Q1 and Q2 2023 were NGN3,700 and NGN4,000 per bag, respectively, meaning that the implied reduction is around -5 percent and -8 percent from Q1 and Q2.
He recalled further that in H1 ’23, average cement retail prices were up 12 percent year-to-date (ytd) on average, and all cement manufacturers stated that price increases were to offset higher production and operating costs.
“On a per tonne basis, production costs and energy costs were up 24 percent y/y to NGN33,658 and 6 percent y/y to NGN13,622 on average, respectively. The devaluation of the naira in Q2 was a primary cost driver during the period. If Dangote Cement (Dangcem) and Lafarge Africa (Lafarge) also reduce prices to defend market positions, our estimated adjusted earnings per share (EPS) will both be lower by around -4 percent for 2023,” Osadiaye said.
Though he welcomed BUA’s announcement, he noted that the price reduction could be offset by various factors such as elevated distribution (haulage) costs, which he said, showed no signs of easing.
This is because diesel prices have been up substantially over the past three months, retailing at around NGN1,000/litre following higher import costs and the now suspended VAT on diesel. Higher transport costs will significantly offset any benefits from lower factory prices.
This view was shared by a cement dealer who introduced himself simply as Thomas. He also noted that the price reduction would only benefit dealers and sundry buyers who lived close to BUA factory sites in the North, arguing that those in Lagos would rather go for Dangote cement whose factory is in Ibeshe, Ogun State.
“We do not expect a moderation in the cost of transport fuels in the short term given bullish crude oil prices and Russia’s self-imposed diesel export ban. In recent months, diesel imports from Russia into West Africa have steadily increased due to its discounted pricing.
According to the S&P Global Commodity Insights, Russian diesel accounted for c.40 percent of the sub-regions total imports in August 2023 vs a negligible contribution in the prior year,” Osadiaye said.
He recalled that in Q2 ’23, BUA Cement’s volume sales of 1.685mmt works out to a market share of c.22 percent in Nigeria which compares with 59 percent for Dangcem, noting that BUA Cement is dominant in certain regions of the country, however, given its total aggregate volumes and believed that there is a limit to the firm’s influence on pricing.
“As such, we continue to expect that Dangcem will dictate local pricing. In Q2, BUA Cement reported a plant capacity utilisation of c.61.3 percent – the highest in the industry. As such, at full capacity, the firm can only introduce an additional 1.1mmt to the market quarterly. All else constant, the firm’s market share could expand by c.10 percent to 32 percent under these conditions. This is unlikely. We expect that Dangcem will react to adverse changes in its market share,” Osadiaye said.
Continuing, he noted, “Dangcem’s response could be more acute if Lafarge also lowers ex-factory gate prices, forming a super-minority pricing block with BUA Cement. Presently, Lafarge cement sales represent a market share of c.19 percent. Combined, both BUA Cement and Lafarge account for 41 percent of local cement sales and BUA’s additional 6mmt by the end of the year would further increase the pair’s pricing power.”
Businessday.ng
