Nigeria’s cement industry will continue its growth spurt into 2020, as investment in capacity continues in response to rapid increase in consumption in a stable-to-strong pricing environment, says investment firm, Renaissance Capital.
“The Nigerian cement market continues to grow strongly, with volumes at the end of FY13 reaching just under 22m tpa, representing a 9.6 percent compound annual growth rate (CAGR) over the past 10 years,” according to RenCap’s basic materials analysts led by Roy Mutooni, in a research note released July 18, 2014.
“We now expect consumption to reach 43mnt by 2020 (11% CAGR) and believe Nigeria’s per-capita consumption rate will reach 213 g by 2020, following the 17 percent increase from 107kg in 2011 to 125kg in 2013.”
The boom in cement consumption is anchored on economic growth in Nigeria that has averaged 7 percent per annum over the past five years creating demand for housing, offices, roads, bridges and other concrete structures.
RenCap expects imports to diminish rapidly as domestic production continues to grow over the medium term, reaching 60mn tons per annum by 2018.
This would put Nigeria among the top 10 countries in terms of cement production.
Based on 2014 numbers, the top three producers of the building material are China with 2.3 billion mta, India 280 million mta, and USA 77.8 million mta, according to data from USGS Mineral Programme Cement Report (February 2014).
The Nigerian economy will expand by 6.2 percent in 2014, accelerating from a 5.5 percent expansion last year, the National Bureau of Statistics (NBS) office said last week.
The recently rebased GDP data showed Nigeria’s GDP Per Capita almost doubling to about $2,700.
RenCap estimates that margins for the industry will peak in 2015/ 2016, underpinned by stable– to–strong pricing, a tight supply/demand balance and the operational leverage benefits from new plants coming online over the short to medium term.
“Our analysis suggests that, even after accounting for all capacity announcements and expansion plans, the likelihood of excess capacity remains low, particularly considering that none of the current players has yet begun exploiting the available regional export opportunities,” Mutooni said in the report.
“The combination of higher prices and newer, more efficient capacity points to growing sector profitability over the medium term, which we believe should increase the attractiveness of the sector to potential investors.”
The cumulative revenues of the four dominant cement makers (Dangote, Lafarge, Ashaka and Cement Company of Northern Nigeria, grew by 9.5 percent in the first quarter 2014 to N142 billion from N129.71 billion in the earlier period.
The firms are in the sweet spot of demand for the building commodity that shows no sign of abating soon.
The release of updated data of the Nigerian economy by the NBS showed that, construction grew by 14.2 percent in 2013 and 9.4 percent in 2012, with real estate growing by 12 percent and 5.6 percent in the same period, underpinning the expansion in the cement sector, which comprises 1 percent of GDP in 2013, but grew by 39 percent in 2013, and 14 percent in 2012.
Investors should buy Lafarge WAPCO, which has a target price of N138 per share, representing a 16 percent upside from current levels, said RenCap.
“The combination of continued operational improvements, significant capital investment plans and undemanding valuation makes Lafarge WAPCO our preferred play on the Nigerian cement sector. We remain positive on the outlook for DangCem, but believe most of its potential upside is already captured in the stock’s premium valuation metrics,” Mutooni said.
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