Cement Production: Ending the cycle of scarcity

Lafarge Pakistan Cement 

 Recently, the Federal Government announced its preparedness to become self sufficient in cement production as manufacturers are expected to begin production in their respective expansion projects. While this has received applause, Nigerians are on the lookout for cheaper product, writes Alexander Chiejina

If policy pronouncements alone could translate into good governance, the present administration would have been riding on high public approval rating. One of such pronouncements is the recent promise by President Goodluck Jonathan to stop the importation of cement into the country by the first quarter of 2012.

This statement is in several quarters as a move towards making the nation self-sufficient in cement production for export to countries within the West African sub region, given the incentives in place to encourage trading and the African continent at large.

With worldwide cement consumption projected to reach a record 3859 metric tonnes by 2012, China dominates world cement statistics, results show consuming more than a third of global output – or 1,851 million tonnes - in 2010, almost double 2004 levels. India, the closest rival to China for economic growth was the second-largest consumer at 212 metric tonnes, with the United States, the third-largest consumer, saw demand fall down to 69 metric tonnes.

Given the tremendous growth in the nation’s cement industry over the years, demand for and consumption of cement has continued to increase. As government remains the largest consumer of cement in the country, the frequency of road and bridge reconstruction as well as rehabilitation of social infrastructure shows government's continued patronage of the industry despite the widening demand-supply gap which exists.

No doubt, the sector has the potential to contribute to the larger economy by virtue of the industry being labour intensive, a major employer of labour-both skilled and unskilled, and a source of Foreign Direct Investment.

Through the construction, renovation and rehabilitation of major roads, bridges, networks and public infrastructure, the cement industry plays a major role in overall economic development and enhancement of social welfare.

With efforts by cement firms to boost cement production, industry analysts, dealers and end-users are upbeat that a hitherto high cost of cement that customarily comes as an outcome of scarcity will reduce almost to a barest minimum even as power consumption which takes about 45 percent of the production chain, Liquefied Pour Fuel Oil (LPFO), an essential raw material in cement production, effective transport system etc. pose great danger to government’s plan to make the nation sufficient in cement production.

Speaking to BusinessDay, Joseph Makoju, Chairman, Cement Manufacturers Association of Nigeria (CMAN) revealed that manufacturers do not expect less that 60 percent performance from most of the new plants in 2012.

 “Investments in the industry are ongoing and if the government continues with the strict implementation of the backward integration policy, our expectation is that more new entrants will come into the business of cement manufacturing and the present tempo of growth in the cement industry will be sustained.

“Don’t forget that late March 2011, rise in the price of cement directly related to an increase in the cost of haulage. As a result, builders had challenge purchasing the product, thereby affecting social housing projects. Also, cement manufacturers provide trucks to convey their goods to designated markets. While depreciation sets in faster on the trucks and repair works, these costs are transferred to the final consumer of cement,” Makoju revealed.

Impact of government policies

A cement production plant

Through recent policies, the government demonstrated its support for the rapid investments seen in the nation’s cement industry. As an industry with very huge capital outlay, the nation’s cement industry is highly regulated.

Following the re-introduction of backward integration in the sector during President Obasanjo‟s administration, government had since then paid close attention to investments in the sector, putting various incentives in place to protect the industry and encourage potential investments in cement production.

In line with this policy, significant investments in the cement industry have culminated with the addition of three cement plants (Dangote Cement plants at Obajana and Gboko- former BCC-plant; Holcim and Flour Mill’s UNICEM plant)

However, in a bid to protect local manufacturers at the expense of cement importers, the FG re-introduced policies such as increase in duties on imported cement, cancellation of all existing unutilised import licenses issued between 2002 and 2008 as well as annual review of local production to ascertain the need and extent of imports

Meanwhile, existing government incentives available to investors in the industry includes removal of restrictions on the importation of gypsum, reduction of the duration for obtaining exploratory and mining licenses to 18 and 6 months respectively, approval of tax deductible incentives on investments in system conversion to coal, approval of concessional pricing and special allocation of LPFO to the sector, and delinking the price of gas for cement production from the price of LPFO.

Apart from policies which are directly linked to the cement sector, the federal government through its Nigerian Investment Promotion Commission (NIPC) encouraged new investments in the sector through Pioneer Tax Status from which players like Dangote Cement and Unicem which invested in new capacities through brown-field and green-field projects are benefitting.

Apart from the pioneer tax status, tax relief for Research and Development is also available for industry players who engage in active research and development for the improvement of their industrial processes.

Meanwhile, most companies in the cement industry however are yet to exploit this tax relief incentive as little Research and Development activities are carried out locally. Cement companies like Lafarge WAPCO and Ashaka mostly rely on the Research and Development carried out at the parent (Lafarge) level.

The cement industry is also poised to benefit from government’s export policies, especially those relating to free trade within the ECOWAS region. With the indication that cement export will be feasible in the medium term, players are poised to benefit from ECOWAS incentives on exports to West African countries.

Some of these incentives include manufacture-in-bond scheme, export expansion grant (EEG) scheme, trade liberalisation scheme of ECOWAS and Nigeria Export Processing Zones (Free Zone Law).

While Nigeria is making giant strides towards reducing its reliance on imported cement, industry experts are of the opinion that a cheaper and more reliable source of fuel is also needed as part of the long-term solution to bringing down local cement prices as this problem extends to all parts of the industrial sector. According to them, focusing on lowering energy costs and improving logistics infrastructure would better sustain the nation’s economic growth.

Survival of the construction industry

Many Nigerians would have expected that by now the price of cement should be below N1, 000 going by efforts of Government to liberate the sub-sector as well as pronouncements by major cement manufacturers in the country.

While the nation aims to become self-sufficiency in cement production by first quarter of 2012, contrary to expectations that cement prices would crash, the cost of the product is still on the high side. The product rose from N1, 500 to N1, 800 early this year and is now being sold for N2, 000 depending on the area of purchase.

Damilola Adedeji, a building contractor said he had to put most of his building projects on hold pending when the price of cement, which is essential in building construction, would abate for him not to run at a loss. Adedeji is however optimistic that the intervention of President Goodluck Jonathan would help lower the cost of cement over a period of time.

BusinessDay gathered that reasons for rise in the price of cement includes shortfall in the supply of Low Pour Fuel Oil (LPFO) thereby to high cost in the transportation of cement. Many industry watchers have argued that until the cost of production reduces, goods produced in the country would remain on the high side.

Commenting on the issue, Jide Mike, Director-General, Manufacturers Association of Nigeria (MAN), disclosed that the price of cement may remain high due to the cost of power, which accounts for half of production cost.

"Your input will determine your output because you still want to remain in business. You cannot say because 

you want cement price to go down; therefore, you run at a loss. No doubt, the price of cement could fall if the country had a stable power supply as obtained in other countries," Mike revealed.

Meanwhile, one major issue that shook the housing sector last year was the high cost of cement, which is one of the basic raw materials used for construction. Right from the beginning of year 2011, the price of 50kg bag of cement rose from N1, 500 to about N1, 900 in January. It however continuously rose to between N2, 400 and N2, 600 per bag in April, 2011, a trend made it difficult for developers and intending home owners to properly carry-on their project execution.

The situation then was almost getting out of hand, as the masses lamented over the high cost of cement, as no reason was given for the skyrocketing price up until the federal government’s intervention through the Economic Management Team.

As a matter of fact, the constituted economic team came on board when cement price had risen to about N3, 000 per bag in parts of Lagos and was so alarming that construction chiefs called on the economic team to take the issue of production and distribution seriously.

The concern then was to tackle the fluctuations in cement prices, as they were mandated to crash the prices so as to make the product available and affordable, thereby boosting the construction industry.

Reacting to the development, Bode Adedeji, President, Nigerian Institute of Estate Surveyors and Valuers (NIESV) disclosed that the escalating price of cement compounded the myriads of challenges facing the housing and construction sector of the economy.

Adedeji however noted that there is need to avoid crisis in the sector as persistent crises will compound the unemployment problem the country currently bedeviling the nation. Although the economic team impacted on the prices of cement at the first instance, as the price of cement reduced to pave way for meaningful development in the building sector, the effort did not sustained as prices began to change marginally.

As the nation remains faced with dearth of housing for its teeming population, Nya-Etok Ezekiel, Chairman, Social Housing Advocacy Group (SHAG) stated that the group resolves to champion the realization of delivering one million housing unit annually in order to increase the housing stock where the low income group will be the specific target group.

While declaring support for sustained investment in mass housing, Nya-Etok Ezekiel maintained that housing development is the bedrock of the economy of developed nations, which contribute between 30 to 70 per cent of their Gross Domestic Product (GDP).

It is believed that these challenges have given room to programmes and decisions among various groups and government agencies, aimed at advancing the sector even as industry experts anticipate things to get better this year.

Industry Challenges

Perhaps one of the most visible challenges in the Nigerian cement industry is the lack of required resources to meet the ever increasing demand for cement. Cement consumption though still relatively low, has increased phenomenally over the last few years with local supply not being able to meet up. Government in its attempt to boost local production placed a ban on importation of cement in 2001 but later in 2007 lifted the ban due to the inability to meet its objectives.

Another major challenge facing manufacturing companies generally is the issue of unstable supply of power. Being a capital intensive sector which to a large extent relies on the use of heavy duty automated machinery, constant electricity remains a critical success factor. However, due to the inconsistency and/or unavailability of the state generated power supply, companies are forced to rely on alternative sources of power generation which invariably imposes high overhead costs and reduces margins.

Meanwhile, the cost of establishing a cement company is extremely high. This is because the machinery involved, cost of installing a new plant, etc. is enormous such that aspiring cement manufacturers cannot gain entry into the industry. However, in addition to the high initial costs, the cost of maintaining the heavy duty equipment used for the normal day-to-day activities makes it difficult for existing players to remain profitable.

For David Iweta, a cement manufacturer, “Due to the nature and composition of cement which is quite heavy, the costs of distributing the product to the final consumer is relatively high. As such most manufacturing companies are located near their customers so as to reduce the burden of transporting large sacks of cement across long distances. This explains the reason why most producers are regional players who prefer to operate within a specified coverage area.”

Milestones

Alhaji Aliko Dangote, President, Dangote Group

 Lafarge has recently commissioned its new Lakatabu plant at Ewekoro in Ogun State. Lakatabu, which cost a whopping N79 billion ($526.67 million), will add extra 2.2 million metric tonnes of cement per annum to the company's Elephant plant which has been producing two million metric tonnes of cement annually. What this translates to is that Lafarge's production capacity will double to 4.2 million metric tonnes annually.

Meanwhile, with the addition of six million metric tonnes of cement to be generated from the new Ibese Cement Plant in Ogun State, Dangote Group is expected to provide 70 percent of the total target of 20 million metric tons from all cement producing companies in Nigeria.

Conducting the Ogun State governor Ibikunle Amosun round the six million tons per annum capacity facility recently, Aliko Dangote, President of Dangote Group, revealed that the Ibese new cement plant is expected to provide over 7,000 jobs.

BusinessDay gathered that the firm’s expansion project in Obajana, Kogi State and the construction of Ibese new cement plant, which cost $620 million (N99.22 billion), would inject about 17 million tons into the market annually even as it has already commenced the construction of some facilities to actualise the export dream.

According to Dangote “The national consumption hovers around 18 million tons per annum and by the first quarter of next year, all the cement companies in the country would have been producing up to 20million tons per annum with Dangote Cement accounting for over 70 per cent of it.”

On its part, BUA Group has spent $300 million in acquiring 87 percent stake in Edo Cement Company (ECC) with a view to increasing the production capacity of the firm to two million metric tonnes before the end of 2011. The deal by BUA is aimed at upgrading and modernizing ECC's production processes to manufacture two million metric tonnes annually on top of the 350,000 metric tonnes.

Furthermore, Kebbi State Government has entered into partnership with Brewtech Engineering Company, a German engineering firm for the take-off of Equity Cement Company (ECC) in the state. The deal is expected to manufacture an initial 300 metric tonnes of cement on a daily basis or 109, 500 metric tonnes annually.

Signing the N1.8 billion deal on behalf of the state government in Birnin Kebbi recently, Sani Rukubulo, Commissioner for Commerce revealed that Kebbi state would own 25 percent equity stake in the company located at Katanga in Maiyama Local Government.

Meanwhile, other players in the nation’s cement industry include UNICEM Calabar, Cement Company of Northern Nigeria (CCNN), Sokoto and DURECHEM, Ogun State.

These aggressive investments, in hundreds of billions of Naira, are in line with Federal Government's resolve to ensure that the country is not only self-sufficient in cement but also becomes a net exporter of cement.

With manufacturing companies are faced with the challenge of unstable power supply, Lafarge had commissioned a N23 billion independent power plant (IPP) capable of generating 90 megawatts of electricity. The plant is situated close to Lakatabu. The firm, in conjunction with Nigerian Railway Corporation (NRC), has also commenced rail haulage of its product. The initiative, in its first phase, is expected to help distribute cement to Ibadan.

Aside this, Dangote has in place independent power plants (IPPs) at all its cement plants in Ibeshe, Gboko and Obajana to help address the power supply currently been experienced in the country.