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The Nigerian cement sector have been projected for revenue boost in the second half of 2024, driven by a surge in public sector demand and government-backed infrastructure projects. However, according to a recent report by CardinalStone Research, persistent cost pressures and foreign exchange volatility could dampen the positive momentum, impacting the performance of the broader Industrial Goods Index on the Nigerian Exchange (NGX).
The report indicates that the outlook for the cement industry is largely positive on the back of the Federal Government’s capital expenditure drive, which includes a N10 trillion allocation in the 2024 budget and an additional N6.2 trillion supplementary budget. This strong government spending, channeled through initiatives such as the Renewed Hope Infrastructure Development Fund (RHIDF), is expected to drive cement demand and subsequently bolster the Industrial Goods Index which tracks the sector’s performance on the NGX with three leading players namely Dangote Cement, BUA Cement, and Lafarge Africa.
“The cement sector’s revenue outlook is skewed to the upside in H2’24, driven primarily by public sector demand through large-scale infrastructure projects,” CardinalStone stated. However, while the sector’s topline growth could support a potential uplift in the index, the report highlights significant headwinds that may limit profitability and investor sentiment. Persistent energy cost pressures, FX losses, and a reversion to higher effective tax rates are expected to weigh heavily on the sector, threatening to drag down the overall Industrial Goods Index.
Cost pressures and FX volatility impact
“Rising production costs and FX losses are major challenges for the sector, significantly undermining profitability despite higher pricing,” analysts stated. The average price of a 50kg bag of cement has remained elevated, retailing for as much as N15,000 in early 2024, even though the federal government and industry players had agreed on a reduction. However, persistent energy cost inflation, which saw diesel prices surge by 79.3 per cent year-on-year, has exacerbated the cost burden on cement manufacturers, contributing to a jump in energy-related production expenses to approximately 48.0 per cent of total costs.
“The price of Automotive Gas Oil (AGO) surged by 79.3 per cent year-on-year, averaging N1,462.98 per litre in H1’24. This has put immense pressure on margins, contributing to a sector-wide decline in profitability. The industry average gross and EBITDA margins dropped to 44.2 per cent and 30.5 per cent, respectively, in H1’24, down from 53.3 per cent and 41.7 per cent in H1’23,” the report noted, signaling potential downside risks for the Industrial Goods Index.
Furthermore, foreign exchange volatility has been a major source of concern, with the domestic currency depreciating about 39.74 per at the official window in H1’24. This currency weakness resulted in N269.19 billion in foreign exchange losses for the sector’s leading players, impacting overall profitability. Given the cement industry’s significant FX exposure through foreign-denominated loans and payables, continued naira depreciation could further erode earnings, potentially dragging down the NGX’s Industrial Goods Index in the coming months.
Increased tax burden
Another factor likely to impact the sector’s contribution to the NGX Industrial Goods Index is the reversion to higher effective tax rates following the expiration of pioneer tax incentives across multiple cement plants.
“The average industry tax rate jumped by 12 percentage points to 28.96 per cent in H1’24,” the report stated, adding that companies such as Dangote Cement and Lafarge Africa will no longer benefit from pioneer status tax reliefs, which had previously supported net earnings. This increased tax burden is expected to weigh on bottom-line profitability for cement manufacturers, thereby creating a drag on the Industrial Goods Index, which could see slower growth despite robust revenue projections.
Infrastructure projects to offer hope for short-term stability
Despite these challenges, the cement sector’s alignment with the government’s infrastructure drive could sustain its positive influence on the index in the short to medium term. Key projects like the Lagos-Calabar Coastal Road, the Abuja-Kano Expressway, and the second Niger Bridge, all scheduled for completion by 2024, are expected to drive cement consumption. This robust demand, coupled with product innovations like Lafarge Africa’s waterproof “Water Shield” cement, may mitigate some seasonal slowdowns and maintain stable sales volumes.
With the total industry capacity projected to rise to 62.75 million metric tonnes (MMT), up from 57.0 MMT in 2023, CardinalStone estimates a sector-wide capacity utilization rate of 51.3 per cent for FY’24, an improvement from 49.4 per cent in the previous year. This enhanced production outlook, if sustained, could provide a buffer against cost-related setbacks and lend support to the broader Industrial Goods Index.
Outlook for NGX’s Industrial Goods Index: cautious optimism
For the Industrial Goods Index, which has been closely tied to the performance of large cement manufacturers, these mixed signals could result in heightened volatility.
“Without a significant reduction in energy costs or stabilization of the naira, the sector’s earnings could remain constrained, limiting its positive contribution to the index,” CardinalStone warned. Investors are advised to monitor macroeconomic developments closely, as any major shifts in government policies or energy prices could have far-reaching impacts on the Industrial Goods Index and broader market sentiment.
