December 13, 2019/Cordros Report
In this report, we discuss the outlook for the Nigerian Industrial Goods Sector, with a key focus on the Build Materials Companies (Cement producers). 2019 has been the most competitive year yet for Nigerian cement players, given the capacity expansion by the rising star, BUA cement, and the resurrection of WAPCO following the divestment from its South African entity (LSAH). Irrespective, we believe the Nigerian cement industry is big enough to accommodate three players. On our themes for 2020, we see (1) stronger domestic cement demand, (2) stable cement prices, even as players compete for market share, while (3) the land border closure will affect the export market for companies.
Cement Demand Outlook; How Much of An Opportunity?
We like that Nigeria’s present administration remains committed to bridging the infrastructure deficit in Nigeria. On that premise, we believe CAPEX outlay will be even stronger 2020 as the government prepares to reflate economic growth with an ambitious NGN10.6 trillion budget. The Buhari-led government earmarked NGN2.14 trillion for CAPEX spend in 2020 (excluding CAPEX components of statutory transfer). While we acknowledge the significant shortfall from the NGN2.93 trillion budgeted in the prior year, our optimistic view hangs solely on a higher implementation rate, given better revenue prospects. The President acknowledged that investing in critical infrastructure is a crucial component of the government’s fiscal strategy in 2020.
Cement Prices Should Be Stable in 2020
Following the consistent price erosion over 2019, we now expect cement prices to be stable amid the intensely competitive environment. We believe the new volumes which hit the market at the twilight of 2018, especially from BUA, have stabilised. Thus, the DANGCEM-led price increases announced in April 2019 should now fully reflect in players’ toplines over 2020, when we expect cement demand growth to be stronger. Accordingly, we expect average cement prices will rise by 1bp to NGN2,197/bag in 2020. Farther out, we hold a similar view for cement prices in 2021E-2024E. However, the risk to our prognosis remains the possibility of significant cost pressure occasioned by currency devaluation, which would force players to re-think their pricing strategies.