By Charles Ike-Okoh
MON 24 MAY, 2021-theGBJournal- Dangote Cement’s talk about its export strategy should inspire confidence for shareholders and stakeholders equally.
But in fact when you scratch the surface the picture isn’t as rosy, the perils are masked and the demand may not exist as extrapolated by the cement giant.
There are doubts by analysts about key export markets and their very low utilization rates, harsh industry dynamics seemed overlooked, there are no game-changing demand catalysts out there and very hard competition exists throughout the continent and even from within (BUA looking at exports to Niger and Cameroon).
Dangote Cement’s argument is that 15 countries in the Economic Community of West African States (ECOWAS), especially those on the coast, are obligatory importers of cement, reliant mainly on imports from outside ECOWAS.
The company also talked up Nigeria’s endowment with high quality limestone, which is an irreplaceable and critical ingredient in the cement production process. These deposits are centred in the southern parts of the country, close to the demand markets (In 2017, the south-south, Lagos, south-east and south west regions accounted for 70% of industry demand’’-EFG Hermes estimate).
The multi-billion dollar company (revenues in excess of US$2.5 billion) exported its maiden clinker to Senegal in June 2020. Total exported clinker was 197kt in 2020 when Apapa terminal was used seven times. In 2021, the Onne terminal will be operational and Dangote management plan is to utilise Onne as frequently as Apapa.
Frontier Equity Research firm, EFG Hermes analysts said in a note seen by theGBJournal, that ‘’the export strategy will take time’’ after they queried Dangote Cement management severally about its clinker capacity in Nigeria.
Dangote’s clinker factor provided is estimated at c74.1%, and EFG Hermes doesn’t doubt the figure because, Nigeria is largely a 42.5 grade cement market, and based on this, EFG Hermes estimates that, Dangote Cement produced c11.6mt in clinker (excl. the 197kt exported) in 2020.
‘’Assuming full utilisation of its name plate grinding capacity (32.25mtpa), it suggests c23.8mt in clinker would be needed. We believe the operating grinding capacity is 28.25mtpa, as Gboko (4mtpa) remains largely mothballed, implying clinker needs of c20.9mt if operating at full throttle,’’ says EFG Hermes.
Based on the above, EFG Hermes believes Dangote Cement’s clinker production capacity in Nigeria is capped at c20mtpa.
Though sizeable, it is important to note c11.6mt clinker was needed in 2020 to produce 15.7mt of cement volume in Nigeria. This infers probable export clinker volume of c8.4mtpa, if run at full capacity.
‘’Unfortunately, there is no detailed information on clinker capacity utilisation rate, but management guide towards targeting full operation supported by this export strategy,’’ the Frontier Research firm said adding, ‘’though we believe its clinker capacity operation will increase, we think the bulk of this will be for the Nigerian market (large domestic demand expected to grow at 2.6% CAGR for 2020-25e). Also, the exported clinker is sold to its plants in West Africa (initially, Senegal and Cameroon) and therefore, we think clinker sales to third parties are still a long way off.’’
Moreover, Dangote Cement’s export strategy was not a new initiative for the market, as its regional competitors started exporting clinker as early as 2015. For this reason, analysts find it hard to pinpoint Dangote Cement’s competitive advantage, except for its economies of scale in Nigeria.
In terms of ECOWAS cement industry, EFG Hermes calculated installed capacity was 97.75mtpa (51.9% in Nigeria) and demand of 54.25mt (48.1% from Nigeria) implying an utilisation rate of 54.7% in 2020. Excess capacity was computed to be 44.5% in 2020.
‘’With increased capacity build, especially in Nigeria, we do not expect to see any real change in the dynamics regionally (avg. 41.7% in excess capacity over 2021-25e). Even excluding Nigeria, we compute excess capacity of 31% avg. (2021-25e), thus concluding there is little need for new capacity, except for investing in newer technologies.’’
Dangote Cement message is also around its trading within the ECOWAS region where they think they are able ‘’to offer a product that is free of import duties, compared to the non-ECOWAS products the region currently imports.’’
Through the ECOWAS Trade Liberalisation Scheme (ETLS), the region should operate as a free trade area with duty free access for originating goods to member markets. But that is mostly not the case.
According to EFG Hermes: ‘’ Though noble, this is difficult to implement as highlighted in the European Centre for Development Policy Management (ECDPM) report that concludes “confusion around these regulations and weak policy implementation, a regional market for cement seems far off”.
This is underscored across different member states where cement import bans (even from member states) or similar regulations were enacted, for instance in Nigeria and Ghana, that went contrary to the ETLS.
Besides, some form of pushback from member states, in the near term, as a means to protect their own budding domestic markets, is expected.
In terms of common external tariff (CET) for cement products from outside the region, it is understood the ECOWAS CET that came into effect in 2017 is 35% on cement, 25% on clinker and 20% on limestone, with VAT added.
In terms of ECOWAS cement industry, calculated installed capacity was 97.75mtpa (51.9% in Nigeria) and demand of 54.25mt (48.1% from Nigeria) implying an utilisation rate of 54.7% in 2020.
Furthermore, excess capacity estimate is 44.5% in 2020. With increased capacity build, especially in Nigeria, nobody expect to see any real change in the dynamics regionally (avg. 41.7% in excess capacity over 2021-25e). Even excluding Nigeria, we compute excess capacity of 31% avg. (2021-25e), thus concluding there is little need for new capacity, except for investing in newer technologies.
In terms of competition within the continent, Morocco and Algeria present a strong challenge through excess cement capacity – c44.2% in 2020 – and clinker exports) to the West Africa region.
The North Africa region made up of six countries with 93 cement plants have an aggregate installed capacity of c178mtpa and c99mt in demand in 2020 (using EFG Hermes’ calculations).
This region has abundant limestone deposits and excess clinker capacity with only 7 grinding units (7.5% of the aggregate) with the majority (6 grinders) located in southern Morocco (aka Western Sahara, a disputed region).
These are some of the risks and uncertainties that could make investors nervous that Dangote Cement, after a history of bold expansion drive, may have to rethink the gamble this time.