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Cost pressure shapes Nigerian industrial goods sector 2020 outlook

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TUE, DEC 24 2019-theG&BJournal- Significant cost pressure occasioned by currency devaluation, which would force players to re-think their cement pricing strategies will broadly influence the Nigeria Industrial Goods sector outlook in 2020, says Cordros Securities.

But cement prices are forecast to be stable amid the intensely competitive environment, demand growth will be stronger and average cement prices are expected to rise by 1bp to NGN2,197/bag in 2020.  In 2020, CAPEX outlay is forecast to be even stronger as the government prepares to reflate economic growth with its ambitious NGN10.6 trillion approved budget.

The President Muhammadu Buhari-led federal government earmarked NGN2.14 trillion 2020 (excluding CAPEX components of statutory transfer) for CAPEX spend in 2020.  The President acknowledged that investing in critical infrastructure is a crucial component of the government’s fiscal strategy in 2020.

Key capital spending allocations in the proposed 2020 budget, which is forecast to be heavy cement consuming projects, include; Works and Housing (NGN262 billion), Transportation (NGN123 billion) and Power (NGN127 billion).

Nigeria’s growing preference for concrete roads, given its better lease of life, also looks set to bolster cement demand.

‘’We believe the recently completed 28km Itori-Ibese road in Ogun State and the 43km long Obajana-Kabba road in Kogi State must have induced both the government and private sector to embrace cement-paved roads. Meanwhile, the 32km Apapa-Oshodi-Oworonshoki-Ojota road in Lagos State is also near completion,’’ Cordros noted.

Against the preceding, a slight legroom for Nigeria’s share of cement consumption in SSA is forecast to improve by 55bps to 18.7% in 2020, translating to a 4.1% y/y growth in cement demand to 23.3Mt, a 1.8x premium to GDP growth.

‘’A risk to our forecast remains a significant revenue shortage, which would cascade to lower than expected CAPEX implementation.’’

Cement sales began the year on a firm footing, with demand expanding by 7.1% y/y in Q1-19, owing to the better than expected January outing as the government ramp up CAPEX spend in a bid to appeal to the electorate, given the impending election.

Despite the election-induced slowdown in February, the Nigerian cement demand improved over 2019, with demand growth estimated to have been 4.9% y/y higher to 16.3Mt, a 2.5x premium to GDP growth. Amid the still depressed private demand, the improvement was mainly due to higher CAPEX outlay driven by the post-election ramp-up, especially in Q3. For evidence, as of August, the government has released NGN1.27 trillion in CAPEX, compared to the full-year budget of NGN2.93 trillion.

When annualised, this amounts to NGN1.90 trillion, equivalent to the implementation rate of 54%, a significant improvement to the implementation rate of c. 32.4% achieved in 2018 and 45.3% average in the last five years leading to 2018.

Notable projects in 2019 budget include (1) Mambila hydropower project (NGN1.02 billion), (2) Rehabilitation of railway tracks (NGN27.1 billion), (3) Federal national housing programme (NGN30.0 billion), and (4) Construction of Nnamdi Azikiwe Airport runway (NGN13.0 billion).

Meanwhile, on account of the prolonged 2019 general elections, together with an earlier than anticipated wet season in Nigeria, demand slowed significantly in Q2-19, shedding 1.8% y/y to 5.5Mt. Further afield, performance improved markedly in Q3-19 (+9.1% y/y) even as the combined impact of heavy rainfall in the period and land border closure, had put a cap on sales uptrend.

‘’To our mind, continued price discounting and aggressive sales promotions mainly drove the improvement. For evidence, DANGCEM’s management said the “Bag of Goodies” promotion, launched in July, helped drive strong double-digit volume growth in Nigeria, especially in August and September,’’ Cordros said.

On the other hand, cement prices stayed depressed on increased competition with price discounting of between 2% and 6% in Q1-19 alone. For instance, DANGCEM cut prices by 2.9% y/y in Nigeria, blaming an intensely competitive operating landscape and slowdown in sales due to the prolonged election period. Similarly, both WAPCO and CCNN followed suit, trimming prices by 4.2% y/y and 6.0% y/y, respectively.

According to Cordros, the move to ramp up market share was the underlying motive of the latter following its capacity expansion in the previous year.

Although sector players announced price increases in the succeeding quarter (e.g. DANGCEM: + NGN150/bag), implementation was a tall order as producers struggled to sustain market share in an intensely competitive setting. Thus, price discounting and aggressive promotional activities, partly offset the price increases announced over Q2-19 and Q3-19.

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