February 10, 2023/CSL Research
The cement sector remained resilient in 2022 and this was reflected in its 4.14% y/y GDP growth in Q3 2022. The output performance was the ninth consecutive quarterly real growth since Q2 2020, during the peak of the coronavirus pandemic. Output growth in the cement manufacturing sector can be attributed to persistent negative low real interest rates, which drives the demand for alternative assets including real estate. The construction sector saw a real output growth of 5.52% yoy in Q3 2022, driven by increased investments in infrastructural projects by the national and sub-national government.
Our outlook for the cement sector is mildly positive in 2023. Nigeria’s increasing population and high urbanization growth are factors that are expected to drive increased activities in the real estate sector. We also expect the use of tax credits to encourage the private sector to partake in road building. We note an increase in CAPEX expenditure in the 2023 budget which
could drive growth in the sector. Based on the 2023 fiscal plan, an estimated N6.4trn is earmarked for capex. However, we note that if historical patterns are considered, the implementation rate could be much lower at c.30%-40% . With the presidential elections due in February 2023 and less than six months in office, the Buhari administration will likely look to solidify its legacy by investing in capital projects. This is expected to boost the profitability of the cement industry players.
However, with high oil prices, energy costs might cut profitability associated with higher activity levels. The elections could also distract governance activities, as delays in policy implementation are expected during any transition period. The current volatility and uncertainty of the world economy could pressure the Central Bank of Nigeria (CBN ) to continue to raise rates and this might impact cost of funds and discourage private sector participation. Increased funding costs may also erode profitability of the players in the sector.
For the listed players, energy disruptions faced in 2022 put a cap on production capacity, which led to higher operating costs notably haulage costs. Inflationary pressures negatively impacted revenue growth due to higher operating expenses. In 2023, topline growth for the cement players is expected to be driven by elevated prices and volumes. We see volume
growth increasing in 2023 based on the expectation that several headwinds faced in 2022 e.g energy disruptions should normalize. We expect price increases to continue to contribute to topline growth in 2023. We note that the players in the cement industry have a pricing power (although at various degrees among the industry players). Therefore, there might be another phase of price increases in 2023 – albeit at a moderate pace and this is expected to continue to support topline growth. BUA Cement’s agreement with the IFC to fund additional lines will also likely increase their total volume capacity.
