Dangote moves to lower cement price

Dangote moves to lower cement price
02 June 2008

As part of a 28-month strategy aimed at increasing the volume of cement produced by Dangote Cement Limited locally and moving the country from an importer of the commodity to an exporter, the cement group has invested US$1.85bn in the construction of three new cement plants in Nigeria. This new investment will, according to the company’s projections, lead to a fall in the price of a bag of cement from the current N2000 to less than N1000 when it is completed.

In a related development, local cement producers have expressed worries that their investments may be jeopardised following moves by some companies to persuade the Federal Government to allow importation of bagged/branded 5 kg cement into the country.

Dangote’s US$1.85bn investment outlay which was effected through a confirmed letter of credit routed through GTBank Plc to J.P. Morgan, New York, last Friday, to an engineering consortium led by the Chinese firm – Sinoma International Engineering –  would see the total volume of cement produced by Dangote Cement rising to 26.5Mta by 2010.

Dangote Cement, from its plants at Obajana and Benue Cement Plc, currently produces 8Mta. The cement group, however, is planning to expand capacity from both plants to 9.5Mta by 2009.

Confirming the payment made by his company, the President of Dangote Group, Alhaji Aliko Dangote, said the US$1.85bn will be used for the expansion of the Obajana Cement plant in Kogi State to include a second train that will increase capacity to 12Mt.

While new plants will be constructed at Ibese and Shagamu, both in Ogun State, with installed capacities of 5.5Mta, respectively. He disclosed that with the 12Mt to be produced at Obajana, 5.5Mt each from Ibese and Shagamu and 3.5Mt from Benue Cement, will bring the total volume produced by Dangote Cement locally to 26.5Mt by 2010.

He said the aim of the cement group is to ensure the price of cement, which has peaked at N2000 a bag in spite of the provisional licences awarded 13 firms by the Federal Government to import bulk cement early this year, to less than N1000 per bag by the time the new plants start production in 2010.

Dangote indicated that the group’s goal is to flood the market with the commodity and ensure that the price not only drops, but it absorbs the extra capacity produced by the new plants.

“Right now the price has risen contrary to expectations that importation of bulk cement will bring down the price. So, our target is to force down the price in the next 28 months, and export extra capacity to neighbouring countries,” Dangote stated.

He further revealed that the contract for the construction of the new plants was signed last February during President Umaru Yar’Adua’s state visit to China.

“The contract was awarded on a turnkey basis to Sinoma International which is an engineering firm that will oversee the construction of the new plants and came into effect upon opening of the confirmed letter of credit which was backed by cash.

“Dangote Cement put up US$600m of the contract sum, while US$1.25bn was borrowed to make up the balance. The L/C was opened by J.P. Morgan, New York,” he explained.

Other members of the consortium include Loesche of Germany and Bedeschi, an Italian firm that will both be responsible for the manufacture and supply of the plants and equipment for the cement factories.

In compliance with the contract terms, the consortium, Dangote said was paid US$1bn in advance to commence work on the construction of the plants.

Dangote said: “The balance of US$850m will be disbursed as work progresses and the consortium meets the predetermined milestones specified under the contract.”

Speaking further on the cement group’s expansion strategy into Africa, Dangote said the US$1.85bn paid last Friday is just the first phase of the contract entered into with Sinoma International.

The second phase costing US$1.3bn will entail the construction of new plants in other African countries for which another letter of credit will be opened this month, he disclosed.

The countries to be covered by the expansion plan include Tanzania, the Democratic Republic of Congo, Senegal, Equitorial Guinea and Ethiopia.

A third phase will entail Dangote Cement setting up plants in North Africa in countries like Libya and Algeria. Dangote is by far the largest producer of cement in Nigeria, a dominance he intends to consolidate locally and on the African continent by spreading his footprint across the region.

By the time the second and third phases of the expansion plan is accomplished in 2011, Dangote Cement will be producing 60Mta in Nigeria and other African countries.

Construction industry analysts explained that Aliko Dangote has his sights on conquering Africa where he is conscious of the fact that huge infrastructure spends in the continent buoyed by high regional growth estimated at 5.5 per cent per annum (World Bank estimate) will push up demand for cement.

Elucidating on why the price of cement has not dropped in spite of the licenses awarded to companies to import bulk cement for one year, in the first instance, an importer stated that the price cannot fall because freight charges have risen as a result of high oil prices.

“Rising oil prices have naturally been transferred to freight charges because shippers use low pour fuel oil (LPFO) for their vessels, and its price, like all petroleum products, has gone up.

“So the ex-cargo price of bulk cement has risen just like all other imports. The problem is that the licensees completely underestimated the impact high oil prices can have on the price of their commodities.

“They rushed headlong to import bulk cement, thinking that could depress the price of cement which was around N1200 a bag in January this year. But by the time they went to import bulk cement, they discovered they could not sell at that price because freight charges had increased and are still rising.”

Meanwhile, local manufacturers may be in for tougher times, with over US$10bn investment endangered, if Ministry of Commerce and Industry succeeds in persuading President Umaru Musa Yar’Adua to approve the importation of cement in 50kg branded bags.

THISDAY investigation revealed that some companies including Minaj, BUA Group, Lababibi and Regan and Madewell are among those pencilled down to bring in four million metric tones of cement in 50 kg branded bags. But the Manufacturers Association of Nigeria (MAN) has said the move will hurt local investment in cement production and “is not in the best interest of the Nigerian economy”. THISDAY gathered that the move is designed to be a further intervention by government to relieve the supply pressure that has resulted in the hiked cement prices in the country.

In January 2008, President Umaru Musa Yar’Adua lifted the ban on the importation of bulk cement into the country. Importation of bagged cement remained banned, and only companies with actual investments or ongoing investments were allowed to import bulk cement to supplement their production as well as encourage local production of the product.

The lifting of the ban, according to the government, was expected to bridge the deficit of 11.5Mt in the supply of cement, which had been recurrent in the industry in the last few years, and crash the surging prices. But the reality in the market is beginning to cast doubts on government’s effort. The annual demand for cement is estimated at about 18Mt.

Minister of Commerce and Industry, Chief Charles Ugwuh, had said: "Local operators can only supply between 6 and 6.5Mt of cement leaving the deficit of 11.5Mt. It was based on this that the President now wrote and gave approval and a guideline on what we should do and what the stakeholders and business group should do in this matter."

While maintaining that the decision of government was aimed at rejuvenating the cement industry, the minister also said the move would go a long way to alleviate the suffering of consumers who pay through their noses for the cement, stabilise price and supply of cement as well as encourage investors.

In March, the Federal Government granted 13 licensed companies an extension in the concession to import bulk cement in order to curtail the escalating prices.

Although the ministry of commerce and industry said importation of bagged cement remained banned, it planned to issue licences to some companies it referred to as bulk users in the construction industry to import cement in “jumbo bags”.

The minister attributed the rise in demand for cement to increase in construction activities in Abuja and Lagos areas. President of the MAN, Alhaji Bashir Borodo, who gave the association’s position in a telephone interview with THISDAY yesterday, said the planned importation of 50kg bagged cement will destroy huge investments that have gone into local production of cement.

“Frankly, we believe that if local cement manufacturers are given enough incentives they can produce enough cement to meet local needs at very affordable prices. So, we think this plan to import cement in 50kg bags is retrogressive and not in the long term interest of the economy,” Borodo said.

The MAN president explained that if a railway system is built to link Obajana to Abuja, it will drive the price of the product down by at least N600 in the Federal Capital Territory.

He said the other area where cement manufacturers require major incentives was power supply. If these incentives were provided, he added, the six local manufacturers of cement in the country will adequately meet local needs for the product. Borodo warned that this move apart from threatening the over US$10bn investment that has gone into local cement manufacturing, could also lead to port congestion and a situation where ships filled with cement will jam the ports and cripple other sectors of the economy, like the “Cement Amanda” of the 1970s.

“Although the ministry consulted stakeholders about five months ago when it first muted the idea of lifting the ban on cement importation, but the agreement at the time was for only bulk cement to be allowed into the country. Unfortunately, they want to open everything up and allow everything in to destroy local effort,” he said.

Published under Cement News