The upward pressure on cement prices has attracted attention this month, as the Nigerian government struggles to keep prices low enough to support the development of the construction industry.
Despite the economic slowdown, high demand from the construction industry and insufficient local supply have pushed cement prices upward over the past year. The price of a 50-kg cement bag rose from around N1200 ($8.14) in early 2007 to N2400 ($16.29) in early 2008, falling back towards N1600 ($10.72) at the end of 2008, in part due to the availability of imported cement.
Given the implications this has for the real estate market, the minister of commerce and industry, Achike Udenwa, has expressed the presidential intention to engineer a significant reduction in prices this year. "We will continue to work with cement producers but we cannot sit idle and watch the price of cement skyrocket," Udenwa told a meeting of cement producers at the start of April.
In an effort to curb cement price inflation, the federal government lifted its import ban and introduced an import licensing system in early 2008, granting an initial six licences to importers. A total of 13 licences have been attributed in all, to both cement companies and bulk cement importers. The aim was to keep cement prices on the Nigerian market at between N1000 ($6.77) and N1200 ($8.14) per 50-kg bag, allegedly on presidential instructions.
The move comes as the level of local production in Nigeria's cement supply mix has fallen over the past 20 years. Whereas local production accounted for 81% of the total supply (3.5m tonnes) in 1986, this ratio fell to 40% of total supply (2.3m tonnes) in 2000, according to the Cement Manufacturers Association of Nigeria (CMAN). The association, which represents companies controlling 80% of the market, now estimates that local production has rebounded slightly, accounting for over 50% of supply, but still significantly lower than before.
The overall market has been growing, according to the Ministry of Commerce and Industry, which estimates that Nigerian consumption totaled 16.5m tonnes in 2008 and is set to reach 18m tonnes in 2009, an annual increase of 10%. Of this, the government states that half of the supply (9m tonnes) is produced locally.
One of the drivers of demand has been the real estate market. Given the country's housing deficit, estimated at some 16m houses by the Ministry of Works, Housing and Urban Development, market growth shows no sign of slowing in the coming years.
"The supply of cement on the Nigerian market does not match the level of demand, which is continuing to grow," a senior manager at a cement production company, who asked to remain anonymous, told OBG. "We expect that over the medium term, the Nigerian per-capita annual consumption of cement will reach 150-200 kg."
Faced with such pressures, the government's measures have a lot of expectations riding on them. The import licensing has not yet delivered the full desired price effects, however, and the government has criticised the CMAN member companies for cartelising the market.
"The aim of encouraging importation was to supplement local production and bring down prices," Udenwa told a meeting of the CMAN. "This has not happened because cement producers control over 80% of the cement market, both locally and imported. The minor importers have no incentive to drop prices because the quantities they can import are not enough to force down prices."
Although the government's priority has been to allow imports to soften the price of cement as a way of supporting the development of the construction industry, the CMAN has called on an upward revision of import tariffs to support local production. Given the country's high power costs, manufacturers argue that their pricing is simply transparent and reflective of the high cost base. Furthermore, the devaluation of the Naira since November has affected import prices for all goods.
Existing producers are also expanding local production and importing cement to fill the gap in supply. Thus, according to figures from the Ministry of Commerce and Industry, Dangote Cement imported 3m tonnes of cement; Burham Flour Mills, 1.7m tonnes; Eagle Cement, 530,000; and Lafarge (through its subsidiary Atlas) imported 481,000. Meanwhile, new cement importers have emerged, such as Otedola Cement, Minaj Cement and Maholean Cement. On the production side, Lafarge Wapco, a subsidiary of the French multinational, is investing N70bn ($474.5m) in a second cement factory that will double existing productive capacity by adding an extra 2.2m tonnes. Construction of the Lakatabu factory, which started in Ewekoro, Ogun State, in February 2009, will be finalised by the second quarter of 2011. The company is also building a 90-MW independent power plant to allow both cement plants to be self-sufficient.
Similarly, the Dangote Group has invested $500m in the expansion of Obajana plant, operated by its Benue Cement Company, increasing its production capacity from 900,000 tonnes to 2m tonnes annually. Dangote has also announced an unspecified investment to further expand capacity to 3m tonnes a year.
Both local cement producers and the government are moving to bridge the shortfall in supply. Although prices have not yet fallen to the levels demanded by the federal government, the political will to reduce cement inflation is clear. Additionally, with added capacity, the government's wish to promote local production is likely to be realised over coming years, providing a substantial base to cover future demand.