This article is an abridged version of the full article, which appeared in the November 2012 issue of World Cement. Subscribers can view the full article by logging in.
Those of you who had the opportunity to pick up a copy of the May 2012 issue of Africa Forbes would have seen a familiar face on the front cover: that of Aliko Dangote, CEO and Chairman of the Dangote Group of companies, which has its headquarters in Nigeria. Dangote has been on the Forbes rich list since 2008, and in March of this year he was named as the 76th richest man in the world. He has been instrumental in building Dangote Group into a multi-million dollar conglomerate from its origins as a small trading company in 1977. In addition to cement manufacturing, the Group has been involved in the food and the telecommunications industries. In April 2012 there was news that the Group would be investing US$7 billion in the power, petrochemical and mining industries. More recently, Dangote announced the sale of 63.4% of Dangote Flour Mills to the South African food company, Tiger Brands. The new 6 million tpa Ibese plant was inaugurated in February 2012, and during the opening ceremony, Aliko Dangote confirmed that work had already been scheduled to begin doubling the plant’s capacity to 12 million tpa.
Did Dangote feel that an increased local supply of cement would help to stabilise the market and bring about an eventual reduction in cement prices?
“The laws of supply and demand certainly apply here, and should begin to take effect as the cement supply stabilises. All the factors will be working towards bringing prices down because, with the increasing capacity, we are pumping more volume into the market. Cement manufacturing is a high fixed cost business. When you expand your volume, you have the ability to bring down your unit cost. In time, we should be able to lower our unit cost; in turn, this should translate to a stabilisation of prices, which must ultimately be shared with the customer. We expect cement prices, in real terms, to start coming down.
“Even now, that process has begun. If you look at the trends of ex-factory prices over the last two years, there has been hardly any change. Manufacturers have held their ex-factory prices at the same level across this period, and in the current Nigerian financial climate of increasing cost and high inflation, it is rare for the price of any commodity to remain static.
“The price at which we are selling cement today is the same price we were selling at in January 2008; there has not been a price increase in four and half years. At that time, we were selling at N1385, and the price of gas was US$1.50. In Ibese now, we are paying US$3.30. The price of low pour fuel oil (LPFO) was N20.83 per litre. Now, the price from the Nigerian National Petroleum Corporation (NNPC) is N107 per litre, more than five times the cost. Diesel is our major cost. In 2008, it was about N42 per litre, but now, it is about N160 per litre. The Naira was not devalued throughout 2008. In January of this year, though, the Naira’s exchange rate against the US$ was N113, whereas we are currently paying N160. We have been absorbing this increased cost with continuous reduction of our profit margin. Whilst we can continue to absorb this cost, we must allow others to survive in the market. For some of our competitors, profitability in the last quarter actually fell by as much as 48%. We also have to survive in the business ourselves. It seems to be the generally held belief in Nigeria that the price of cement will go down to N1000. If the factors listed above had remained the same we would have still needed to give a discount of N400. Key events since January 2008, though, have actually cost us more than N400. The devaluation of the Naira was one of them; the astronomical increase in the price of LPFO from N20.83 per litre to N107 per litre is another. Also, we buy our spare parts from abroad, as there is no spare parts market in our country, and this is another area where prices have gone up. Indeed, our target was N1000, but of course, we have no control over the exchange rate, or the cost of LPFO, and naturally equipment requires frequent replacement; none of it lasts forever. All of these factors affect the eventual price of cement. We will, of course, reduce prices should the aforementioned factors change. It is our desire to sell cement at a cheaper rate and we will keep working towards achieving this.”
A continental company
At present, the Dangote Group sees itself as a continental company with Africa as its home base. It does not entirely rule out investments in other parts of the world though.
“Our main area of focus will be Africa,” says Dangote. “We want to be a continental brand and we are aggressively investing in many African countries; to date we have a presence in fourteen. In some, we are building cement manufacturing plants, while in many other countries we are building import terminals and cement grinding plants. We will continue to expand our presence in Africa in order to consolidate our position as a leading African producer of cement.”
The Group is already operating in Ghana and is now considering Angola. It is also looking at investing in grinding plants, possibly in Gabon and Equatorial Guinea.
Dangote continues, “We have already started up a grinding plant in Cameroon, and we are close to commissioning our plant in Senegal. We are building plants in Zambia, Ethiopia, Tanzania, and the Republic of Congo. We also have a plant in South Africa, and are looking at the possibility of investment in Sudan and Egypt.”
A global major soon?
In a recent television interview, Aliko Dangote said that he expected the Group’s total cement capacity to be about 60 million tpa by 2014, which could place the company among the top eight cement players in the world. This would be a remarkable achievement just ten years after the Group entered the cement market. What other factors have enabled the Group to be so successful?
The Group prides itself on an excellent track record. As Dangote confirms, “We have made our mark by picking areas of comparative advantage and turning them into profitable businesses. We diversified from supplying products for backward integration, into manufacturing the same products. That strategy has worked really well in many areas, cement being one of them, and our decision-making process is very fast. Furthermore, we do not spare expense when paying for the best technology. This is our strength; we do not compromise on obtaining the best technology in any of the manufacturing businesses we are involved in.
“We also aim for very high-efficiency/low-cost operation. We like to build greenfield plants and in most of our cement manufacturing plants we employ state-of-the-art equipment. These are the biggest advantages we have over the competition. Most of them use old technologies, old plants, and have high operational costs. With our high-efficiency plants, our returns are very good and as a matter of policy, the revenue we generate is re-invested in new capacities. The fact that we are using our own money as capital reduces our financing costs as well. These measures ensure rapid progress and give us a competitive edge over the so-called ‘big players’.”
Fuels and power
Dangote reminds us that the cement production process is highly energy intensive. He confirms that energy costs in cement manufacture constitute almost 40% of the total cost, a large part of which is the cost of fuel. Nigeria’s cheapest and most available fuel is natural gas.
As Dangote says, “Our preference is to run our plants on natural gas but some plants are not close to the gas grid. In such plants, we have to consider either LPFO or coal. Coal is still not available in commercial quantities, but in spite of that, we have designed our plants with the flexibility to use gas, coal or LPFO. Our policy of flexibility puts us in the position of being able to make future decisions on fuel choice based around which is the most cost-effective for cement production.
Demand for cement
When asked about Nigeria’s current cement demand, Aliko Dangote replied, “Our view on the cement market is that housing construction absorbs the bulk of cement, but we are trying to encourage greater consumption in other areas, such as in concrete road construction. In our country, consumption per capita is about 125 kg per person. For a country with our level of development, it should be twice that. The way to increase our per capita consumption is to begin to create large concrete projects while continuing to increase the housing supply.”
Written by Paul Maxwell-Cook. This article is an abridged version of the full article, which appeared in the November 2012 issue of World Cement. Subscribers can view the full article by logging in.
Read the article online at: https://www.worldcement.com/africa-middle-east/29102012/cement_aliko_dangote_interview_nigeria_717/