Thursday, August 28, 2014

Dangote 1: Lafarge: 0

Standard Organization of Nigeria’s change of all-purpose cement grade from 32.5 to 42.5 is killing a fly with a sledgehammer. The cement war between Nigeria’s major manufacturers (LafargeWAPCO and Dangote) crystallized when the House of Representatives and SON called it in favour of Dangote. In a economic competition that is profit driven and has no benefits for consumers of cement (in terms of significant price drop) this intervention is unsavory and sends foreign investors the message that Nigeria is protectionist in a circuitous manner
Cement importers and West African Portland Cement Plc. (WAPCO, established 1959), which transitioned to Lafarge/ WAPCO after a takeover by Lafarge SA in 2001 dominated Nigeria’s cement industry. WAPCO and Cement importers set prices for cement. For a large market like Nigeria, business was lucrative for WAPCO in spite of its limited production volume (4.5 million metric tonnes annually) and high energy costs – especially as the facilities lacked gas pipelines. The importers even had higher profit margins, as the cost of importing is less than production cost. By  2012, there was a glut of cement and cement importation was banned in 2013. 

Few points to note:
·         WAPCO was profitable because of the 32.5 cement grade that it produced. Cement is produced limestone rock, chalk, shale, or clay and additives such as Pozzolana, fly ash (industrial waste) and limestone. Nigeria has limestone in industrial quantities and is the preferred additive for manufacturers.
·         There are 4 grades of cement- masonry cement which is used for plastering, 32.5 cement which was all purpose and up till May 2014 was acceptable in Nigeria for constructing commercial and residential buildings.  Most buildings such as Cocoa House, my office, my house and your house- if you live in Nigeria- were built with 32.5 cement grade. 42.5 grade is used for bridges and heavy construction while 52.5 grade is used in countries like the UK and US because of their weather. The difference in all these grades is the proportion of additives i.e. limestone used in the production. 32.5 have more additives than 42.5. Currently, both grades are produced by cement manufactures in Nigeria in different quantities with Lafarge producing more of the 32.5 grade because of its capability.
·         Dangote supposedly became a player in the cement industry due to influence by the Obasanjo administration when it pursued a policy to encourage cement manufacture rather than importation considering that Nigeria has requisite materials to produce cement. In 2000s, Dangote acquired a new production facility in Obajana with a capacity of 10 million metric tonnes. Earlier this year, another facility with similar capacity was commissioned at Ibese. Also, in 2013, production at the outdated facility at Gboko was discontinued
With Nigeria having 2 major players competing for cement market share one will think that both manufacturers would produce the 32.5 and compete for buyers. However, it will be unprofitable for Dangote cement  to produce 32.5  because its facilities will be underutilized and there will be no economies of scale.    Like eggs, the amount of energy used to boil 1 egg will boil 10 eggs so it is more efficient to boil 10 eggs. For Dangote cement, it is more profitable and efficient to produce a higher grade of cement than "cooperate" and produce the same grade of cement with its competitors. According to reports, it costs Dangote $3 to produce a 50Kg bag of cement sold at $9.
 Without the government’s regulation, it will have been a survival of the fittest contest between Dangote and LafargeWAPCO. Rather than let the markets and consumer preferences decide, spurious associations and claims were made blaming the occurrence of building collapse on grade of cement. If a building collapses, it is likely that substandard materials were used. It is unfortunate that the government was partisan in this issue and made decisions on the partisanship. Also, the government should have plainly said it is adopting a protectionist policy in Nigeria's cement industry. Countries protect certain industries and no one blames them for it. This deception connotes that Nigeria is not a fair playing ground and sends a wrong message to the investors we seek to attract. There is absolutely no need for the deception. The appearance of partisanship in this matter is unnecessary as both companies are moving on from just competing for the Nigerian market to Africa's market. Lafarge recently announced a merger of her Nigeria and South African units, whilst Dangote cement has also shown interests in markets in Uganda and other parts of Africa. In a purely economic-business interest matter, the companies will survive and still make their profits. Question is do we have government that will vigorously pursue the interests of her people as it protects the interests of business allies?

update 1: Dangote cement recently launch 32.5 grade cement.
update 2: Earlier in November, Dangote slashed the price of its cement to NGN 1000. I am with  a Sola Salako who  wrote below
“I hear Dangote just singlehandedly, crashed the price of cement to N1,000 from N1,700! Obviously, this is another move in the attempt to stifle competition coming on the heels of getting SON to re-grade cement classification in its favour via political patronage.While this seems like a benefit for consumers in the short term, I fear it is very inimical to growth in that sector in the long term. The few competing brands may eventually close down if they don’t survive the price war after emerging bruised from the pseudo classification battle. More unemployment looms…Just as Dangote has the singular power to determine pricing downwards, who will challenge him when he pushes price to N3,000 after he has successfully run competition out of the market? This is akin to a rat nibbling away at your feet and blowing soothing air so you don’t feel it…until it hits blood!Nothing to rejoice about here if we are long term oriented people, unfortunately, Nigerians are not, so….”

Nigeria has been plagued with a leadership that thinks her citizens are incapable of basic comprehension and thinking skills. This thought pattern has permitted various officials to make incredible claims and get away with such statements. The incredulity continues. On the13th of August, the Federal Ministry sent a circular (below) announcing the sack of resident doctors. Less than a week after, the minister of health boldly claimed that no doctors were sacked. Seriously!

From the airports to offices, everyone is on an Ebola alert. You see airport officials and security men brandishing thermometers to take temperatures before entry. This will be normal if it was not amusing. In the past week my temperature and those of my colleagues has ranged from 25 to 34 degrees; yet we are allowed to enter the office premises. When I mentioned that the thermometers were not right, I got a "I-am-here-to-take-temperature-not-interpret"response. Colleagues returning to Nigeria also share the same experience. An interesting study will be to study the effect of lack of acuity and wit on our society. 


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