Economic Confidential, September 20 2008

OPINION

TOWARDS AN AFFORDABLE CEMENT PRICE

By Bolaji Kazeem

For some time now cement the major raw material for building and construction works has been a topical issue. Every day, news about high cost of cement makes headlines in our national dailies. While some industry watchers blamed the present government for lack of political will to enforce government policy to check possible abuses in the sector, others are pointing accusing fingers at some big players in the cement sub-sector for the formation of a monopolistic cartel to manipulate the cement market to their selfish ends.

However, of recent, columnists and writers in some media have criticized genuine efforts of the present government to stall the soaring prices of cement in the market and the granting of import approvals to the new entrants to join the existing 13 cement companies in the importation of bagged cement into the country. 

It is worthy of note to place it on record that all stakeholders including the Press were carried along by the present administration at every stage in the process leading to the decision to allow temporary importation of bagged cement.

This policy is the only way to encourage the growth of local cement capacity, and making the commodity available at affordable price.

Government in theory and practice has encouraged local production of cement through various incentives to stakeholders in the industry.  Such incentives include banning of importation of bagged cement, promotion of backward integration in the Greenfield areas and deliberate restriction in order to allow local capacity to grow.

These incentives have created opportunity to major players in the cement sub sector to invest huge capital and expand their facilities.  Recently, Dangote Cement had signed $1.25 billion financing facility as part of financing arrangement for the $3 billion production plan by the company.

The President, Dangote Group, Alhaji Aliko Dangote recently  disclosed that within 28 months, Obajana Cement Company would be producing 26 million tones per annum after the three new Plants are completed.  Not only that, Dangote Group has started work on cement factories in Ogun State which the cost of the project is put at N115.81 billion.

The enabling environment has also encouraged Lafarge Cement Worldwide to embark on expansion programme in Nigeria.  Mr. Brund Lafront, the chief Executive Officer of Lafarge Worldwide said the company’s capacity in Nigeria alone will hit 10 million tones by 2010.  He stated that the company invests more in Nigeria because they are confident in the prospects and that they are able to operate successfully in the country because they know of potentials and benefits derivable from the project. He was even categorical that negative perception of Nigeria will not sway it from its commitment to invest in the Nigeria Economy.

These developments and comments coming from the big players in the cement sector have demonstrated government’s willingness to support and provide enabling environment for producers of cement in the country to grow capacity utilization in the cement sub sector. The recent soar in price of bagged cement is not acceptable to government considering enormous support it has given to local manufacturers in the country to thrive.

Following the complaint by stakeholders about short supply of gas, high cost of demurrage, high cost of transportation and bad roads, the Ministry of Commerce and Industry had to step in to examine the problems. It discovered that local operators can only supply 6.5 million tones. While the total annual demand for cement in the country stands at 18 million metric tones of cement leaving the deficit of 11.5 million tones. The boom in the construction industry,  the soaring oil price in the International Market and Investment in capital market in addition to Real Estate development by three tiers of government in order to showcase their democracy dividend have been identified as some of the factors  responsible for the soaring cost of cement in the country.

Government is aware that cement manufacturers cannot expand their facilities over-night to compensate for the supply deficit.  This scenario has brought up dilemma for government.  The urgent need to alleviate suffering of Nigerians from the high cost of cement as well as to avoid abandonment of developmental projects led to approval of license to 13 stakeholders for bulk importation of cement to enable local manufacturers bridge the deficit between the market demands and supply of cement in the country.

The companies that benefited from this government decision to grow local production were Dangote group of companies, Lafarge Group, Torcem Nigeria Limited, Flour Mills Nigeria, Ibeto Cement Company and Eastern Bulkcem Ltd.  Others  include Quacem Cement Company, Essette (Nig) Limited, Gateway Mining Company Ltd, Pureclem Industries Ltd, Gateway Portland Cement Ltd, Westcom Technologies and Energy Service and International Cement company Ltd.

Government’s prompt action at that period stabilize price of cement in the market and subsequently have a marginal reduction from N2, 000 to N1,500. This reduction has not met government expectation of price range within N1, 000 – N1, 150 to the final end users.

This short term measure was created to restore order and stability in the cement market and should therefore not be seen as policy reversal as government remains consistent in its commitment to promote backward integration as well as growth of local capacity in the industry.

According to the Minister of Commerce, Engr. Charles Ugwuh Cement requires a huge investment some times in the region of $400 million to set up a small plant. He said “Because of increase in demand for cement, we do not have the capacity but the demand is more than what we can supply.  So we are trying to bring in cement through those who are already involved. We believe that if you open the door to traders you have problem with your existing investors who are putting a lot of money to produce cement.”

He added that in the face of the biting scarcity and outrageous prices, and in order to mitigate the hardship suffered by consumers, Government decided to intervene further by approving the importation of bagged cement as a one-off exercise, which is expected to elapse on 31st December 2008.

He further said that “in appreciation of the obvious adverse implications of liberalizing cement importation, Government acted cautiously and responsibly to ensure that only those with verifiable investments in the sector benefited from the licence. At no time did Government contemplate granting licences to traders knowing fully well the catastrophic damage such a measure would do to local investments in the sector.  Rather, in defiance of the opposition from a few stakeholders bent on creating a monopoly in the sector, government decided to extend licences to six (6) new entrants in order to break the emerging monopoly. These are new investors, who satisfied the requirement of demonstrating ample evidence of having made significant commitment to backward integration in the sector. 

By granting licences to only those with investment in the sector and designating the importation of bagged cement as a one-off exercise targeted to fill the demand-supply gap created by inadequate local capacity, Government was further demonstrating its commitment to encouraging the growth of local capacity in the sector.

This is a sound policy to boast local production within short term in order to ameliorate the problem pending the expansion programme of the stakeholders. It will also facilitate fresh ideas that would open up the market than allowing the existing stakeholders to create cartel and deprived a lot of people with good ideas and investment with funding opportunist from coming in with their kind of funds to invest in the cement sub-sector.

Bolaji Kazeem

Federal Ministry of Commerceand Industry

bolaji28@yahoo.com

Abuja