On Cement: ‘Culled’ From The News Magazine

Is it possible to cull one’s self? Well, I don’t know. But I wrote this piece for The News magazine ’bout a month ago (month ago). They are not online as far as I can tell.

I saw this tweet this morning from my friend and I thought to share the article here. The full thing is below. I was constrained by a word limit but maybe that’s not such a bad thing. Enjoy.

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In May this year, at the World Economic Forum in Abuja, I was in the audience at one of the sessions where President Goodluck Jonathan said ‘look at Dangote who is now the richest black man in the world…if not for our policies, he could not have achieved that’.

This was a remarkable statement that might get a leader kicked out of office in some other countries of the world. It is true that Dangote is now the richest black man in the world worth over $20bn. It is also true that much of his wealth is linked to his cement business, which has around a 70% market share in Nigeria and is now trying to expand across Africa. What is also true is that cement prices in Nigeria are around $263/tonne when the same product can be obtained only a few hours away from Nigeria at $67/tonne.

Why is this case? Why is the Nigerian President openly boasting about a policy that is enriching one man by causing Nigerians, the people who elected the president, to pay 3 times what they can pay elsewhere? To answer these questions, it is important to understand the nature of cement as a product and a market.

Cement is a vital input especially in fast growing economies that need a lot of infrastructure; there is almost no way around it. It is also a bulky product, which means that it is almost always produced close to where it is consumed. Indeed, only around 3% of current global cement production is traded across borders. Finally, the hardest part of cement production is starting a new plant – it is expensive. However, once a plant has been built, it is much cheaper to simply continue expanding production to meet demand. What this means is that there is a heavy advantage for those who enter the market first – that is to say, there is a tendency for a few players to dominate the market for a long period of time and you end up with an oligopoly.

Given the above, it is not hard to see how Dangote is able to get away with a 70% gross profit margin. Consider the numbers – the world’s largest cement manufacturer, Anhui Conch of China, produces 217MT of cement annually and generated roughly $8.9bn in revenues in 2013. Dangote Cement produced less than 1/10th of Anhui Conch’s cement output at 20MT but generated $2.4bn in revenues. The end result was that while Anhui Conch ended with 18% margins at the net profit levels, Dangote Cement ended with an astonishing 52% net profit margin – the highest profit margins, by far, of any major cement manufacturer in the world (Anhui Conch is the next closest in terms of profit margins).

A few weeks ago, all the newspapers were awash with stories about how Dangote Cement had ‘slashed’ cement prices by between N100 and N300 per bag. To avoid charges of gross exaggeration, none of the papers who reported the ‘slashing’ mentioned the actual price of the product that was being ‘slashed’. Of course they couldn’t because a headline that read ‘Dangote slashes N100 from N2,600 bag of cement’ would look completely ridiculous. For every $10 Dangote Cement makes, $7 is profit i.e. the limestone, the costs of energy and salaries directly related to the production of the cement only cost $3. It is true that cost of doing business in Nigeria is very high but how does the happily coexist with world record profit margins?

The question to then ask is what effect all of this has on the Nigerian economy. The justification for the policies that have made Dangote Cement possible are usually that it is our own i.e. Nigerian and it creates jobs in Nigeria. These are valid arguments and would justify granting the company some kind of protection given that we desperately need to develop industrial production capacity in the economy. But these benefits do not exist in a vacuum; there are also costs to them and any honest discussion of the matter must weigh the costs against the benefits and determine whether it is worthwhile. After all, the purpose of all production is consumption – we are producing cement so that it can be used to build things that solve problems and not just cement for cement sake.

The most obvious problem that we need cement to solve is the huge housing deficit in the country. By the government’s own estimates, we need 17 million homes to close this gap. Cement is not the only thing required to build a house of course, but you cant build houses without cement in Nigeria, certainly not on the scale we need to. The more expensive cement is, the harder it is to close that gap. By tolerating expensive cement like we do in Nigeria, we are shooting ourselves in the foot because far more jobs will be created in house building than Dangote Cement can ever hope to employ.

But when it comes to house building in Nigeria, there is an often-overlooked cost. There are no reliable estimates for the number of unfinished buildings in Nigeria. But it only takes a drive around any of our towns and cities to get a rough idea of what the situation – unfinished buildings are everywhere from Ikoyi to Alimosho in Lagos as an example. While familiarity has made Nigerians get used to the sight of unfinished buildings across the country, this is something that is very unusual in developed and even middle-income countries. For one, leaving buildings unfinished for long periods tends to quickly turn them into a den for crime and drug use.

The reasons for unfinished buildings are of course varied – lawsuits might be one. But the overwhelming reason is the cost of completing them. Again, this can be evidenced by the fact that low to middle-income Nigerians who manage to build their own homes hardly ever complete it before moving in. Indeed it is not unusual to find people living in homes that have not been plastered on the outside. These homes are usually self-funded and the owners typically squeeze themselves to do as much as possible to make the building livable before moving in. No great leap of logic is required to say that cheaper cement in Nigeria will move possibly millions of buildings from the unfinished to finished category in the Nigeria, creating plenty of jobs in the process.

This part of the story is very important as we attempt to solve the housing deficit in Nigeria. It is not because people are just sitting around waiting for the government to ‘do something’ that has caused the deficit to rise to 17 million. Nigerians have actually tried and continue to try to solve the problem by building their own homes. We cannot help Dangote Cement at the expense of Nigerians. This is what the current policy, which make it possible to charge very high prices for cement in a captive market are doing. It is helping the producer at the expense of the consumer. And it is causing us to drive the economy with the handbrake on.

The government cannot claim to seriously want to tackle the housing deficit crisis and at the same time the President is openly boasting about a policy that has made a cement manufacturer the richest black man in the world. Dangote Cement is not going to solve the housing deficit problem in Nigeria – it is Nigerians and the government who will solve it. Expensive cement is a needless impediment to getting to where we want to.

We can learn from the Chinese who seem to understand the purpose of producing cement – between 2011 and 2013, China used 6.6 gigatons of cement. In the entire 20th century, 1901 – 2000, the United States used only 4.5 gigatons of cement. And what has this translated to? Today, around 90% of all households in China own at least one home. Further, China’s existing housing stock is enough for every household in the country to own a home but Chinese property developers are still adding around 15 million units of housing every year. This is a country with a population of over 1 billion people. And yet, you will not find a Chinese businessman who made his money from cement on any rich list – indeed, China’s richest man, Jack Ma, is around $7bn ‘poorer’ than our own Aliko Dangote by current estimates.

These things are worth reflecting on if we are really serious about tackling the housing and infrastructure problems we face. The Chinese are producing cement to consume it while we are producing it to make the cement producers rich. Producers have been helped for many years by the government; it’s time for someone to help the consumer.

 

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9 thoughts on “On Cement: ‘Culled’ From The News Magazine

  1. Well done and thanks for trying to educate those who may may not understand. Read a reply to your tweet earlier today about cement in which the author proudly said “Nigeria needs to have one of its own on the Forbes list”. Held myself back from replying but my response is available in this write up which I recommend you please send to that fellow.

  2. Pingback: On Cement: ‘Culled’ From The News Magazine – Y! Opinion

  3. Feyi:

    I have asked you this question before – and I do so again now – “What is your proposal exactly for this price reduction? That the FGN commands Dangote to slash these prices to $63/Mt?”

  4. And risk not having one of our own on the Forbes list…..now that will make the President really sad don’t you think?

  5. People do not turn from being capitalists to socialists in a jiffy. The poverty mentality would only propel our leaders to aspire to be ‘gatherers’. The “Yes Sirs; and Thank you Sirs” of people they impoverished but give stipends to would only propel them to dish out unpopular policies.
    The societal value systems have degraded and I don’t see our dear President rising above that. He is a reflection of who we all are.

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