BUA Cement's Price Cut: A Temporary Relief or Long-Term Strategy?

Last week, BUA Cement made a major announcement that sent shockwaves through the market - they would reduce the ex-factory price of cement to N3,500 per bag (from N4,200). This news was met with widespread excitement and celebration, as it seemed to offer relief from the ongoing housing cost crisis in Nigeria. Given that shelter is one of the three basic human needs, any effort to ease the financial burden of obtaining these essentials is met with enthusiasm.

However, my inclination is to approach this news with a critical eye, as sustainability is of paramount importance to me. The decision to lower prices, especially by BUA Cement, surprised me, given my understanding of the cement industry's dynamics and the financial standing of the players involved. I doubt the long-run sustainability of this decision.

The cement industry in Nigeria operates within an oligopolistic structure, characterised by a few dominant players. Dangote Cement is the undisputed market leader, with a 32 million tonne installed capacity, significant revenue, and market coverage. BUA Cement and Lafarge vie for the second and third positions, but BUA Cement has recently solidified its position as the second-largest player.

Dangote Cement's market leadership is primarily due to its immense scale and integration, which affords it a substantial cost advantage over its competitors. This advantage allows Dangote Cement to set industry prices, with other companies following suit. In an industry where you lack a cost advantage, reducing prices can be challenging, as it can lead to a profit squeeze. This is because competitors with cost advantages can respond aggressively and potentially drive you out of the market.

These figures illustrate the vast difference in size between the two companies. BUA Cement has a limited national presence, dominating the northern market (90% market share) but having a smaller footprint in the South-South region (30%-40% market share).

Capacity utilisation for both companies has consistently remained below 60%, reflecting the industry's tendency to manage production and compete on prices rather than flood the market with excess supply. Despite this, both companies continue to expand their capacity, likely due to tax incentives for new production lines.

Dangote Cement consistently commands a price premium over BUA Cement, despite the latter's efforts to aggressively increase production capacity in recent years.

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While BUA Cement's cost margins are higher than Dangote's, its selling and distribution expenses are lower. Dangote's strong distribution channel, enabled by integration and a national presence, allows them to command higher prices and maintain higher profitability.

Given BUA Cement's limited national spread and competitive disadvantages, it's unclear how effective its price reduction strategy will be in the long term. Even if other players respond, it's likely to be a short-lived price war. True price reductions will only come from policies aimed at boosting cement supply in the market, not merely from the players' goodwill or 'patriotism'.

So, what could be BUA Cement's motive?

It's speculative, but it's possible that they're pre-emptively lowering prices to stave off potential competition, especially if the government considers allowing cement imports. Competition could erode the high margins enjoyed by the oligopolists, prompting BUA Cement to temporarily cut prices and then revert to business as usual.

In conclusion, BUA Cement's price reduction announcement raises questions about its sustainability. The fundamentals and financial numbers seem to contradict the move, suggesting that it may be a short-term strategy to maintain the oligopolistic status quo. I might be wrong, only time will tell if this decision proves to be a wise one. The jury is out.

Selah.

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