The aim of every business either big, medium or small is to minimize costs and maximize profits or as modern strategic thinkers put it, maximize the wealth of owners.
One sector under the keen watch of Nairametrics are the cement makers, these are firms, who despite the huge capital intensive nature of the business and the tough operating environment in Africa’s largest economy, were able to record low cost margins compared with other manufacturers.
The second quarter results of the four dominant cement makers in Nigeria showed them spending less to produce each unit of product, signaling high returns to shareholders.
For the first six month through June 2015, Dangote Cement Nigeria Plc (Dangcem), Lafarge Africa Plc, Ashaka Cement Nigeria Plc, and Cement Company of Northern Nigeria (CCNN) recorded an average cost of sales ratio (COS) of 55.46 percent.
This compares with the 85 percent for Nigerian flour millers, 92 percent for Aluminium makers and 70 percent for Consumer goods names, meaning cement makers are applying the latest technologies to reducing costs while seeking aggressive expansion across Africa.
The chart shows Dangcem recorded the lowest COS margins with 34.88 percent in the second quarter of the year which explains its highest industry profit margins. Ashaka C. had 59.28 percent (COS) as the company recorded the second highest profit margins.
Cement cost control strategies
Dangote C. has been able to improve operating efficiency and at the same time boost profitability as it relies less on power from the grid which is unreliable.
Instead of using diesel oil at factories to power plants, the company is dependent on gas, a cheap source of energy at both Obajana and Ibese plant sites. Dangcem is also currently investing in coal processing facilities at its sites and is exploring the possibility of converting Gboko to gas.
Ashaka’s successful completion of its Low Pour Fuel Oil LPFO-to-coal substitution scheme was significant in reducing production costs hence low cost margins.
Lafarge Africa has undoubtedly achieved a high level of gas utilization. The proximity of its Ewekoro plant to the rail line makes it easily accessible for the company, providing a cost effective alternative to road transport. These focus and market penetration strategies explain the company’s 22 percent increase in net profit in the review period.
CCNN is regarded as the company with the highest cost per ton among the big four. This is because of the company’s continued reliance on LPFO at factories. It location also makes distribution cost spiral up. The company is located in the North West cities of Kaduna and Kano.
While other Nigerian manufacturing firms are groaning under huge energy costs, Cement makers have been able to think outside the box and deploy alternative sources of energy to save costs.
Nairametrics believes other manufacturers can study the model these firms have employed as a way of tapping into the large Nigerian market.