Dangote Group: Expanding On Concrete Foundations

Via The Economist, an interesting look at Nigeria’s Dangote Group’s efforts to expand across Africa:

THERE are 21 monster lorries at the Dangote Cement quarry in Obajana (pictured), a three-hour drive from Abuja, Nigeria’s capital. Their cargo of limestone boulders gives off a bleach-white glow in the hot sun. As big as they are, the trucks can dump the giant rocks into the waiting crushers in seconds. The mashed stone is carried on two conveyor belts to a factory 9km (6 miles) away where it is dried, cooked with additives, ground and packed into bags. The Obajana plant is the largest of its kind in Africa. And it is hugely lucrative. Each 50kg sack of cement sells for around $9, of which almost $6 is profit.

The business has turned the firm’s founder and majority shareholder, Aliko Dangote, into the richest man in Africa, with a fortune of $25 billion. Cement is the mainstay of Dangote Group, a conglomerate that is also big in food manufacturing. Obajana is the largest of the company’s three cement plants in Nigeria, which generated most of the firm’s revenue of 386 billion naira ($2.5 billion) last year. A fourth production line, almost complete, will turn Obajana into one of the ten largest cement plants in the world.

It is part of a broader expansion that will take Dangote Cement into 13 other African countries. Funds are also in place for an oil refinery and petrochemical plant. A listing on the London stock exchange is planned. A firm that has grown up in Nigeria now seems ready to step onto the global stage, just as its home country has become Africa’s largest economy (see article).

Its founder has never lacked ambition. The scion of a merchant family, Mr Dangote began his career in the 1970s as an importer of bulk commodities, such as rice and sugar, but soon moved into manufacturing. “Backward integration” has been a guiding principle for his firm. That term usually applies to a company that takes over a supplier, say a poultry producer buying a soya farm. In Nigeria it is used to mean replacing imports with local production, often with inducements such as trade barriers and tax breaks for investment in machinery. It is a coarse policy of development, borne of despair. The dollars generated by Nigeria’s oil exports have pushed up its exchange rate and made imports cheap, stifling local industry and jobs.

Dangote Group sees itself as a paragon of backward integration, choosing enterprises in which it can exploit Nigeria’s natural advantages. There is plenty of limestone for cement-making and lots of arable land for sugar plantations, for instance. The scope of the conglomerate has widened as profits from one business have paid for entry into a new industry. Each industry it has moved into has been more capital-intensive than the last: from salt, to flour and sugar, then cement and, coming next, a $9 billion move into oil refining.

Critics grumble that Dangote owes its profits to protectionism, its dominant market share in the industries it operates in and its founder’s ties with Nigeria’s political leaders. Mr Dangote’s move into cement-making came after a conversation with the country’s then president, Olusegun Obasanjo, who wondered why his country could only import it. A subsequent ban on foreign firms importing cement unless they also set up plants in Nigeria encouraged Dangote itself to go into production. So did the prospect of a complete import ban once the country was self-sufficient.

Cement is a cheap, bulky product. Plants typically need to be near both limestone and customers if they are to make money. So there is a logic to making it in Nigeria, a big market with the raw materials at hand. That said, the business would doubtless be less profitable if imports were unrestricted. Dangote’s margins in Nigeria are 63%, compared with the 30-40% margins typical in other “frontier” markets. And after several years of stability, the firm is set to raise its domestic prices further.

Lord, make us pure, but not just yet

Dangote’s top brass argue that without the import ban, no one would make the sort of long-term investment required to build a cement industry. There are huge gaps in Nigeria’s infrastructure, not least in power supply. The Obajana plant has its own electricity generators; they are designed to run on gas but have to burn more expensive oil much of the time, while the gas pipeline is being upgraded. “Others don’t have these add-ons, so we think it is only fair that we have infant-industry protection,” says Joe Makoju, an adviser to Mr Dangote. “It should fall away as conditions improve; we want to compete on equal terms,” he says.

True or not, the firm’s competitiveness will soon be tested. Over the next three years Dangote plans to spend around $3 billion on new cement works in other African countries. Integrated mining, manufacturing and packing plants, like the one at Obajana, will be producing cement by the end of the year in Senegal, South Africa, Ethiopia and Zambia. If all goes to plan, Dangote will triple its cement output to 61m tonnes a year by the end of 2017. By then almost half of its cement bags will roll off production lines outside Nigeria.

This expansion is a bet that the fast pace of economic growth in Africa will continue and that rising prosperity will create demand for housing, offices, roads, bridges and other concrete structures. Africa has fairly low per-capita consumption of cement. Nigeria, for instance, gets through around 125kg a person each year compared with 500kg in some richer countries in north Africa. If GDP in Africa continues to grow at the 5% annual rate it has managed in the past decade, demand for cement should grow at 7-10%, reckons Andy Gboka of Exotix, an investment bank that specialises in frontier markets.

The startup costs of a cement works are formidable. Mr Dangote has confessed in the past to a fear that Obajana might have sunk him. One risk is of idle plants should sales not match expectations. Another is that optimism about demand will spur others to invest, leading to a glut of capacity. Part of Dangote’s hurry is to reduce that risk. Its global rivals are much bigger (and two of the largest, Holcim and Lafarge, are merging, as the next story explains), though many of them are so burdened by debts incurred in an earlier, ill-judged acquisition spree that their ability to invest in Africa is limited. In contrast, Dangote’s debt is less than half its annual earnings. “We want to take advantage now,” says Devakumar Edwin, the firm’s chief executive.

It is not the only bold bet the conglomerate is making. A chunk of the $9 billion it is spending on its oil-refining venture will be on plants to make fertiliser and polypropylene, a versatile plastic, from the refined crude. It is the most complex industry Dangote has yet entered, though it is consistent with the theme of import substitution. Nigeria is Africa’s largest oil producer but also its second-largest importer of petrol. It is a matter of national self-esteem, as well as economics, that the refinery will spare Nigeria’s crude oil an expensive round-trip.

Hoping the lights will stay on

Business logic is no guarantee of success, of course. A state-owned refining venture has flopped badly. The Dangote refinery would have to run constantly to pay off its upfront costs. The firm is thus gambling that the recent privatisation of electricity generation and supply in Nigeria will deliver more reliable power by the time the refinery is up and running in 2016. If Dangote’s bet pays off, it will make Nigeria’s economy more stable. Petrol imports are a huge drain on its foreign exchange and fuel subsidies are a big cost to its exchequer, which has meagre tax revenues.

Most of the funding is in place. Dangote will provide $3.5 billion from the retained earnings of its other ventures. This will be topped up by a $3.3 billion loan raised from a consortium of banks, including Standard Chartered, at an interest rate that even Africa’s most soundly managed countries might envy. Dangote’s low debt and the sacks of cash made by the cement business should allow the bankers to sleep soundly.

More cash may soon be available. Dangote Cement sold 5% of its shares in a listing on Nigeria’s stock exchange in 2010. The local securities regulator demands that 25% of the business should be freely traded. But the local market for saving is not big enough to raise that sort of capital. So the company had planned to float a further 20% in London last year. That was delayed, perhaps in part because of the troubled listings of Bumi (now renamed Asia Resource Minerals) and ENRC, two mining firms with risky operations and controlling shareholders in places—Indonesia and Kazakhstan respectively—which like Nigeria suffer from poor corporate governance. Dangote now wants a further delay in its London listing, until perhaps 2016, so analysts can see how its investments outside Nigeria fare and value them accordingly.

One reason for the London listing is “positioning”, says Mr Makoju. The firm wants to rub shoulders with big global firms. It is also a way to force through improvements in the firm’s governance and business culture. For family-owned businesses such as Dangote, the priority has generally been growth rather than returns, says Phil Roseberg of Sanford C. Bernstein, a research firm. The discipline of external investors should help Dangote become a firm that can compete outside its home market. The listing, when it comes, may also alter perspectives within a company that is used to being a big noise in Nigeria. The lorries at Obajana seem huge at close quarters. But against the backdrop of the quarry, with its gigantic tiers of limestone, they look more like toys.

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