African markets

Nigeria: Cement companies report widespread foreign exchange losses

The Nigerian industrial sector accessed $4.4 billion from the Central Bank of Nigeria (CBN) to finance its import bills between January and June 2022, which represents almost half of the total amount disbursed by the apex bank. to seven sectors during the same period.

This is according to CBN sectoral currency usage data, seen by Nairametrics.

Meanwhile, major industrial firms in the Nigerian economy have lamented the scarcity of foreign exchange. Due to this challenge, the three listed cement companies in the country recorded more than 78 billion naira in foreign exchange losses between January and September 2022.

Overview of CBN data: The apex bank stepped in with $8.89 billion to seven sectors of the economy in the first half to fund their import obligations. This is 55.4% more than the $5.72 billion disbursed in the corresponding period of 2021.

  • The industrial sector received the giant’s share, accounting for 49.9% of the total amount at $4.44 billion. The amount received by companies in the industrial sector during the reporting period is 95.5% higher than the $2.27 billion received in the first half of 2021.
  • Manufactured goods follow with $1.86 billion, accounting for 20.93%, while businesses involved in food production that received $1.21 billion accounted for 13.56% of the total sum.
  • Others on the list include the oil sector ($700.6 million), minerals ($291.7 million) and transportation ($274.1 million), while the agricultural sector received the least with $121.17 million.

Breakdown of foreign exchange losses of companies: According to data mined and analyzed by Nairalytics – the research arm of Nairametrics, Dangote Cement, BUA cementand Lafarge Africa recorded cumulative foreign exchange losses of N78.62 billion in the first nine months under review.

  • Unlike the comparable period of 2021, where they recorded an overall loss of N9.84 billion, it increased by 699.1% year-on-year.
  • BUA Cement recorded the largest increase from N295 million to N5.26 billion. On the other hand, Dangote Cement recorded the biggest loss with 72.39 billion naira against 8.32 billion naira in the previous year.
  • Meanwhile, Lafarge Africa was able to print a lower foreign exchange loss than the previous year, registering a decline of 21% from 1.22 billion naira recorded in the first nine months of 2021 to 967.29 million naira during the period under review.

Why the losses: The Nigerian foreign exchange market has been affected by high volatility caused by the currency supply crisis amid continued strong demand for greenbacks.

  • While the increase can be attributed to Nigerians’ decision to hedge against inflation, other factors also contributed to the volatility. These factors include increased demand due to ‘JAPA’ syndrome, strengthening US dollar against emerging currencies, declining crude export revenue and global inflation, etc.
  • BUA Cement noted that the huge increase in its foreign exchange loss is due to the wide margin between the auction bid and the I&E tariffs. As you may know, the CBN faced a dilemma in the form of a dearth of foreign inflows, with REITs and FDI at record highs.
  • During the presentation of its nine-month results, Dangote Cement explained that the increase in its foreign exchange losses was due to the depreciation of currencies in some pan-African countries.

Nigeria’s foreign exchange reserve has lost over $3.2 billion since the start of the year due to the CBN’s constant intervention in the window of investors and exporters, which kept the exchange rate in a managed float state. The CBN said it provided $7.74 billion to I&E, SMEs and Invisibles between January and June 2022.

How the naira fared: Exchange rates between the naira and other major currencies have been falling since the start of the year, especially the US dollar. At the official counter for investors and exporters, the exchange rate depreciated, going from an average of N416/$1 recorded last year to more than N440 for one dollar.

  • Similarly, the naira has weakened on the black market, hitting an all-time high of N/$900 last month. As of Tuesday, November 15, 2022, the US dollar was trading at an average of N800, representing a depreciation of 29.4% from the N/$595 recorded at the start of the year.
  • The exchange rate on the cryptocurrency P2P exchange market has also behaved in the same direction as the black market, currently trading at an average of N795/$1.

How companies source foreign currency: Due to the inability to obtain sufficient foreign exchange from the official market, manufacturing companies operating in Nigeria are now being creative in sourcing foreign exchange to meet their import bills.

While some companies were able to generate dollar revenue by exporting their goods to other countries, many were forced to source dollars from the parallel market at a higher rate. Unfortunately, this has led to higher operating costs, leading to either lower margins or higher selling prices.

Meanwhile, the CBN has increased currency sales to the I&E window and businesses since it halted currency sales to Bureau De Change operators in July 2021.

However, there is not enough supply to meet business demand, forcing them to incur additional foreign exchange costs. During its third quarter results presentation, BUA Cement hinted at sourcing foreign exchange from other channels at higher rates.