Nigeria's industry and mining sectors ready for investment and growth

 

Comprising major food and consumer staples producers, Africa’s largest cement manufacturers, and a handful of heavy industries and light manufacturing, Nigeria has a diversified industrial sector. According to data from the Nigerian Investment Promotion Commission (NIPC), the country is home to the largest manufacturing sector on the continent and, along with Egypt, South Africa and Morocco, it accounts for two-thirds of the continent’s manufacturing in nominal US dollar terms.

Given the potential of the industrial sector for both employment and revenues, the government is hoping to stoke further growth. As a result, President Muhammadu Buhari’s and the federal government’s March 2017 Economic Recovery and Growth Plan (ERGP) singles out manufacturing as one of six priority sectors.

The long-term promise is significant given the country’s vast array of inputs, such as natural gas, metals and agricultural commodities, as well as a domestic market of 180m people and duty-free access to another 120m consumers within ECOWAS. “The challenging economic situation has pushed local companies to improve self sufficiency and rely increasingly on Nigerian products and services,” Christos Giannopoulos, CEO of PZ Cussons Nigeria, told OBG. However, as the 2016 recession highlighted, there are a number of challenges to overcome to realise this potential. Broader economic concerns, including currency volatility and economic contraction, had a noticeable impact on the sector.

Growth Rates

In line with the broader economic difficulties of 2016, Nigeria’s manufacturing sector contracted by 5.8% that year and the government expects it will shrink again by 7.8% in 2017. More positively, the ERGP forecasts a rebou nd will follow, with average annual growth in manufacturing of 8.5% from 2018 to 2020. Prior to the economic downturn, the sector grew at a 13.3% average annual rate from 2011 to 2015, triple the overall economic expansion, accounting for 9.5% of GDP in the final year of that period. Employment reflected a similar progression. Total jobs in the sector, which account for 2.9% of the workforce, fell as well. As of February 2017 head counts shrank for 23 consecutive months. That compares with job creation figures of 20,535 new positions over 2014 and 2015, and 53,340 in 2013. According to the Manufacturers Association of Nigeria, 272 firms closed shop in 2016, and capacity usage across the sector averaged about 20%.

However, as 2017 progressed conditions were improving. The authorities have announced some ambitious plans to help reduce obstacles to growth. According to Udoma Udo Udoma, the minister of budget and national planning, the ERGP aims to reduce unemployment from 13.9% in the third quarter of 2016 to 11.2% by 2020, by creating 15m new manufacturing jobs. In March 2016 Oluyemi Osinbajo, vice-president, pledged to cut bureaucracy and red tape, with the aim of cracking the top 100 of the World Bank’s “Doing Business” rankings by 2020. The country was ranked 169th out of 190 economies in 2017, up from 170th in 2016.

Currency

The country’s currency situation is stabilising. Since the global reduction in oil prices beginning in 2014, currency risks have been a major challenge for the industrial sector. When crude prices plunged by more than 50% in 2015, Nigeria’s foreign reserves shrank, resulting in downward pressure on the naira. The currency eventually saw its dollar peg removed and shifted to a managed float, resulting in the value depreciating from N150:$1 to roughly double that amount. This drove up the costs of imported inputs and prompted the Central Bank of Nigeria (CBN) to institute capital controls, including banning foreign exchange for key imports (see Economy chapter).

For example, the cost per tonne of imported raw sugar for Dangote Sugar Refineries surged 148% from the first quarter of 2016 to the first quarter of 2017, causing the company to increase prices for refined sugar by 121%. Similar price spikes were seen across the economy, particularly in consumer staples. The inflation rate ticked past 18% in November 2016, the highest since 2007, and producers which normally focus on the domestic market were looking at whatever export opportunities they could find to generate foreign cash, including trucking cement across the borders. By May it had dropped to 16.3%, its lowest in a year.

The improved outlook for 2017 and 2018 is encouraging, given the impact the 2016 downturn had on the various industrial subsectors. For the naira, the gap has narrowed between informal and formal market rates, the latter of which hovered around N305:$1. In late May 2017 informal rates were at around N375:$1, down from highs of above N500:$1. “We have to be patient, but 2018 is shaping up to be a good year if we sort out the currency,” Nicholas Barberopoulos, deputy managing director of Nigerian Foundries, told OBG.

Policy Prescriptions

The government’s most recent master plan for the industrial sector is the Nigeria Industrial Revolution Plan (NIRP), which was introduced in 2014 before oil prices fell. Prescriptions in the ERGP build off the same basic ideas: import substitution, improving access to finance and building supply chains based on the country’s exploitable natural resources. The ERGP’s headline goal is a doubling of manufacturing’s contribution to GDP, noting that the current 9.5% share compares poorly with other countries, such as South Africa, at 13%; Mexico and Morocco, both at 18%; and Indonesia, at 21% (see analysis).

The government’s existing industrial policies also offer a set of investment incentives and tax breaks. The Nigerian Export Processing Zones Authority (NEPZA) lists 14 free zones in operation across the country, and another 19 in various states of planning, construction or suspension. These range from diversified manufacturing zones to specialist areas such as the Olokola Free Trade Zone for energy and petrochemicals operations; the Abuja Technology Village Free Zone for science and technology; the Lagos Deep Offshore Logistics Base and Nigerdock’s Snake Island Integrated Free Zone, offering oilfield services; and the Lekki Free Trade Zone.

Despite dollar scarcity between January and June of 2016, Nigerian investors took in N165.6bn ($585.2m) in investment for the manufacturing sector. The Ogun Guangdong Free Trade Zone, on the northern border with Lagos, led the pack in terms of inward investment, taking in N54.6bn ($192.9m), a third of the total investment in the country. Investors in Ikeja took in investments worth N37.5bn ($132.5m), followed by those in Kano Bompai with N28.3bn ($100m), and the Apapa Zone with N20.9bn ($73.9m).

As of mid-2017 the suspension of the Pioneer Status programme – another package of incentives for capital expenditure, including tax holidays and dividend exemptions – was lifted after a comprehensive review of the regime. The incentives programme had been put on hiatus after the discovery of suspected abuse of the scheme in September 2015. Of the 27 industries that qualify for a tax holiday, those in the manufacturing industry make up a sizeable share.

Import Substitution

Nigeria’s industrial policies in recent years have focused increasingly on import replacement in a bid to help cultivate domestic industry, reduce the trade imbalance and conserve foreign reserves. “We should not exclusively look to obtain foreign currency through exports, but also consider how we can produce locally to reduce imports,” Adrian Naidoo, country manager of Buhler Nigeria, told OBG.

The logic of what imports are targeted for replacement can vary, but most are either the result of a labour-intensive process, such as automotive assembly, or rice growing and processing, which serves as a way to reduce the food import bill.

The country uses two main tools to reduce imports. The first is high tariffs, which are up to 70% on products like imported cars. The other is by restricting access to foreign exchange for the purchase of specified imports. The CBN has published a list of 41 types of items for which importers will not be able to access foreign reserves. Items include rice and other staples, toothpicks, textiles and tomato paste, as well as a range of pharmaceuticals products. The list is designed to bolster the domestic production of these goods. However, some have argued that these policies have exacerbated the effects of the recent recession, contributing to an increase in inflation and a reduction in supply. Furthermore, industry players noted that transitioning to an import substitution regime is a long-term process, as factories and other facilities require large-scale investment, and take time to develop and build.

Domestic producers are also dealing with issues regarding smuggling, with a wide range of goods, especially those on the CBN’s banned list, coming across the border. “The basic problem is the logic of import substitution,” Pat Utomi, an economist and chairman of Integrated Produce City, told OBG. “Development strategy should be guided by the comparative advantage school of thought in economics and try to dominate the full value chain of a country’s natural resources.”

Oil and gas are Nigeria’s biggest endowments, and it has had notable success in developing local content policies and cultivating domestically owned production. However, there are a number of other areas offering a competitive advantage for import substitution policies.

“Creating supply chains based on local resources could also apply to rubber, gum arabic, cocoa, rice, tomatoes and other crops that Nigeria could be producing at larger scale,” Utomi told OBG. Unlike the automotive industry, for which inputs would be imported for local assembly, agricultural supply chains start with local resources, and therefore combine two themes of the NIRP policies. There have been attempts to develop stronger supply chains, in part through the Agricultural Transformation Agenda (ATA), which was launched in 2011 under the previous minister of agriculture, Akinwumni Adesina (see Agriculture chapter).

Major Segments

Among manufacturing activities, agro-processing, which comprises the production of food, beverages and tobacco, is the largest subsector, accounting for 45% of output in 2015. Light manufacturing, including wood products and textiles, was the second-largest contributor, making up 31% of total output. Resource processing, such as cement and basic metals, represented 18%. A number of new segments are also emerging, including automotive production and pharmaceuticals (see analysis).

With a market of 180m consumers and plenty of fertile, arable land, Nigeria has prioritised a revival of its agricultural sector. A major goal for the country is reducing its food import bill, and becoming self-sufficient in certain commodities, like rice and tomato paste, in addition to wheat production.

The ATA sought to spur backward integration for agro-industrial producers, including by providing fiscal incentives and turnkey infrastructure in processing zones for staple crops. The zones have not yet yielded significant results, but there are efforts to continue the initiative, such as with the $160m Integrated Produce City, developed by the Centre for Value and Leadership in Edo State. The project aims to optimise efficiency and logistics in the agricultural value chain, and reduce waste. It would include outgrower schemes, as well as on-site agro-processing facilities and storage capacity.

Pre-Packaged Foods

Given the country’s large domestic population, Nigeria is home to a number of operators in the food and beverages category, including soft-drink giants such as Coca-Cola (which owns Nigerian Bottling), Nestlé, Guinness Nigeria and others.

In the broader fast-moving consumer goods (FMCG) segment, staples producers include international giants such as Unilever and Procter & Gamble. Local competitors are led by UAC Foods, but also by smaller producers of various goods. Wilson’s Juice and Farm Pride have been cited as fast-growing smaller enterprises in the beverage sector, and OmoAlata Food Services makes a popular Nigerian alternative to instant soup. Salimonu Company and BeeKanny Plantain Chips & Chin-Chin mainly provide low-cost snacks for street sellers, such as bottled water, ground nuts and plantain chips.

As with several other large African markets, the emerging middle class in Nigeria has helped to drive the narrative in the country’s manufacturing and FMCG segments, although the macroeconomic slowdowns and limited inclusiveness of growth patterns mean that potential is being fulfilled at a slower pace than expected. At 65%, a majority of Nigerians still live on less than $2 per day, according to 2016 National Bureau of Statistics data (see Retail chapter).

The currency challenge has meant that the cost of doing business for many of the companies in the FMCG segment rose by around 50% in 2016, with SevenUp Bottling posting a nine-month pre-tax loss of N4.8bn ($17m), the first loss reported in three decades. UAC Foods, which focuses on food, ice cream, fruit drinks and spring water, reported a 10% drop in before-tax profit, and an 18% fall in turnover.

Adaptations

Companies have responded to the currency situation by increasing prices, as UAC Foods did with its popular pre-packaged Gala sausage roll, or by shrinking product sizes. This was done to keep them affordable to a larger segment of consumers, who in recent months have faced climbing inflation rates and a reduction in subsidies for key household items like fuel. “Consumers have been affected by the challenging economic situation, which has shown that Nigeria is still a very price-sensitive market, despite high brand loyalty,” Anders Einarsson, managing director, of Promasidor Nigeria, told OBG. In June 2017 Nestlé announced that for the next five to 10 years, it expects to design its offerings around price-conscious consumers, who represent the vast majority of spenders.

Some firms have reduced their exposure. South Africa’s Tiger Brands sold its 65% stake in Tiger Branded Consumer Goods back to the Dangote Group in 2015. The South African firm bought Dangote’s flour mills in 2012 for $5.1m, and after three years of failing to make a profit, sold the business back to its original owner for $1. Tiger Brands retains a presence in Nigeria through a 49% stake in UAC Foods, which is owned by the United Africa Company of Nigeria, a local conglomerate.

Demand for packaged foods has jumped by 40% in the past five years, in part helped by the growth of formal retailing in the country. This is expected to translate into growth at an average rate of 7% in the next decade for the plastics sector, according to the NIPC. The plastics segment has expanded from about 50 companies in the 1960s to more than 3000 companies as of 2017. These companies have a capacity of 100,000 tonnes per year of polymers and plastics.

Cement

Nigeria has seen significant investment in cement production over the past decade, partly due to incentive packages and tariff reforms. Output rose after the country’s return to democracy in 1999, on the back of tax breaks for production and the curtailing of imports. Tariffs on imported cement were boosted in 2012 after foreign production sunk the price of a 50-kg bag from N2000 ($7.10) to N200 ($0.71). The domestic industry responded by adding capacity. As a result, Nigeria went from importing upwards of 60% of its cement to filling local needs and producing extra for export. The country has been a net exporter of cement since. Cement prices have recently become a point of frustration, with makers such as Dangote Cement and BUA Group forecasting price drops that had yet to materialise as of mid-2017, and distributors paying closer to N2000 ($7.10) per 50-kg bag, instead of the N1000 ($3.53) predicted, according to local media.

Dangote Cement is the dominant player in both Nigeria and across Africa. At roughly 29.3m tonnes per annum, Dangote’s plants have the largest capacity of any cement producer in Nigeria. Together with Lafarge Africa, the two firms accounted for roughly 90% of the domestic market by sales in 2016. Reported earnings for Dangote before interest, taxation, depreciation and amortisation in the first quarter of 2017 totalled $337m, up 43.2% from $237m in the same period the year before. Lafarge reported N17.7bn ($62.6m), up from N5.1bn ($18m) over the same period.

Automotive

Nigeria has a history of automobile assembly, but output at the six plants built between 1975 and 1980 had ceased by 2012. However, the government looks set to boost production again. Modelled in part on the success of South Africa’s Automotive Production and Development Programme (APDP), one of the biggest initiatives in Nigeria’s industrial sector is the development of a domestic automobile industry. The APDP, run by South Africa’s Department of Trade and Industry (DTI), helped dramatically increase output in their domestic auto manufacturing sector, with more than 600,000 units produced per year. Working with the DTI, Nigeria is hoping to achieve similar results as the automotive ownership rate in Nigeria is currently a third of the global average. The NIPC estimates a potential $3.5bn in opportunities, and a chance to grow the workforce from 2600 to 70,000.

Imports

The import market for vehicles, spare parts and intermediate goods was worth $6.9bn in 2014, accounting for 11.5% of total external purchases. As part of its import substitution policies, Nigeria hiked import duties in 2015, taxing finished vehicles at 35%, semi-knocked-down (SKD) kits at between 5% and 10%, and completely knocked-down (CKD) kits at 0%. Combined with inflation and capital controls, the effect was noticeable. Imported cars plummeted from 100,000 to 40,000 units in 2015, according to a report by Deloitte. However, scaling up assembly has proved to be a challenge. Of the 49 licensed producers, which include Stallion Group, Ford Motor Company, Peugeot Nigeria and local start-up Innoson Group, just 25 have started production. Figures for output vary by source – the National Automotive Design and Development Council, a federal agency, pegged production in 2015 at 11,332 units, whereas an estimate from the Lagos Chamber of Commerce and Industry found 2500 units.

Additionally, import figures may not be truly representative of the overall market, given the flow of cars smuggled into the country from neighbouring Benin. It is estimated that in 2013 an additional 250,000 vehicles found their way to Nigeria illegally. The overall market for new and used vehicles is estimated at between 500,000 and 1m units annually. “The illegal importation of vehicles in Nigeria is a major problem for the auto industry, and while there have been serious efforts by Customs and security authorities to tackle the issue, much still needs to be done,” Boulos AG Boulos, CEO of Boulos Group, told OBG.

Beyond just making cars and trucks, domestic companies have been working to spot specific market niches that need servicing. At Boulos Group, a Lagos-based industrial conglomerate, a partnership with Suzuki Motors of Japan will see the company produce a domestic version of the Suzuki Super Carry, a light truck that can be configured in multiple ways. It plans to offer the vehicle in various configurations to be custom-specified by customers. The initial goal is to produce 50,000 units per year, and move from SKD to CKD, Julian Hardy, managing director at Boulos Enterprises, told OBG.

Outlook

The potential Nigeria offers as an industrial producer is not in any doubt, and the long-term advantages – whether in terms of accessible inputs or domestic sales – are sizeable, but so too are the challenges. As a result, the stabilisation of the macroeconomic situation offers some short-term hope. In June 2017 it was speculated that the CBN would drop its system of multiple exchange rates, but market expectations of a loosening of central control over the currency’s value have been confounded before. For now, import-replacement policies have had mixed results, and in some cases exacerbated price rises, but as other reforms and investments – such as improvements to the supply chains – yield fruits, the country may succeed in further expanding domestic production.

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The Report: Nigeria 2017

Industry & Mining chapter from The Report: Nigeria 2017

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