Opportunities in Nigeria's non-oil industrial sectors

In spite of the country’s traditional reliance on hydrocarbons, Nigeria’s industrial sector is diversified and growing, ranging from food and beverages to building materials, and catering to a market of over 170m people. After a decades-long slump in manufacturing output, triggered by the scaling up of oil production in the 1970s, the country is working to reverse the trend and enable manufacturing and heavy industry to play a larger role in the economy. Success would diversify the economy and create job opportunities for Nigerians.

Tackling Obstacles

Increasing domestic competitiveness to allow for a reduction in imported goods is difficult, however, and to help improve local capacity the government has explored a handful of protectionist policies, which is not unusual in Africa. For example, in 2014 domestic production of passenger cars commenced, thanks to a government policy to hike tariffs on imports. The outgoing Jonathan administration had launched a number of initiatives to create industrial supply chains by boosting activity in areas such as mining and petrochemicals, as well as assisting industrial activity in a broader sense by addressing economy-wide obstacles. These include familiar problems such as the lack of reliable electricity supply, corruption, bureaucracy and difficult logistics on account of the current state of transport infrastructure.

Even when measured up against these sizable challenges, Nigeria’s fundamental advantages as a manufacturing centre are significant. The country has the world’s seventh-largest population and ninth-largest proven gas reserves, according to BP’s “Statistical Review of World Energy 2014”. The over 170m consumers also make it Africa’s most populous country, and it is likely to remain one of the world’s most important markets for industrial outputs such as cement, fast-moving consumer goods (FMCG) or cars. The opportunities in Nigeria are even greater for companies that can produce for export on the 1.1bn-person continent, a fact which multinational manufacturers ranging from Nestlé and Lafarge to Nissan have taken advantage of.

Increasing Contributions

Industry accounted for 20.6% of Nigeria’s real GDP in 2013, according to the Central Bank of Nigeria’s (CBN) “Annual Economic Report 2013”, the most recent full-year statistics available. However, in compiling data the country lumps in manufacturing with upstream oil and gas production. Manufacturing itself accounted for 9.2% of real GDP for the same year, and the government would like to see the figure rise to 10% by 2020. Growth since 2008 has been minimal, in a range between 4.1% and 4.2%, often clocking in at a lower rate than headline growth rates. Of a total of $23.58bn in capital inflows in 2013, up from $16.69bn in 2012, manufacturing drew just $620m, or 2.6% of the total, according to CBN figures. The country’s capital markets drew 74%. As of the end of 2013 capacity utilisation was at 57.8%, according to the central bank’s report.

A number of major manufacturers are publicly traded on the Nigerian Stock Exchange (NSE), and subsegments such as FMCG have performed particularly well. Stock prices in the sector surged by 44% in 2010, for example. By 2013 producers of consumer goods were trading at a large premium to the rest of the market, according to Meristem. In late 2013 the sector’s price-to-earnings ratio was at 31.37, compared with 13.33 for the NSE All Share Index, a broad measure of the whole market. Manufacturing is seen primarily as an opportunity for import substitution, but exports are a key part of the plan in the future. Manufactured goods accounted for 15.2% of the non-oil total, according to the CBN’s 2013 annual report. Finished leather, a semi-manufactured output, comprised 18.5% of the total, with other semi-manufactured goods at 12%.

Agricultural produce accounted for 47% of exports, highlighting the opportunity Nigeria wants investors to capitalise on: the ability to convert raw materials into products ready for retail, or at least semi-finished goods. Of the top-20 exporters by sales in 2012 only three were exporting finished goods. The rest send out agricultural and mid-chain products and semi-processed metals.

Policy

The Federal Ministry of Industry, Trade and Investment (FMITI) published its Nigeria Industrial Revolution Plan (NIRP) in 2012, with the main goal being to boost manufacturing from 4% of GDP to 10% by 2020, timed to match up with the Vision 20:2020 plan, which aims to position it as one of the top-20 economies worldwide by that year. NIRP’s goals include fully replacing imports of metals, petrochemicals and processed palm oils, among other things.

The target for the automotive sector is 50% of supply from domestic operations by 2020. The Jonathan administration also made local production a major factor in its own procurement procedures, such as in the automotive industry, where it is anticipated to buy locally made cars and trucks whenever possible for its own operations. NIRP also includes capacity-building measures such as training funds and lending programmes through non-commercial outlets like the Bank of Industry (BOI). Plans to support small and medium-sized enterprises (SMEs) are found in the National Enterprise Development Programme, a vehicle for providing finance, business development programmes, training and turnkey facilities for companies at this level.

Capacity-building measures of this nature are crucial because, while the country has made boosting manufacturing output, revenues and exports a strategic priority, doing so given the high operating costs producers face – a result of limited power and transport infrastructure, and the need to import equipment and raw materials – remains a challenge.

Opening up textile markets slashed the number of manufacturers in that segment from 124 in 1994 to 45 as of 2011, according to the Manufacturers Association of Nigeria (MAN), due to the difficulty local producers had in adjusting to the influx of cheaper goods. As a result, and in order to improve the scale of the domestic sector and allow it to better compete with imports, tariffs are now in place in a number of sectors, from cement to automotive.

Fast Response

The tariffs, at least in certain sectors, appear to be having the intended effect. Private sector responses to import tariff increases have been swift: the new tax regimes have stimulated investment, but also incentivised the smuggling of imports, which has the potential to derail the strategy. Rice tariffs, which vary by quality, have been rising ahead of a plan to ban imports by 2015 (see Agriculture chapter). The country wants to grow enough to feed itself, boost its milling and processing sector, and cut down on its food-import bill. As a result of the increased emphasis on hydrocarbons production, agriculture as an economic sector has suffered in much the same way as manufacturing has since the 1970s, which has prompted the government to try to overhaul the sector and improve efficiency. Nigerian rice accounted for 75.5% of supply in the 1990s, 55.1% in the 2000s and 53% from 2010 to 2012. Domestic producers’ inability to compete on price and taste explain the phenomenon – the cost of production is about double that in Thailand, one of the world’s main rice suppliers. Even with shipping costs and associated fees calculated in, Thai rice is cheaper in the Nigerian market. The tariffs and pending ban are intended to allow local producers to expand capacity in the long term. The tariff has been combined with public sector initiatives such as staple crop processing zones (SCPZs), which provide turnkey facilities and fiscal incentives to agro-industrial ventures.

However, in addition to smuggling, the Seaport Terminal Operators Association of Nigeria complained in April 2014 that in the first three months of the year 150 shiploads of rice, or 60,000 tonnes, had to be diverted to ports in neighbouring countries because of the high tariff. In March 2014 Ngozi Okonjo-Iweala, the minister of finance and coordinating minister for the economy, said the government was considering lowering the tariff on imported rice. She told local press, “We increased the tariff to 110%, and it encouraged some people to go and grow rice, and we grew 1.1m metric tonnes of the product. But it also encouraged smuggling by neighbouring countries because they immediately dropped their own tariffs to 10%.”

Looking to Auto Assembly

It is a similar situation in the automotive sector. The Automotive Industrial Policy Development Plan, approved in late 2013, establishes a 70% fee on all imported passenger cars up to 2019, after which it will fall to 55%. Commercial automobiles will be taxed at 35%. Nigeria’s population makes it an important market for vehicles, and it is likely to be of increasing importance as the population grows. Nissan has already said in October 2013 that it hopes to make Nigeria a manufacturing hub for the region, given the potential scale of the local market.

Currently, Nigeria imports nearly all of its cars, with an average of 50,000 new and 150,000 used vehicles entering the market through formal channels in recent years. However, a total of 5m vehicles were registered in 2013, according to Courteville Business Solutions, a private firm that provides registry services in 20 of 36 Nigerian states, implying a large informal market. According to the National Automotive Council, a government agency under the FMITI, the import bill for vehicles and parts was $7.4bn in 2013. The statistics available may not be accurate, however, given the size of the informal trade in vehicles and parts, and the challenge of collecting data in a large country where capacity for data collection and management is limited. The Nigerian Automotive Manufacturers’ Association is reliant on manifests from ships carrying vehicles into the country for its information, and warns that the numbers can be subject to distortions.

Smuggling

The risk of smuggling due to a tariff-based import replacement strategy is strong for both rice and cars. Nigeria ranked 136th out of 175 countries in Transparency International’s 2014 Corruption Perceptions Index, and outside the oil sector one of the most discussed examples is the Nigerian Customs Service. Border guards are widely perceived to be complicit in smuggling. At land borders in 2013, Customs officers facilitated the smuggling of an estimated 8000 50-kg sacks of rice a day in 2013, according to industry data. Akinwumi Adesina, minister of agriculture and rural development, pleaded at a legislative hearing in April 2014 for lawmakers to jail corrupt officials.

Power Up

Perhaps the greatest obstacle to manufacturing – and indeed any other sector in Nigeria – is electricity (see Utilities chapter). Erratic supply from the national grid requires backup generators, which typically are powered by diesel fuel and produce power at a more expensive rate per KWh than grid supply. MAN’s members spent N470bn ($2.87bn) on generators in 2011, according to a study of manufacturing in the country. The group estimates that the goal of getting 10% of GDP from manufacturing by 2020 will require current electricity production to jump from an average annual level of 3000 MW to 50,000 MW – roughly on par with South Africa – in that same time period.

Addressing this issue has been a priority for Jonathan’s outgoing administration, which recently oversaw a long-awaited privatisation process for generating and distributing assets in 2013 and 2014. Expanding supply will take time, however, particularly as new stakeholders tackle some of the remaining bottlenecks in the power sector, including a tariff that investors say is too low to allow for large capital injections, a set price for gas sales to generators that is far below global market rates and historically low collection rates of existing distribution companies. As a result, manufacturers will be relying on diesel generators for the coming couple of years. Large-scale power users, including Lafarge and Dangote Cement, often build their own captive power plants, with the possibility of selling the surplus into the national grid.

Furthermore, in June 2014 the Dangote Group took a step forward in its plans for a $9bn oil refinery and petrochemicals complex in the Lekki Free Trade Zone. The firm struck a deal with Engineers India for both project management consultancy, and engineering, procurement and construction contracts for the refinery and polypropylene plant. The complex is planned to have an input volume of 500,000 barrels per day of crude oil and will be co-located with a petrochemicals and fertiliser plant, with an output of 1m tonnes per annum (tpa) of polypropylene. The contract for the fertiliser plant was awarded to Saipem, a subsidiary of Italy’s Eni. Work on the site is expected to be completed in 2017.

Getting Credit

Access to finance, as is the case in many emerging markets the world over, is also a challenge for manufacturers, in particular SMEs. High street lending rates in Nigeria tend to hover in the mid-teens for most firms, and often higher for SMEs (see Banking chapter). Manufacturing accounted for 11.8% of private sector lending in 2013, down from 13.1% in 2012, according to the CBN, and the government has established several other avenues to boost this figure.

The Nigeria Export-Import Bank disbursed N9.44bn ($57.58m) in 2013, a 30% rise over N7.31bn ($44.59m) in 2012, with manufacturing getting 50.14% of the total, or N4.73bn ($28.85m). The BOI, which has a mandate of helping to promote and develop the domestic industrial sector, approved and disbursed N154.48bn ($942.33m) and N32.72bn ($199.59m), respectively, in 2013. Of the total disbursed, 5.2% was allocated to microcredit, with the rest being for term loans.

There are also two SME-targeted lending schemes, the SME Credit Guarantee Scheme and the SME Manufacturing Refinancing/Restructuring Fund, both formed in 2010. The former has provided guarantees to 40 ventures to date, while the latter has allotted N235bn ($1.43bn) in credit to some 535 projects, according to the CBN. “To allow for SMEs to flourish, Nigerians must have access to capital in the form of loans or grants with low interest rates," Tony Ohifeme Ezekiel, founder and CEO of Itex Furniture, told OBG.

There have been other sector-specific initiatives to improve access to credit. The Textile Intervention Fund, being managed by the BOI, received N100bn ($610,000) in seed capital from the government in 2010 to support manufacturing uses for indigenous cotton. In early 2013 Olusegun Aganga, head of the FMITI, credited the fund with saving 8070 jobs, boosting capacity from below 40% to 61% and helping half of the country’s textile ventures become profitable. However, in March 2014 local media reported the fund had collapsed. Mohammed Abubakar, president of the Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture, blamed loans to ventures without a secure cotton supply or that did not address capital needs.

Cement

Among Nigeria’s various manufacturing segments, one of the most visible in recent years has been cement. The country’s cement sector is dominated by a few large companies, with smaller firms importing and reselling. Dangote Cement is a major player and is now a globally known provider. Two other world leaders operating in Nigeria, Lafarge and Holcim, announced in September 2014 that they were going ahead with a merger of their worldwide operations, pending final approval by the European Commission, a $50bn deal that would create the world’s largest producer.

Cement output climbed 15.6% in 2013 to 21.2m tonnes, outstripping the average increase in the past years of 10.9%. Nigeria’s per-capita consumption of cement was 126 kg, according to the “Global Cement Report 10th Edition”. With the global average at 510 kg, this suggests plenty of room for growth, especially as in 2012 the government estimated the country had a housing shortage of 15m-20m units. Infrastructure spending is also expected to serve as another demand driver. However, quality has been a concern in recent years, and the Standards Organisation of Nigeria (SON) introduced new rules to reduce the risk of structures collapsing. It mandated that 32.5-grade cement can be used only for plastering. Builders are now required to use 52.5-grade cement for building bridges, and 42.5 grade for columns, slabs and block moulding. While Dangote Cement produces 52.5 grade currently, the ruling is expected to impact Lafarge more than other producers because the company has a larger proportion of the lower grade in its product mix. Producers sued in hopes of winning a court judgement against SON’s decision, citing 32.5 as an acceptable grade worldwide, but the suit was rejected in June 2014.

High Prices

Cement prices are high, between double and triple the global average in recent years, according to industry reports. This is due in part to energy costs, such as the expense of ensuring consistent access to electricity and firing cement kilns. Prices are also impacted by protectionist policies from the administration of former President Olusegun Obasanjo, which banned foreign investors from importing cement unless they established local production. Dangote Cement, which now has one of the highest profit margins in the sector, began its operations soon after this was implemented.

The country remains committed to protecting its cement market, with a recent example coming in late 2012, when cheap imports dropped the price of a 50-kg bag from an average of N2000 ($12.20) to N200 ($1.22). Tariffs were boosted as a response, and cement producers profits rebounded in early 2013. Capacity upgrades are a theme across the Nigerian cement sector, with Lafarge, Ashaka Cement, Dangote Cement and others in expansionary modes. The Dangote plant at Obajana in Kogi State is the largest in Nigeria, and expansion plans could make it one of the world’s largest. Dangote Cement’s plans for Africa include a cumulative $3bn in spending on new cement works on the continent, with $1bn planned for disbursement in 2014. The overall plan is to triple the group’s production by 2017, boosting it to 61m tonnes a year. Meanwhile, Ashaka told local press in late 2014 that it is planning on investing around N100bn ($610m) in expanding its cement facility in Gombe State. Alhaji Umaru Kwairanga, the firm’s chairman, said the scheme would boost production from 1m tpa to 4m tpa. Also in late 2014, Lafarge proceeded to buy stakes from minority shareholders in Ashaka. The firm already owns 58.61% of Ashaka, following an off-the-market deal with a value of N41bn ($250.1m) in which Lafarge Group sold its stake to its African subsidiary. The takeover is part of Lafarge’s plan to boost cement production in the country by investing an additional $1.37bn over the next three to four years, doubling its capacity to 16m tonnes.

Mining

Nigeria exported tin, columbite and coal into the early 1970s, but activity died out as crude oil became the focus. Efforts to revive the sector have been several years in the making, beginning with a bidding round in 2006 (although individuals can also seek licences), and the passage of the Nigerian Minerals and Mining Act in 2007. The Metallurgical Industry Bill, intended to address details regarding the metals sector, was awaiting approval by the National Assembly in March 2015. The Ministry of Mines and Steel Development has designated coal, bitumen, iron ore, limestone, barites, gold, lead and zinc as strategic assets. In addition the country has deposits of gemstones, tungsten, bauxite, copper, kaolin, feldspar, gypsum, granite, marble, soda ash, talc, zircon, phosphates, rutile, monazite and ilmenite.

Total mined output for 2013 rose from 60.4m tonnes in 2012 to 60.5m tonnes, according to the CBN’s annual report for the year. This was much less than the 23.3% spike seen in 2012, which is attributed to increases in production across the range of minerals. At present, the small-scale mining sector employs 500,000 miners and supports a total of 2.5m dependents, according to a report by the UN and the African Union. Illegal mining has been an issue in Nigeria, as elsewhere in West Africa, although enforcement of licences and production is being enhanced in order to address this.

The potential for developing mining activities in Nigeria is significant, according to the Extractive Industries Transparency Initiative (EITI), of which Nigeria is a member country. However, according to the EITI, illegal exporting and a general lack of regulation are causing the domestic sector to lose out on potential revenue. The group recommended adopting a taxation system similar to Nigeria’s petroleum sector, in which companies pay profit taxes. It also recommended regular reviews of the mining cadastre to remove licences from players that are not mining or exploring but merely holding these rights in hopes of reselling them. The EITI found that an estimated 70% of mining licences were held by speculators as of 2011.

FMCG

The FMCG sector is a manufacturing mainstay in Nigeria, as investors look to capitalise on a rising middle class. Foreign investment in Nigeria often comes with the expectation of a longer payback period, due to higher costs and a population that has far more potential than current purchasing power, but for FMCG producers revenue growth and profitability are strong. The FMCG market in Nigeria grew from $884m in 2009 to $1bn in 2011, according to a report on the African FMCG markets by Lagos-based Ciuci Consulting. Current spending patterns among the population as a whole show that food, shelter and transport account for 70% of disposable income, according to market research from Standard Bank, the South African lender.

These broad trends are reflected in the annual reports of some of the large food processing and FMCG firms. Cadbury Nigeria, for example, reported a five-year compound annual growth rate of 10.97%, according to market researcher by Meristem Securities, a Lagos-based broker and investment firm, while Unilever Nigeria has seen an average of 8.8% annual growth in turnover in the past decade. The performance has helped not only large multinational investors, but also local companies, including Dangote Group, United Africa Company of Nigeria and Flour Mills of Nigeria.

Spending Power

The growth is a result of a rapid expansion in household income; since 1995 Nigeria is second only to China in the rate at which this measure is increasing, according to Standard Bank’s research. However, there is also plenty of room to grow. Nigeria has the lowest household income among BRICS (Brazil, Russia, India, China and South Africa) and MINT ( Mexico, Indonesia, Nigeria and Turkey) countries, and per capita consumption of most consumer staples is lower than global averages by a wide margin. “For us, the most important factor is consumption per capita,’’ said Christos Giannopoulous, CEO of the consumer-staples company PZ Cussons Nigeria. “For anything we sell it is near the lowest in the world. It can only go up.”

Beer is a prime example of how price sensitive Nigerian consumers can be. Growth in Nigerian Breweries’ turnover had been at least 10.08% per annum from 2006 to 2011, reaching a high of 24.32% in 2007. However, this dropped to 5.71% in 2011, and was estimated at 6.22% for 2013, according to Meristem. The reason behind this decline is that consumers have been increasingly drinking home brews or other unregulated options, as they are cheaper – a trend that has been exacerbated by a weakening naira and fuel subsidy rollbacks.

Adaptation

Price sensitivity is a factor across African markets, often prompting FMCG manufacturers to innovate when it comes to lower-end products. SAB Miller, which entered Nigeria’s market in 2012 through an acquisition of the mid-sized International Breweries, came up with a solution in its home market of South Africa that may serve as a good model. It found a way to repackage a fast-spoiling local homebrew in order to extend shelf life from five days to five weeks. Chibuku Super, as the product is known, packages the brew in plastic bottles instead of cartons, and arrests the fermentation process. It is cheaper to produce than lagers and ales, and is therefore considered to have potential across the continent to draw in drinkers who cannot afford Western-style beers.

Another way to cut costs is to replace imported barley with locally grown sorghum, a tactic that Guinness Nigeria had adopted. From an initial model in which it bought sorghum for traders, Guinness has moved to a more proactive role in ensuring the quality and consistency of its inputs. Sorghum accounted for more than 70% of grain volume at the brewer in 2012, and it has established relationships to help farmers and increase its own supply security. A partnership with the Institute for Agricultural Research at Ahmadu Bello University in Zaria helped to create a seed that boosted yields, according to the company. The two are now working with DuPont, the US chemicals company, to develop a seed resistant to striga, a parasite that is responsible for as much as 80% of crop failures of infested fields.

Distribution

Local market considerations are also crucial at the distribution stage. Informal markets are the primary outlets for most FMCG products in West Africa, and formal retailing is only a small part of the total. The number of retailers and restaurants is growing, but middlemen who supply market stalls and street hawkers comprise the bulk of business. The pressure to shift activity to the formal sector is coming from retailers that are looking to tap into lower-income segments and the government. Yaw Nsarkoh, managing director of Unilever Nigeria, told OBG, “Nigerian consumers are, as a whole, underserved and overcharged. The prices of consumer goods in the country are two-and-a-half to three times the global average. With high levels of poverty, this is not a sustainable model.”

In Lagos, for example, the state government has been establishing no-hawker zones and is converting open spaces into markets where hawkers can be settled. However, for street vendors, the lure of the clogged artery road is strong. For much of the day, main streets are packed with cars in stop-start traffic jams, so that they are moving slow enough for hawkers enjoy a captive market of drivers and passengers. Monitoring informal channels is important to understand the size, type and geographical scope of operations, said Giannopoulos. He added that companies are expanding their distribution fleets and delivery methods, but generally work with distributors that come to its storage depots to buy on a cash-and-carry basis. Cash-and-carry distributors provide access for manufacturers to millions of consumers, both domestically and abroad, but lack feedback on trends in demand or demographics. Nsarkoh said, “As more formal retail outlets come online, manufacturers are beginning to emphasise premium product lines to safeguard margins.”

Foreign & Domestic

As part of the wave of investor interest in Africa following the 2008 global financial crisis, several new large-scale FMCG investments and joint ventures have been announced. Proctor & Gamble announced a $100m expansion plan in 2009, and in February 2011 Nestlé opened a N12bn ($73.2m) factory to make food products under its Maggi brand name. PZ Cussons has teamed up with Wilmar International to cultivate domestic oil palm for local production of palm oil-based goods. While Nigeria is keen to attract foreign investment across all economic sectors, the government is working hard to channel capital into value addition for indigenous crops, as with rice, in large part thanks to the Agricultural Transformation Action Plan, a series of reforms headed by the Federal Ministry of Agriculture and Rural Development that aims to boost agricultural output and improve supply chains (see Agriculture chapter). This plan includes the establishment of 14 staple SCPZs across the country.

Outlook

For the short and medium term, the government’s focus is on import replacement and addressing primary sector blockages, such as power, transport infrastructure and financing. Nigeria’s petrochemicals sector could see large expansion as a result, with Dangote Group starting work in 2015 on its petrochemicals complex in the Lekki free zone, east of the central business district, which would include an oil refinery and other industrial enterprises. The momentum is certainly moving in the right direction, giving investors ample tailwinds to ensure profits in spite of the challenges. The country’s baseline fundamentals, including rising purchasing power, a growing population and limited penetration, make it an attractive long-term bet, as evidenced by the spate of new investments in recent years and the strong performance of companies in the FMCG, auto and building material segments.

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The Report: Nigeria 2015

Industry chapter from The Report: Nigeria 2015

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