Recognising potential: The government promotes manufacturing while the private sector invests in some key projects

With its large population, its GDP still showing growth in the high-single digits in a recession-haunted world and its vast if underexploited natural resources, Nigeria is an attractive but challenging market for industrial firms. The sector is still quite small overall, accounting for less than 1% of GDP. Some fields are expanding rapidly, while others are starting to show signs of growth. There is certainly reason to accentuate the positive but by no means any cause to eliminate the negative. These themes can be illustrated by examining four industrial branches: cement, steel, petrochemicals and food processing.

CONCRETE ACHIEVEMENTS: As far as cement is concerned, 2012 will go down as quite a milestone. It was the year when Nigeria became self-sufficient. This has been an arduous 10-year process, based on the principle of backward integration, and it has worked. In the process it has produced a national champion that has gone trans-African and, in 2013, will likely be listed on the London Stock Exchange.

Back in 2002, Nigerian cement production was just 2.5m tonnes, far below requirements for a construction sector even then beginning to boom. Indeed, national consumption in 2003 was around 7.6m tonnes, or three times as high. While imports would obviously be necessary for some time, the national cement industry had to be revived. Key to the government’s approach was that import licences would be issued only to firms that were also producing locally or else had a clear commitment to do so.

FOREIGN PARTNER: The government has had a helper in the form of France’s Lafarge. The world’s largest cement manufacturer first came to Nigeria in 1972, building a plant at Benue with a capacity of 900,000 tonnes per annum (tpa). Then in 2001, Lafarge took over a majority interest in Ogun-based West African Portland Cement as part of its acquisition of the UK’s Blue Circle. The French giant also owns a share of almost 59% in the 1.3m-tpa Ashaka plant in Gombe State and has a minority stake in the 2.5m-tpa Unicem plant at Calabar. Most recently it doubled its Ogun-based capacity when it brought on-line the new 2.5m-tpa Ewekoro-2 plant in December 2011, with overall capacity at the plants in which Lafarge has a stake rising to 8.5m tonnes.

LOCAL SUCCESS STORY: But along with the foreign helper, the sector has received a domestic boost in the form of Aliko Dangote. Now reckoned by many to be Africa’s richest man, his companies account for approximately one-third of the value of shares on the Nigerian Stock Exchange (NSE). Having formulated a production-oriented strategy by 2004, Dangote proceeded to invest $6.5bn in the cement industry between 2005 and 2011, with his Dangote Cement aiming to enhance and expand capacity.

Dangote Cement’s assets include the Benue plant that Lafarge had once built, with the Nigerian company having carried out a reconstruction plan to raised the facility’s capacity to around 4m tpa.

Remarkably, it did so without recourse to a technical partner. In June 2012 it completed a second unit at its greenfield cement works in Obajana in Kogi State, raising the plant’s total capacity to 10.25m tpa.

That makes it the largest cement factory in Africa, and it is due to get still larger when a further 3mtpa capacity is added by 2015.

There is also a new 6m-tpa plant at Ibese in Ogun State, which opened in February 2012 and where capacity stands to be doubled before long. Additionally, yet another 6m-tpa plant is nearing the end of the pipeline in Calabar State, with Dangote eyeing the prospects of exports to Cameroon and Gabon as well as the local market.

Indeed, Dangote has pan-African ambitions. As of June 2012, cement factories were planned for completion before end-2014 in Ethiopia and South Africa (each 3m tpa), as well as Congo-Brazzaville, Gabon, Senegal, Tanzania and Zambia (1.5m tpa apiece).

Overall, in Nigeria and out of it, capacity could be as high as 50m tpa. This would be a good credential for the listing on the London Stock Exchange that Dangote is planning for 2013. END OF IMPORTS?: Meanwhile, back in Nigeria, the sector’s total installed capacity now stands at around 27m tpa and 2012 production looks to top 21m tonnes, jumping 56% from the 12.8m tonnes recorded in 2011. And, for the first time, it covers the briskly rising total of domestic consumption. One consequence has been a good deal of noise to the effect that cement should be considered as the preferred material for the much-needed road-building programme, rather than imported asphalt, in line with Western standards of road construction. Another is the possibility of fulfilling a government promise to ban imports as they are no longer necessary.

Not everyone agrees. High cement prices have been a bone of contention for some time, with President Goodluck Jonathan intervening in mid-2011 to call for a 25% price reduction. The desired effect was achieved within three months but prices have crept up again since then. There would seem, as of August 2012, to be no dramatic price effect despite all that extra capacity. However, Dangote is working on developing and opening up his distribution system, arguing that liberalised distribution is needed before price effects can really be felt.

The high input and cost of doing business – especially infrastructure like power and roads – are primarily responsible for the relatively high price of cement, and it will be up to the government to remedy these deficiencies over time. In the meantime, private players are fending for themselves. As such, Lafarge built a 90-MW plant to support Nigeria’s power challenge and minimise the impact of power outages, which affects production output, leading to scarcity and higher prices.

Finally, there is the question of what potential local demand is: with infrastructure to build and solutions to be found to address the country’s acute housing shortages, it could be as high as 35m tpa.

STEELING A MARCH: Meanwhile, in the ferrous metallurgy industry, the Ukrainians are coming – perhaps. A delegation from the former Soviet state visiting in early July 2012 declared willingness to inject $2.65bn in the Ajaokuta steelworks in Kogi State as part of Nigeria’s federal privatisation programme. A project launched by the government in the 1970s, conceived as an integrated iron and steel manufacturing facility with an eventual capacity of 5.2m tpa and potential to act as the basis for the country’s long-hoped-for industrialisation, Ajaokuta has never quite lived up to expectations.

Mismanaged through the years of military rule, Ajaokuta did little better when the civilians took over in 1999. A concession arrangement with a US-based gas company proved unsuccessful. Another followed in 2004 with a metallurgical specialist, namely Global Infrastructural Holdings, owned by Indian steel magnate Pramod Mittal. Global also had a concession on Ajaokuta’s Kogi-based ore supplier and an 80% stake in another Nigerian steel producer, Delta Steel. But arrangements collapsed in allegations about investor asset stripping and broken government promises, with arbitration continuing into 2012.

Perhaps 90% finished, Ajaokuta would achieve a capacity of 3.9m tpa of liquid steel as a result of the $2.65bn injection of funds, according to Reprom, the Ukrainian firm that would be dealing with the project. No federal funds would be involved, with Ajaokuta’s assets serving as state equity. The facility could be an important factor in the development of the broader Nigerian economy. “The completion of the Ajaokuta steel project is key to the development of the industry. Its completion will spike demand for iron ore as quality and steel production will increase,” Alex Abaito Ohikere, the director-general and CEO of National Steel Raw Materials Exploration Agency (NSRMEA), part of the Ministry of Mines and Steel Development, told OBG.

Nigeria could do with the steel. Annual per capita consumption of the metal – a key indicator of an advanced economy – is extremely low, at around 10 kg as against a global average of 150 kg. Raising this figure to 100 kg is part of Vision 20:2020, Nigeria’s long-term economic development plan. Meanwhile, importing what ferrous metals the country does use is a drain on foreign exchange reserves.

STEEL GOODS: Developments in the downstream sector are beginning to be encouraging, however. For example, speaking in February 2012, Joseph Odumodu, the head of the Standards Organisation of Nigeria, the federal government agency that regulates the quality of goods produced, imported and used in the country, said that local capacity existed for around 80% of the 200,000 tonnes of reinforcing steel bars required nationally, and that he expected 100% coverage to be reached before the year’s end. Standards have to be raised, Odomodu admitted, but he was able to point to a positive example: he was speaking at the opening of a $20m thermal mechanical treatment plant in Ogun State by Phoenix Steel Mills, a 2004 start-up that, he noted, had already achieved export standards for reinforced steel bars.

The manufacturing of steel pipes, of which the country needs about 1m-1.2m tonnes every year, is another area of potential growth. The SSC Pipe Mill in Abuja can produce just 100,000 tonnes of these. But, visiting that factory in January 2012, Diezani Alison-Madueke, the minister of petroleum resources, noted that China’s Yulong Steel had recently committed to establishing a 250,000-tpa pipe mill in Yenegoa in Bayelsa State, while Vigeo Steel was taking steps towards establishing a 200,000-tpa facility in Abeokuta. Additional pipe mill manufacturing facilities could service the oil and gas industry, helping that sector meet the requirements of the 2010 Local Content Act (see Energy chapter).

As to rolling mills, there has been a revival at two formerly state-owned facilities. There has been activity at the former Oshogbo Steel Rolling Mill, bought by the Dangote Group in 2005 as part of a privatisation deal. Rebranded as the Dangote Integrated Steel Rolling Mill and rehabilitated at a cost of around $70m to almost double its original capacity, this facility launched operations in 2012. Meanwhile, Zuma Steel West Africa has invested N45bn ($288m) in a complete re-equipment of a facility at Jos, including building a coal-fuelled power plant as a solution to its electricity supply challenges.

ELECTRICITY: Indeed, as in many areas of the Nigerian economy, securing a steady supply of power is not always easy and has perhaps slowed development of the industrial sector. “Power is the primary obstacle to production. We need to run generators for almost the entire day and must commit the majority of our overhead cost to the purchase of diesel in order to do so. Effective implementation of regulations from the Nigerian Electricity Regulatory Commission is critical to improving this situation,” George Onafowokan, the managing director and CEO of Coleman Wires & Cables, told OBG.

Both Zuma and Dangote are operating on imported billets. Using locally produced billets is not always wise: local output over-relies on scrap metal as a raw material, which is a source of some of some quality issues. But remedying this situation may require major investments in the mining sector. “Infrastructure problems are a huge issue because of the inability to remove raw materials from mining sites. The steel industry, therefore, still depends on scraps and not iron ore,” Ohikere of NSRMEA told OBG.

FEEDING FRENZY: Iron ore is not the only raw material with unrealised potential in Nigeria. There is also natural gas. While Nigeria will be using its rising gas output to fire its power stations and to continue exporting liquefied natural gas on a large scale, authorities are also hoping to use it as industrial feedstock, positioning the country to become a regional centre for petrochemicals manufacturing.

Significantly, foreign investors are interested. The most recent global heavyweight to announce its intentions in this direction is Japan’s Mitsubishi Corporation, which in April 2012 signed a joint venture (JV) agreement with the Nigerian firm Notore to develop a fertiliser plant that will be capable of producing 1700 tonnes per day (tpd) of ammonia, 3000 tpd of urea and 1500 tpd of other petrochemicals. The new facility is expected to be operational by 2016, at an overall cost of $1.5bn. The JV project will be located at the free trade zone in Onne, on the site of an existing facility run by Notore, which accounts for 100% of the growing domestic urea market and sells its products to France and Uruguay as well as to several West African countries.

GAS-BASED INDUSTRIALISATION: This follows announcements in 2011 of other gas-based projects. Saudi Arabia’s Xenel signed a memorandum of understanding in March of that year for a $3.5bn plant producing 1.3m tpa of polyethylene and 400,000 tpa of polypropylene, in the Niger Delta’s Koko Free Trade Zone. David Ige, the group executive director for gas and power at the state-owned Nigerian National Petroleum Corporation, has said that this free zone is destined to become a “gas-based industrial city” once a 40-km gas pipeline to it is built. In March 2012, Indian firm Nagarjuna Fertilisers and Chemicals signed up for $2.5bn worth of gas-based fertiliser manufacturing plants in several geographical zones of Nigeria, although financial closure has not yet been reported. Singapore-based Indorama, too, has gas-based ambitions: in May 2011 it announced plans for a $700m plant to produce methanol, as well as a $1bn, 1m-tpa fertiliser plant.

Indorama already has a well-established presence in the country. As part of a privatisation effort, in 2006 the company bought a majority stake in the petrochemicals complex at Eleme near Port Harcourt, bringing the business to profitability within two years thanks to an immediate dose of turnaround maintenance and subsequent investments. By February 2012 investment had reached $575m, quite apart from the $235m Indorama had paid for its stake. In July 2012 the firm commissioned a new plant at Eleme to manufacture polyethylene terephthalate (PET), adding to its capacity to produce 350,000 tpa of polyethylene and polypropylene resins, as well as 200,000 tpa of olefins. With demand for PET, a chemical used in synthetic fibres and plastic bottles, expected to expand in Africa, Indorama’s PET project is likely to prove a shrewd investment.

GOING LOCAL: With poverty widespread and consumption oriented toward staples, Nigeria presents some challenges for food processing companies, but opportunities exist as well. Major global players in the local market include Swiss food giant Nestlé, or more precisely, its affiliate Nestlé Nigeria, NSE-listed since 1979. The local unit’s revenues increased from around N43bn ($275.2m) in 2007 to just short of N98bn ($627.2m) in 2011, yielding a pre-tax profit of N21.7bn ($138.9m) in the latter year. All that has been on the back of significant effort: investments reached nearly N50bn ($320m) between 2009 and 2011 – N18.6bn ($119m) in 2011 alone, with one new factory built and brought on-stream, and another undergoing major expansion works.

It is not just shareholders and production in respect of which Nestlé has “gone local”. Particular local tastes are catered for, too. Nestlé’s Nigerian Maggi cubes are made with fermented soya that ensures the sour note beloved of locals – and are so Nigeria-specific that they do not sell even in neighbouring Ghana. Nestlé’s Milo malt extract, too, is made with sorghum in Nigeria. Nestlé has been assiduous in its drive to encourage cassava growing to source enough cassava starch for its purposes, incidentally pleasing a government that wants encourage the use of cassava (see Agriculture chapter).

ASIAN PRESENCE: Nor is it only the Western consumer products players to have penetrated the food processing sector. Singaporean food commodities giant Olam has been extremely active in recent years not merely in large-scale agricultural deals, some benefitting a multitude of small-scale farmers, but also in food processing sector acquisitions and JVs.

In early 2010, for instance, Olam purchased, for $107.6m, a 99.5% share in the wheat milling and noodle-making facilities of Crown Flour Mills, one of Nigeria’s three biggest wheat millers. In December of that year, it announced plans for a 450,000-tpa, $200m sugar refining venture in Lagos, with the powerful Lababidi Group (20%), a sweet proposition in Africa’s second-largest sugar market.

Cocoa-processing facilities figured in a $50m plantation project announced in late 2010 with the Ondo State government. Similarly, rice milling facilities were included in $49m and $90m rice farming operations announced in December 2011 and February 2012, while a similar sum was earmarked for further expansion of wheat milling capacity. Also in February, Olam paid $167m to acquire Nigeria’s second-largest biscuit and confectionery maker, Titanium Holding, which accounts for 18% of the biscuit and 28% of the candy market. The deal included three factories and distribution infrastructure. In June 2012, Olam paid $66.5m for the dairy and beverages company Kayass, which operates two plants in Lagos that produce drinks and packaged milk powder.

In short, the Singaporean heavyweight is taking Nigeria very seriously indeed. Not surprisingly, given the country’s size and its fast growth, staples like sugar, rice and flour add up to very big business. Exports are a consideration, as well. Commenting on its takeover of Titanium, Olam talked of aspirations to make its Nigerian operation an “export hub” for biscuit and candy exports to the West African region.

OUTLOOK: The local industrial sector is a mixed picture. While largely undervalued – in 2009 the UNDP estimated the contribution of manufacturing to GDP at a mere 3.6% – state policy has encouraged the success of local firms in the cement segment, which has grown rapidly in recent years. There are also positive signs emerging from the steel sector, which has been largely dormant for some time. Major international players are banking on a gas-based future in petrochemicals, while the food sector is proving attractive to foreign firms that are now well-entrenched in the local market. Nigeria may be a challenge, but its prospects are nonetheless exciting.

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The Report: Nigeria 2012

Industry & Retail chapter from The Report: Nigeria 2012

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