Nigeria has a varied industrial sector, evidenced by the number of separate activities tracked as part of the government’s GDP valuations. Despite 2020 being a tough year for many sectors worldwide, two industrial segments that the country is known for posted positive growth. Major projects continue to push ahead, such as Nigeria’s first privately owned oil refinery and new cement plants, while government plans to add greater value to agricultural output kicked off with external financing. The construction of new free zones is also ongoing, providing investors with more opportunities close to seaports and in the hinterlands. Furthermore, a government decision made near the end of 2020 regarding vehicle imports is setting the tone for the vehicle assembly segment in 2021, and a landmark moment that came around the same time could provide new opportunities.
Structure
Industrial activity is overseen at the national level by the Federal Ministry of Industry, Trade and Investment. The primary mandates of the body are to expand industrialisation – in part by supporting small and medium-sized enterprises active in manufacturing – facilitate the international exchange of goods, and attract foreign and domestic investment. A second government office crucial to the development of industry is the Nigeria Export Processing Zones Authority (NEPZA), which was established nearly 30 years ago to build and operate free zones in the country, as well as license and regulate companies.
In terms of composition, the National Bureau of Statistics (NBS) divides the manufacturing sector into 13 segments: oil refining; cement; food, beverages and tobacco; textiles, apparel and footwear; wood and wood products; pulp, paper and paper products; chemical and pharmaceutical products; non-metallic products; plastic and rubber goods; electrical and electronics; basic metal, iron and steel; motor vehicles and assembly; and other manufacturing. This breakdown helps to track production across various activities and create tailored plans.
Sector Performance
According to the NBS, the manufacturing sector as a whole contracted by 2.8% in 2020, after expansions of 2.1% and 0.8% in 2018 and 2019, respectively. Meanwhile, nine of the 13 segments saw declines in activity, the steepest being oil refining (-62.2%) due to the drastic fall in oil prices stemming from the Covid-19 pandemic, followed by electrical and electronics (-16.5%). The other seven segments contracted by 12% or less. Food, beverages and tobacco proved to be more resilient, logging growth of 1.5%, and the chemical and pharmaceuticals segment grew by 2.5%. Cement and motor vehicles, meanwhile, both rose by around 4%. The latter three segments expanded more in 2020 than during the prior year.
Data from the World Bank shows that manufacturing value added as a share of GDP witnessed a steady decline from 20.9% in 1994 to 6.6% in 2010. However, the metric rose in most years of the following decade to sit at 11.5% in 2019. The NBS notes that manufacturing’s contribution to nominal GDP increased again in 2020, to reach 12.8%. A government decision made near the end of 2020 regarding vehicle imports is setting the tone for the vehicle assembly segment in 2021 The World Bank also tracks manufacturing exports as a share of total merchandise exports, which rose from 3.4% in 2013 to 8.6% in 2015, fell to less than 2% in 2016 and 2017, then rebounded to 10.7% in 2019. The following year manufactured goods fluctuated between a high of 11.5% of all exports in the second quarter and a low of 4% in the fourth quarter, per NBS reports. While oil will retain the top spot in Nigeria’s export composition for the foreseeable future, the government sees manufacturing as a way to diversify receipts and cushion the fallout from future oil price declines. Of the seven trade categories tracked by the NBS, manufactured goods are the third-largest export after crude oil and other oil products. At the same time, manufactured goods comprised two-thirds of imports in 2020.
Cement & Textiles
Nigeria is the continent’s largest cement market and hosts major players such as local BUA Group and Dangote Cement, as well as Lafarge Africa. LafargeHolcim, the French-Swiss parent company of Lafarge Africa, recorded a 5.6% fall in net sales globally during 2020, but noted that performance in Nigeria remained buoyant. Demonstrating the resilience of cement demand that year, the Nigerian operations of Dangote Cement witnessed a 45% year-on-year rise in revenue during the first nine months of 2020, according to the most recent data available as of March 2021. BUA Group, for its part, saw net sales rise by 20% in 2020. Furthermore, the Sokoto State firm plans to bring three new cement plants on-line by the end of 2022 (see Construction chapter).
Smaller segments are also receiving attention, such as the textiles industry that the government intends to revitalise. Nigeria hosted Africa’s biggest textile industry in the 1970s and 1980s, but recent decades have seen factors converge to nearly extinguish the industry, such as insufficient volumes of local cotton, high operating costs and an influx of cheap garments from other countries. This has resulted in Nigeria importing approximately $4bn worth of ready-made clothing each year. To get the local industry back on track, in 2019 the central bank removed all forms of textile materials from its list of items eligible for foreign exchange (forex), effectively ending textile imports. Moreover, since the beginning of 2020 all cotton needs were to be sourced locally. That year the production of cotton jumped from 920,000 tonnes in 2019 to 1.6m tonnes, while consumption rose from 805,000 tonnes to 989,000 tonnes.
Automotive
Alongside cement, motor vehicles and assembly was the top-performing industrial segment in 2020. Under the Nigerian Automotive Industry Development Plan, launched in 2013, various measures have been introduced to curb the high amount of vehicle imports – such as raising the total vehicle import tariff to 70% – and support the local industry, namely by licensing 35 companies to assemble and produce vehicles in the country. Investment by automakers followed, including new or expansion projects by Kia, Nissan, Hyundai and PSA Group. However, supply has not kept pace with demand, and a high level of imports persists. An estimated 1.3m vehicles were imported in 2019, an increase on 734,000 in 2017, although smuggling makes it difficult to pin down an exact figure. The government reversed its policy on vehicle import taxes in the 2021 Finance Bill – lowering duties from 35% to 5%, but retaining a separate 35% levy – to help bridge the supply gap and lower the overall cost of transportation for Nigerians.
The decision has worried investors and other stakeholders. However, at the time of the announcement in November 2020 Yemi Osinbajo, the vice-president of Nigeria, said, “We are not giving up on the automotive industry. There is still a 40% duty on all imported cars, in addition to a policy that allows the government to buy only locally manufactured cars”. While the effect that the decision will have on the automotive segment remains to be seen, 2021 is expected to be a landmark year in another sense, with the introduction of the Hyundai Kona – Nigeria’s first 100% electric vehicle, which is assembled by Stallion Motors in Lagos. The car was unveiled in November 2020 and made available to the public in February 2021.
Agro-processing
Adding value to raw agricultural goods is another area of focus, seeing as Nigeria is a net food importer despite its favourable climate, a large amount of arable land and a high proportion of the population involved in farming. A lack of infrastructure to dry, sort, package and store output means the agriculture sector – which contributes more than 20% of GDP – suffers high post-harvest losses. Since 2016, when the five-year Agriculture Promotion Policy was initiated by the Federal Ministry of Agriculture and Rural Development, emphasis has been placed on increasing farmers’ yields through more sophisticated inputs and training, as well as investing in processing and storage facilities (see Agriculture chapter). The former has made more progress in recent years, with the latter ramping up in 2020.
Given that agro-processing is capital intensive, most funding in the segment comes from international organisations or public collaboration. In June 2020 the federal government announced plans to establish 142 agro-processing facilities across the country’s six geopolitical zones over the next 10 years. The initiative falls under a $1.2bn Nigerian-Brazilian agriculture development programme called Green Imperative, launched in 2018. According to Sabo Muhammad-Nanono, the then minister of agriculture and rural development, the centres will contain equipment to dry, process, package and store agro-commodities to the nutritional and economic benefit of 35m people.
A similar undertaking is the establishment of several Special Agro-industrial Processing Zones (SAPZ). The initiative is largely supported by the African Development Bank, which pledged $500m in funding in 2020 to develop the first four SAPZ in Anambra, Benue, Cross River and Ebonyi states. The project officially kicked off in January 2021 with the overarching goal to establish processing zones in high-production areas to minimise losses and add value to cereals, fruits and vegetables. In addition to Nigeria, the continent-wide programme will be rolled out in 17 other African countries. The first partnership meeting for the SAPZ initiative was held virtually in September 2021 and was attended by organisations such as the African Export-Import Bank, Africa Finance Corporation and the International Fund for Agricultural Development.
Oil Refining
The oil refining segment saw the largest contraction in the industrial sector during 2020, stemming not only from the low demand for fuel due to the pandemic, but also the temporary closure of Nigeria’s main refineries.
The government-owned Nigerian National Petroleum Corporation (NNPC) oversees four refineries: a pair in Port Harcourt with a combined capacity of 210,000 barrels per day (bpd), one in Warri with a 125,000-bpd capacity and one in Kaduna that can process 110,000 bpd. However, the ageing complexes were refining at about 20% of their capacities in the decade leading up to 2020, and by January of that year the facilities had been shut down for the NNPC to conduct a thorough review of what would be needed to upgrade them.
A year later, in January 2021, the appraisal for the Port Harcourt complex had been completed and the review of the Warri refinery was under way. Inspection of the Kaduna facility is expected to be finished by the end of 2021.
In late 2019 when the process began, the NNPC announced the ambitious goal of having the refineries modernised and back up and running in 2023, yet the disruption caused by the Covid-19 pandemic and the general slow pace of appraisals make it likely that the timeline will be pushed back. In the meantime, the private sector is stepping up its support. Local conglomerate Dangote Group has been constructing a refinery and petrochemicals complex near the Lekki Lagoon in Lagos State, which is forecast to begin operations in 2022 (see Energy chapter). The 650,000-bpd facility is set to be Africa’s largest refinery and should help to turn the tide of Nigeria’s oil trade balance. As Africa’s largest oil producer, Nigeria exports mostly crude stocks and then imports refined fuel at a premium. The new Dangote refinery, in addition to the upgrade of the NPCC facilities, are concrete steps in the direction of fuel self-sufficiency for the country.
Supply Chains & Inputs
The merchandise supply chain contains five general parties: supplier, manufacturer, distributor, retailer and consumer. Nigeria secures a large share of its manufacturing supplies from abroad, with the largest categories of imported inputs in 2019 being electrical machinery ($2.7bn), machinery and appliances ($2.2bn), and mineral fuels ($2.1bn). Approximately 75% of all of Nigeria’s imports are sourced from 10 countries in 2019: China was the largest supplier, at 27.5% of the total, followed by the Netherlands and South Korea, supplying around 10% each.
Long-standing supply chain challenges that existed before the pandemic included high import costs, bottlenecks and insufficient capacity at seaports, poor road infrastructure for distribution and a low level of technology adoption (see Transport & Logistics chapter).
The Covid-19 pandemic and the resulting global response of factory and border closures resulted in significant disruptions to international supply chains. In general, manufacturers struggled to source raw materials, intermediary inputs and equipment from international suppliers – namely China – while distributors faced lockdowns and other movement restrictions. In some cases, built-up inventory led to higher storage costs for non-perishable items and high waste of perishable goods, while in other instances inventories dwindled. Nigerian manufacturers also found it difficult to secure forex for imports, as lower oil prices and fewer crude exports negatively impacted the broader economy.
Adopting advanced technologies is one solution that manufacturers – indeed, players in all sectors – can implement in order to boost the efficiency of supply chains. Internet-of-things sensors, for example, can be leveraged to track assets, manage inventory and schedule machine maintenance. The pandemic has resulted in an accelerated push towards digitalisation across the global economy, and Nigerian manufacturers can capitalise on this trend to streamline operations.
Free Zones
Setting up in dedicated free zones is another option for manufacturers. NEPZA operates 23 active free zones in the country, with 13 located in Lagos State and three in the Federal Capital Territory of Abuja. Some are reserved for specific sectors, such as logistics, while others welcome all industries. A further eight free zones were under construction as of early 2021, including Ondo Industrial City, which began development in 2015 by the Ondo State government, and Badagry Creek Integrated Park in Lagos, where Kaztec Engineering has been developing the zone since 2014.
NEPZA has streamlined the process for setting up in federal government zones to six general steps: fill out an application and submit a $500 fee; share a project plan or feasibility study, which will be approved or returned with observations within five working days; discuss site location with the free zone authorities once an operating licence has been issued; remit capital through banks located in the zones and receive a Certificate of Capital Importation; prepare the necessary buildings or warehouse space, or construct a new building within certain specifications; and, lastly, move in and begin operations. If a company requires foreign employees, immigration offices are located within each zone to issue the appropriate documentation.
Companies wishing to establish themselves in a free zone are eligible for either a Free Zone Enterprise Licence, which allows them to carry out an approved activity within the zone, or an Export Processing Factory/Farm Licence for manufacturing or farming operations that export at least 75% of output. Licences are typically granted for one year and can be renewed upon expiry. General incentives available to businesses located in free zones include reduced or zero taxes and fees; preferential regulations on accessing forex; 100% foreign ownership of investments; and the ability to remit profits and dividends to a foreign investor’s home country.
Outlook
Although the pandemic disrupted international supply chains and local operations, the performance of some industrial segments bucked the trend. On the whole, Nigerian manufacturers may take this opportunity to emerge stronger and follow the lead of other sectors that turned to technology to continue and improve activity. Integrating digital tools in all areas of a plant, from tracking inventory to increasing the efficiency of production and monitoring finished stocks, will increase the competitiveness of Nigerian industry.
Meanwhile, higher levels of agro-processing and oil refining will likely provide the quickest wins, as both would not only boost exports and bring in more foreign currency, but also alleviate pressure on financial reserves by reducing imports. While it will take some time for the first four SAPZ to come on-line, the Dangote refinery and petrochemicals complex is scheduled to start producing value-added oil-derived products in 2022.
Other segments are poised for growth, such as metal and cement producers benefitting from high demand locally and across Africa as infrastructure builds resume in 2021, while electric cars could be the next frontier for the vehicle assembly segment.
Read More from OBG
