Manufacturers look to local inputs to ease FX pressure

Nigerian manufacturers are increasingly embracing local raw materials to reduce their exposure to the foreign exchange.

Nigeria has seen its worst foreign exchange crisis in the last nine years on the back of an extremely high dollar demand and a relatively lower supply.

The nation’s manufacturers have been on the receiving end as they import some of their raw materials from hot-rolled steel to chemical gums.

The naira has weakened by over 70 percent after the foreign exchange float in 2023, but this has even driven manufacturers to seek more local alternatives to their raw materials.

FrieslandCampina WAMCO is one shining example. It works with more than 20,000 pastoralists in Oyo, Osun, Ogun, Ondo, and Kwara, including the northern states, to source raw milk – an essential input for its products.

It sources five million litres of milk from local pastoralists. Some of its products today contain 100 percent of local milk sourced directly from farms.

Read also: How Nigerian manufacturers can beat FX crunch

“We train and support these farmers to help them grow trees within their communities, which form part of our dairy development sites. We also help them with pasture development,” the company noted in 2023.

Similarly, Nigerian Breweries said it invested N78 billion in sorghum and cassava cultivation over a period of five years. Sorghum and cassava are inputs for making beer.

Hans Essaadi, its managing director, said last year at the company’s 2023 pre-Annual General Meeting media parley that the biggest brewer would continue to invest in the development, improvement and commercialisation of its agricultural raw materials.

“To increase the positive impact of local sourcing of its agricultural raw materials, Nigerian Breweries has also continuously expanded its sorghum sourcing areas to new communities,” he said, disclosing that it was working with research institutes to achieve higher yield varieties in northern Nigeria.

Attention may have shifted to Dangote Petroleum Refinery, but Aliko Dangote, Africa’s richest man, owns a cement plant that sources its limestone, gypsum, clay and silica locally.

Not only Dangote Cement but also BUA Cement and Lafarge Africa source their materials locally from various sites across the nation.

Also, Nestle said in June 2023 that it was working to develop local suppliers of onion powder in Nigeria and Senegal, and turmeric powder in Nigeria.

“In the area of grains, we have successfully developed local farmers and processors … This has been achieved through (a lot of) training in good agricultural practices, harvesting, warehousing and cleaning practices,” Nestle said, according to Reuters.

“We are now taking this next step to introduce these farmers to regenerative agriculture as part of our sustainability journey and commitment.”

Despite the recent news of imminent exit of PZ Cussons, its joint venture with Wilmar, which began in 2010, has emerged as a profitable venture.

PZ Wilmar owns 26,500 hectares of palm oil plantations in Cross River State. About 5,549 hectares (ha) of oil palm plantation are located in Calaro Estate, while 2,369 ha are in an area known as Calaro Extension. With this, PZ and other manufacturers source their palm oil from Wilmar.

In the financial year ended May 31, 2024, PZ Wilmar contributed £10.7 million (FY2) to PZ Cussons’ adjusted operating profit of £30.3 million. This was an improvement from £7.5 million contributed by Wilmar the previous year.

“Compared to the prior year, this improvement reflects continued strong commercial execution.”

Manufacturing sector’s local raw materials sourcing increased to 55.3 percent in the first half (H1) of 2023, from 48 percent recorded in the corresponding half of 2022 and 53.5 percent reported in the second half of 2022, the Manufacturers Association of Nigeria (MAN) said.

Ifeanyi Okeleke, a farmer and industrialist, said the local raw materials sourcing is more pronounced in the agro-allied sector, where manufacturers seek more cassava, starch, milk, and animal skins for production.

“For instance, I know of Aba and Lagos shoemakers who source their leather or hides from Kano and Kaduna tanneries and from herders. Also, I have also supplied cassava to several companies in the fast-moving consumer goods sector,” he said.

Read also:Nigerian manufacturers’ 2024 outlook hinges on FX stability

Rising raw materials cost

In spite of the backward integration efforts made by manufacturers, raw materials costs are rising.

This is so as some of the inputs are still being imported. Also, the cost of beneficiating or processing raw materials is rising due to high cost of power, rising logistics costs and scarcity of inputs.

The raw material costs of BUA Foods Plc, Nigerian Breweries Plc, Dangote Sugar Refinery Plc, Nestle Nigeria Plc, BUA Cement Plc, Nascon Allied Industries Plc and Champion Breweries Plc rose to N1.27 trillion in H1 2024, indicating a 121 percent growth from N576.5 billion reported in the corresponding period of 2023.

The combined raw materials cost of Nestle Nigeria, Nigerian Breweries, BUA Foods, NASCON Allied Industries and Champion Breweries increased to N718.7 billion in the first nine months of 2023, from N551.8 billion reported in the same period of 2022, according to BusinessDay calculations.

Manufacturers’ challenges

Manufacturers are facing forex crisis, which has crippled most of them that are heavily dependent on foreign inputs.

Several of them are struggling to access cheap funds due to the high interest rate environment. The CBN raised the base interest rate or monetary policy rate by 50 basis points to 27.5 percent in September 2024, which has seen rates in banks hover between 32 percent and 40 percent, according to financial analysts.

“The continued increase in interest rates, which now totals 15.75 percentage points since May 2022, would compound the challenges faced by the sector, including rising production costs in the face of declining consumer purchasing power,” said Segun Ajayi-Kadir, director-general of MAN.

“With the increase in borrowing costs, manufacturers will now pay over 35 percent on their credit facilities. Clearly, this will lead to increase in production costs, higher prices of finished goods, lower competitiveness and production capacity expansion,” he noted.

A combination of high energy and logistics costs, multiple taxes and port delays, including forex crisis, saw 767 manufacturers shut down operations, with 335 distressed in 2023.

“There is a need to resolve issues of electricity tariff and provide single-digit funding for manufacturers,” Ike Ibeabuchi, an emerging markets analyst, said.

“It is also vital for manufacturers to begin to explore new markets to reduce their risks and increase forex earnings. That will solve half of their problems.”