Manufacturers are pumping billions of naira into local raw materials sourcing as foreign exchange (FX) scarcity continues to hurt their capacity to import inputs.
FX crunch due to oil price lows since 2014 has disrupted productions and projections, forcing 54 small factories to shut down in 2016 and threatening more closures and job losses this year in the wake of COVID-19 and crunching FX scarcity.
But multinationals, conglomerates and factories have been responding, pumping billions of naira in backward integration projects and supporting farmers to raise their local input sourcing. Already, local input sourcing has risen to 60.5 percent in 2019 from a low of 47 percent in 2014, data from the Manufacturers Association of Nigeria (MAN) say. On the average, local input sourcing has hit 56 percent since 2014.
Backward integration occurs when firms acquire their suppliers or produce what their suppliers used to.
FrieslandCampina WAMCO, a Dutch dairy maker, has set up 16 milk collection centres in Oyo State and is constructing 10 new ones for the collection of raw milk from local herdsmen as input.
“We are collecting about 40,000 litres a day. Our actual storage capacity is 85,000 litres, which means there is still a lot of room for this to increase,” according to Ben Langat, managing director, FrieslandCampina WAMCO Nigeria, in a recent online interview with BusinessDay.
“Presently, we are in five states – Oyo, Ogun, Osun, Kwara, and we have just launched into northern Nigeria with a large project that is going on in Niger State in Bobi grazing reserve. In 2019, we built a new factory and the bulk of fresh milk that is collected is what we use in producing our Peak yoghurt range,” he says.
Dangote Sugar is pumping billions in sugarcane plantations across northern states to enable it cut raw sugar imports. Raw sugar, an essential input for sugar makers, is still being imported as $337.3 million was spent on the importation of the raw material in 2018, according to the National Sugar Development Council (NSDC), an agency in charge of sugar development in the country. But manufacturers are establishing nurseries and plantations to bridge this gap.
Dangote Sugar’s $700 million project in Nassarawa State is expected to see its plant in Tunga, Nassarawa State, produce 450,000 metric tons and generate 90 megawatts of power annually when completed.
Aliko Dangote, Africa’s richest man and president of Dangote Group, said in early 2019 that his investments in sugar plantations and refineries would cut prices and place Nigeria on the global map.
PZ Wilmar, a subsidiary of PZ Cussons, has 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 2,369ha are in an area known as Calaro Extension. Its investment in oil palm plantations in Cross River State alone is worth approximately $150 million, Santosh Pillai, managing director of PZ Wilmar, says.
The firm also acquired Ibiae plantations with 5,595ha; Ibad plantations in Akampa with 7,805ha; Kwa Falls in Akampa Akpabuyo with 2,014ha, and Oban plantations, also in Akampa, with 2,986ha.
“We are determined to continue with these investments and looking for opportunities to expand our plantations in the state. We have also invested around N20 billion in an oil palm refinery in Lagos,” he states.
Brent crude price was $43.13 per barrel, with WTI crude at $40.55 per barrel as of 4.09pm on Friday. Naira-dollar exchange rate is naira at N462-N470/$ in the parallel market on Friday, as against N360/$ in early to mid-March. Though the official rate is lower, importation of inputs is now more expensive for manufacturers. The CBN is working on FX unification of multiple FX rates— a condition given by the International Monetary Fund (IMF) before pushing $3.4 billion to Africa’s largest economy.
Jesmin Rahman, IMF mission chief for Nigeria, said in a virtual fireside chat Thursday last week that exchange rate unification and greater flexibility was the way to go for Nigeria.
But manufacturers are looking at beating naira volatility by setting up enduring local input sourcing projects.
Flour Mills of Nigeria (FMN) is pumping N50 billion in Sunti Golden Sugar Estates, Niger State, featuring 17,000ha of irrigable farmland and a sugar mill processing 4,500 metric tons (MT) of sugarcane per day.
At full capacity, the estate can produce 1 million tons of sugarcane, which roughly translates into 100,000MT of sugar yearly, according to John G. Coumantaros, chairman of FMN.
According to Coumantaros, the Sunti Golden Sugar Estates achieved its first development target of reaching 2,836ha of land under cane in July 2018.
Many manufacturers are also working with suppliers, providing them with funding, technical support and market.
Guinness Nigeria is supporting over 30,000 smallholder farmers, who supply them with sorghum, to enable them move from basic to more efficient and productive yields.
“In our view, it is a contribution that is beyond buying seedlings. We assure them of the market for their produce. As you are aware, African farmers have issues with a reliable market.
Therefore, being able to assure them of the market gives them confidence,” Baker Magunda, managing director of Guinness Nigeria, says in an interview with BusinessDay.
Nigeria Breweries is also buying sorghum and cassava from Psaltery Nigeria Limited and others, providing support for them.
Biggest food maker, Nestlé Nigeria plc, sources 80 percent of its maize, sorghum, millet, soya, cassava starch, cocoa powder, and palm olein from more than 41,600 local farmers and processors scattered across the country.
Nestlé Cereals Plan project has over 30,000 farmers who supply 100 percent of the grain requirement for Golden Morn Maize. Through its Sorghum and Millet in the Sahel (SMS) project, now called Nestlé Nigeria & IFDC/2Scale Project Sorghum & Millet, it engages a lot of farmers, thereby raising their incomes while reducing unemployment.
