Nigerian manufacturers are cutting back on local raw materials sourcing after it became easier to access foreign exchange to import inputs, BusinessDay learns.
Amid recession in the first half of 2017, many manufacturers sourced local alternatives to foreign inputs, pushing up percentage of local input preference to 60.72 percent, according to data from the Manufacturers Association of Nigeria (MAN).
But with several market interventions by the Central Bank of Nigeria (CBN), which resulted in foreign exchange stability, many manufacturers resumed chase for foreign inputs at the expense of local alternatives, pushing down local input preference to 57 percent.
“The relatively more available forex, resulting from the CBN intervention, may have been rubbing off negatively on backward integration agenda as firms prefer to import raw-materials as against inward looking,” MAN states in its latest economic review obtained by BusinessDay.
Oil price crashed to less than $40 per barrel in 2016, leading to low foreign exchange inflows into the mono-product Nigerian economy, which relies heavily on oil for much of its revenue and foreign exchange. This meant fewer dollars for manufacturers who had to import inputs, machineries and packaging materials. More than 54 manufacturing companies went south then, according to Frank Udemba Jacobs, then president of MAN.
“The foreign exchange shortage has impacted our supply lines. We are spending much more time in order to secure the foreign exchange for certain raw materials and for some equipment we need for our plants,” Yaw Nsarkoh, then managing director of Unilever Nigeria plc, said in March 2016.
The CBN first gave manufacturers 40 percent preference in the FX market, meaning that they had exclusive right to 40 percent of available FX in the market. The apex bank subsequently created special windows for exporters and small businesses, leading to some stability in the market.
“Local raw-materials utilisation in the manufacturing sector has maintained downward trends since the first half of 2017, when the CBN commenced policy intervention in the official forex market,” MAN, led by Mansur Ahmed, said.
According to Ike Ibeabuchi, a manufacturer of chemicals, it is easier to import inputs than seek local alternatives.
“One, you may not be able to find some inputs you want here at the right quantity and quality,” he says.
“Even when you can, it may be expensive. Secondly, it is cheaper to import than invest billions in backward integration programmes. This is why there should be incentives to embark upon those projects,” he further notes.
Manufacturers complain that some raw materials are not locally available at the required quantity or quality owing to infrastructure gaps. This, therefore, drives them to seek foreign alternatives to keep their firms alive.
“In the pharmaceutical industry, there are two inputs we use, which are Active Pharmaceutical Ingredients (API) and excipients,” Okey Akpa, former chairman of Pharmaceutical Manufacturers Group of the Manufacturers Association of Nigeria (PMG-MAN), tells BusinessDay.
“Excipients are things you can derive from starch, Gum Arabic and so on. In this area we have a problem of quality of locally available inputs. In terms of API, the petrochemical industry must be available because they provide precursors. Since we do not have petrochemical industry currently, the basic problem here remains that we have nothing at all,” Akpa states.
Most of his views in 2016 are relevant because up till today, the country is yet to have a functional petrochemical plant that can serve the pharmaceutical industry. In the heat of recession, manufacturers also sought locally fabricated machines. But some manufacturers complained, and still complain, about the unsuitability of these machines for production.
“A local fabricator brought a machine for use in my factory, but it has not worked for two weeks. We have arranged to return it,” Chukwubuike Nnoli, managing director of Zubnol Limited, says.
Now is time for Nigeria to take technical education as well as science, technology, engineering and mathematics (STEM) seriously to enable factories to function well, he says.
Nevertheless, some companies are pushing their backward integration programmes as a forward-looking strategy.
PZ Wilmar, which is a subsidiary of PZ Cussons, has over 50,000 hectares of oil palm plantation in Cross River State for backward integration. Flour Mills of Nigeria and Dangote Group have large hectares for sugarcane plantations.
“We have put plans in place to commence and implement the cassava to ethanol project in Edo State,” Toni Ogunbor, executive chairman, Nosak Group, says in Lagos this month.
“We will also commence the implementation of the 1,000 metric tonnes integrated vegetable oil refinery in the Export Processing Zone and consolidate on our Oil Palm Backward Integration Project, also in Edo State,” he further notes.
ODINAKA ANUDU
