Nigeria's industrial sector sees increased capacity

The industrial sector of what is arguably Africa’s largest economy is a diversified group of producers and outputs, ranging from the large-scale cement plants of Dangote Group, the continent’s largest cement producer, to cottage industries such as plantain chips. With a wide range of accessible feedstock, from agricultural products to hydrocarbons, along with Africa’s largest consumer market, the possibilities are substantial. The volume of output is small, however, and Nigeria is forced to import most of what it consumes, including the raw materials and intermediate goods its industries use. Yet great opportunity exists.

The 2016 import bill is a problem of growing severity, with both limited foreign exchange and downward pressure on the naira shrinking overall buying power and contributing to shortages of key goods. As a result, the government’s policy response has included import-replacement manufacturing. Nigeria hopes to increase production in its textiles, steel and automotive industries, and to build up agri-business activity in tandem with the revitalisation of agricultural output. In each case, opportunities include creating jobs and displacing imports. The automotive sector in particular has been a focus in recent years, with new locally owned assembly ventures and the expansion of existing facilities, such as Peugeot Automobiles Nigeria, which is currently a state asset slated for privatisation. But for now, areas such as cement, fast-moving consumer goods (FMCG) and pharmaceuticals stand out for their steady level of output. “Nigeria’s long-term potential is significant as the country boasts a large, active population that spends money,” Boulos Boulos, CEO of Boulos Group, told OBG. 

Strategy

The government’s most recent plan to boost the industrial sector’s contribution to GDP, the Nigeria Industrial Revolution Plan (NIRP), sets a target of surpassing 10% by 2017, from the current 4%. The plan was published in 2014, before the extent of the decline in oil prices became clear. The NIRP clusters activity in 10 broad categories: food, beverages and tobacco; chemicals and pharmaceuticals; basic metals, iron, steel, and fabricated metal products; non-metallic mineral products; electrical and electronics; textiles, apparel, carpet and leather; pulp, paper and paper products; automotive and assembly; plastic and rubber; and wood and wood products.

The need to manufacture domestically is seen as even more important now that crude prices have fallen. After months of defending the naira in a tight range and instituting capital controls, including a ban on foreign exchange for 41 types of imported products, the Central Bank of Nigeria (CBN) announced in mid-2016 that it would shift to a free float for the currency. However, it has still retained import restrictions in the hopes of encouraging local production (see analysis). In addition to import policies, another ongoing area of focus for both the government and the private sector relates to free trade. Several agreements, such as the economic partnership agreement between the EU and ECOWAS, are currently in various stages of negotiation or implementation, which when enacted could expose local producers to more competition from foreign products (see analysis).

Government Bodies

In addition to the Federal Ministry of Industry, Trade and Investment (FMITI), which offers myriad tax holidays and other investment incentives, there are a range of other public sector players, including the Bank of Industry and the Nigerian Export Processing Zones Authority (NEPZA), which oversees the country’s free zones. NEPZA currently operates 14 zones, with another 18 in various states of planning or construction. These range from diversified manufacturing zones to specialist areas, such as the Olokola Free Trade Zone (FTZ) for energy and petrochemicals operations, and the Abuja Technology Village Free Zone for science and technology. One zone that is likely to become a key industrial focal point is the Lekki FTZ in Lagos State, where Dangote Group is building a $14bn oil refinery, fertiliser and petrochemicals complex. Plans for the development of ports and an airport in Lekki, if realised, could further enhance its allure as a manufacturing site.

Recent Performance 

Industry’s contribution to GDP varies depending on how the sector is defined, which differs by federal agency. The FMITI, which does not include oil and gas production in its figures, pegs the number for manufacturing at 4% of GDP, down from a peak of around 7% in the 1970s. According to the Lagos Chamber of Commerce and Industry, the manufacturing sector fell into a recession in 2015, with contraction beginning in the second quarter of that year. Final figures for the second quarter of 2015 show that manufacturing’s contribution to nominal GDP fell to 9.29%, from 9.77% in the same period in 2014, according to figures from the National Bureau of Statistics. In late December 2015 Bassey Edem, head of the Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture, told local daily Leadership that capacity utilisation hovered at about 45%. The CBN’s main measure of manufacturing activity, the Purchasing Managers’ Index, has indicated a shrinkage in activity in 2016. The index is compiled by surveying companies in 13 locations across Nigeria. A result above 50 indicates growth, while anything below 50 is contraction. The survey results for August 2016 showed production and new orders declining to 42.1 index points, although it did decline more slowly in July 2016 at 44.1.

Challenges 

Industrial producers face a number of hurdles, although few of them are unique to the sector. Access to bank finance has become slightly more complicated in recent months, for example. A rise in non-performing loans – primarily from energy clients, who make up roughly 40% of the banking sector’s total loan book as a result of low oil prices, combined with the government’s shift to a Treasury Single Account (TSA), has limited the propensity for banks to lend to the private sector (see Banking chapter). The TSA restructuring, which consolidated the bank accounts of government ministries, agencies and parastatals previously held at commercial banks into one single pool of cash at the central bank, will improve public financial transparency, but in doing so has reduced liquidity among commercial lenders.

Similarly, the lack of steady electricity supply – Nigerians get about three hours of power a day overall – means that manufacturers spend around 30% of their capital on power, according to a 2015 report from the International Finance Corporation (IFC). Most have invested in diesel-powered generators, and there is now more generation capacity of this sort in Nigeria than in any other country. This alternative is much more expensive, however, at $0.40-0.75 per KWh, compared with $0.15 for grid power, according to the IFC. Some large-scale users have built their own captive power plants, and recent regulatory developments in the energy sector could facilitate this option, as gas buyers can now negotiate directly with producers. Cement producer Lafarge Africa, the Nigeria-based subsidiary of the international group, is an example of a bulk user that has built its own plant, a 220-MW facility in Ogun State, near Lagos. Transport infrastructure is another challenge for industry, as getting goods from factories to markets can be a slow and expensive process. This is particularly true for goods with short shelf lives, as a lack of cold chain storage, for example, means that local agricultural producers for staple products such as tomatoes or cassava can lose up to one-third of their crop before it even reaches the market.

Cement 

The cement industry in Nigeria stands out for its excess capacity, but also its prices, which have at times been the world’s highest. As of 2014 cement production capacity was estimated at between 26m and 28m tonnes, against annual demand of 18. 3m20m tonnes, according to the Nigerian Investment Promotion Commission. In 2013 the country became a net exporter of cement for the first time. However, production data may be unreliable. A recent report by the Nigeria Extractive Industries Transparency Initiative, a group focused on auditing government and private sector figures to ensure transparency of public sector financial flows, found discrepancies in the production data for 2013, and the group has urged the government to increase verification efforts.

The sector is currently dominated by locally owned Dangote Cement and Lafarge Africa. In Nigeria the two firms together claim more than 90% of sales, according to an industry report by Lagos-based Augusto Research. The cement sector is an example of policy-based import-replacement manufacturing. Production grew after the country’s return to democracy in 1999, with a combination of tax incentives for production and curtailing of imports. Tariffs on imported cement were boosted in 2012, after foreign production sunk the price of a 50-kg bag from N2000 ($6.31 at the time of printing) to N200 ($0.63). The domestic industry responded by adding capacity. In late 2015 prices fell to N1500 ($4.74), down from N1750 ($5.52) for a 50-kg bag in November 2014, according to market research firm Northcourt Real Estate, a Lagos-based real estate advisory. During the same period Dangote was selling for as low as N1000 ($3.16), the cheapest since 2005.

Dangote’s profit margins are expected to shrink, according to market research from London-based investment firm Exotix Partners, from 29% in 2016 to 26% in 2017. In addition to lower prices, several other factors are expected contribute to this change, including the fact that sales in export markets are generally at a lower margin. Input costs are forecast to climb at least 6%. Instability in natural gas supply may force a switch to higher-cost alternatives for fuel, such as coal and low-pour fuel oil. A longer-term and non-cyclical factor threatening profit margins is tax rates for the cement sector, which are set to climb, as incentives offered to encourage investment in domestic production are subject to sunset clauses. However, demand is also expected to grow for the foreseeable future, given low levels of current consumption. That rate is 108 kg per capita, which is among the world’s lowest, according to the International Cement Review. An estimated housing deficit of 17m is also key, according Augusto Research.

Petrochemicals 

Due to a lack of domestic refinery capacity, about 80% of polymers used in the country are imported at a cost of about $10bn, Kunle Ogunade, president of the Polymer Institute of Nigeria, told local newspaper The Guardian in February 2016. Domestic petrochemicals production comes from two facilities once owned by the Nigerian National Petroleum Corporation (NNPC) and which have now been privatised. Eleme Petrochemicals Company, in Port Harcourt, was handed over to Singapore-based Indorama Corporation in 2006 by the NNPC. Current annual capacity includes 300,000 tonnes of olefins, 250,000 tonnes of polyethylene and 80,000 tonnes of polypropylene. Notore Chemical Industries, the other petrochemicals plant, is owned by engineering services and consultancy firm O’Secul Nigeria and is located in the Niger Delta region. The plant produces 560,000 tonnes of urea annually. While a number of new facilities have been proposed in recent years, the largest is a $14bn complex currently under construction by Dangote Group. In addition to 650,000 tonnes of crude-refining capacity, it will be able to produce 2.8m tonnes of granulated urea and 750,000 tonnes of polypropylene. Construction is expected to be complete by late 2017. This project is large enough to have already generated more investment proposals to service its needs, including a gas pipeline that would make gas available at the Lekki FTZ. Local upstream producer First E&P formed a joint venture with Dangote for the purpose of building an offshore gas pipeline with a capacity of 3bn standard cu feet per day. This means excess supply, which may position the Lekki FTZ as a hotspot for new investment.

Pharmaceuticals 

Nigeria has at least 130 producers of medicines and other pharmaceuticals, nine of which are publicly traded. Less is known about the privately held players, so overall market data is spotty, according to a 2014 report by consultancy PwC. Imports were valued at $481m in 2013, and given PwC’s expected compound annual growth rate of 11%, that should reach $789m by 2018. GSK Pharmaceutical Nigeria, a local subsidiary of the UK-based company, is the largest producer by domestic market share, with a declared market share of between 10% and 12%. The second-largest domestic producer is Emzor Pharmaceutical Industries, which is primarily a producer of acetaminophen, for which it has a market share of between 50% and 60%.

Consumption trends show a market focused on the most basic treatments, such as anti-infection products. Pain relievers and wellness products are a niche market for now, largely for the middle class and wealthier income segments (see Health chapter). “The poor will do anything for their kids, but will not buy drugs for themselves as much,” Lekan Asuni, former managing director of GSK Pharmaceutical Nigeria, told OBG. “In the middle class, people take their health more seriously and do spend.”

Counterfeits 

While the 184m-person market is expected to grow along with levels of disposable income, one constraint that could hold back new investment is counterfeit products. The World Health Organisation defines these as products fraudulently mislabelled with respect to identity, source or both. In Nigeria the sector regulator, the National Agency for Food and Drug Administration and Control (NAFDAC), lacks the capacity to track drugs at all steps in the supply chain. Created in 1993, NAFDAC regulates and controls consumer products such as food, drugs, cosmetics and medical devices. While there is some way to go, largely in terms of legislation, the agency has been successful in the realm of practical solutions to help consumers identify counterfeits. From 2002 to 2006 drug failure rates fell by roughly 16%, according to a May 2016 report by the World Intellectual Property Review, and the circulation of counterfeit drugs has reportedly fallen by more than 80% since 2001. Part of the solution has been the rise of verification systems such as mPedigree, which was founded in Ghana in 2007 and is now in use in Nigeria as well. This system includes a label with a code revealed on a scratch-off strip. Consumers can text the code to a free service which will verify the source of the drugs.

FMCG 

Nigeria’s roster of FMCGs is a diversified one. At the top of the list, as measured by revenue, are breweries, such as Nigerian Breweries and Guinness Nigeria, which brought in N293.9bn ($927.8m) and N118.5bn ($374.1m), respectively, in 2015. The local arms of global giants have also seen much success, such as PZ Cussons, Unilever and Nestlé.

Not all foreign investments have been a success, however. South Africa’s Tiger Brands sold its 65% stake in Tiger Branded Consumer Goods of Nigeria back to the Dangote Group in late 2015. The South African firm had bought Dangote’s flour mills in 2012 for R1.6bn ($5.1m), and after three years of losses sold the business back to its original owner for a nominal $1. Tiger retains a presence in Nigeria through its 49% stake in UAC Foods, which is owned by the United Africa Company of Nigeria, a local conglomerate.

A large number of domestically owned manufacturers exist as well. These include companies such as Wemy Industry, which specialises in personal care items; Dansa Foods, part of the Dangote Group; Dufil Industries, the maker of Indomie Noodles, one of the most recognisable food brands in the country; and Genesis Group, which is based in Port Harcourt and pursuing a strategy to compete with national-level distributors in the country’s south-east (see analysis).

Automotive 

Reviving Nigeria’s automotive industry has been a priority under previous administrations that has carried over under President Muhammadu Buhari’s administration. Domestic production thrived until a decline that began in the 1990s, but with the size of Nigeria’s population the potential is significant. A November 2015 PwC survey of the country’s auto sector found that 81% of respondents could not afford a car, but 46% said that access to finance would help them overcome that obstacle.

In terms of policy, the government’s approach has been to reward domestic production with tax breaks on imports. The standard tariff on imported cars is 70%, but for local producers that will drop to 35% for passenger cars and 20% for commercial vehicles. Local producers will be allowed two imports at the lower rates for each vehicle built locally. Buhari hopes to increase production from 10,000 units in 2014 to 500,000 by 2020, and 36 companies have been awarded production licences thus far. Investors include Toyota, Honda, Nissan, Ford and Hyundai.

Outlook 

Cyclical pressures, along with structural challenges, have contributed to a challenging environment. Yet this has not slowed capital spending, as evidenced by the Dangote complex in the Lekki FTZ, and with a large consumer market the outlook is encouraging for many industrial segments.

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The Report: Nigeria 2016

Industry & Retail chapter from The Report: Nigeria 2016

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