Local raw materials sourcing hits five-year low on insecurity

The rise in insecurity and limited investments for local raw materials production in Nigeria is taking a toll on the local sourcing of raw materials by manufacturers in the country, BusinessDay analysis has shown.

Data obtained from the Manufacturers Association of Nigeria (MAN) showed that local sourcing of raw materials in the first half of this year was 52 percent, the lowest in five years.

Between 2017 and 2021, local sourcing of raw materials hovered between 53 percent and 60.72 percent. During the period under review, foreign exchange shortage, naira devaluation as well as the disruptions in global supply chain caused by the COVID-19 pandemic and the Russia-Ukraine crisis forced many manufacturers to look inwards for production inputs.

MAN said in its latest half-year report that the sector is generally faced with limited investment in domestic production of raw materials for utilisation in most of the sub-sectors owing to limited funding and policy incentives in the country.

“The basic industrial chemical sub-sector faced severe inactivity in the first six months of 2022 due to lack of domestic production of basic chemicals,” it said.

BusinessDay had recently reported that Grif, makers of aluminium drums, and Federated Steel Mills, makers of iron rods, exited Nigeria because they could not get annealed cold-rolled steel, which was its key raw material, causing the country to lose vital investments.

Economic experts and manufacturers told BusinessDay that issues around rising insecurity, unavailability of some materials and low product quality constitute setbacks for the anticipated 100 percent local sourcing of raw materials through partnership with local producers and backward integration activities.

Since the security situation became intense a few years ago, agricultural activities from which most fast-moving consumer goods (FMCG) firms benefit from have been greatly impacted as farmers had to abandon their farmlands because of kidnapping, banditry, herder-farmer conflicts, terrorism and other forms of insecurity in major crops-producing states.

Over the years, insecurity in the country has increased significantly, especially in the northern part of the country, with data from the Global Terrorism Index showing that Nigeria is the third most terrorised country in the world, after Afghanistan and Iraq, with record terror-related deaths estimated at 1,245 in 2019 and 1,606 in 2020.

Data from the 2021 Economic Value of Peace report by the Institute for Economics and Peace show that the cost of violence in Nigeria from 2007 to 2019 was $1.34 trillion.

Muda Yusuf, chief executive officer of Centre for the Promotion of Private Enterprise, told BusinessDay that insecurity in some parts of the country is posing a major threat to fostering local sourcing of raw material as well as the backward integration plan of the federal government despite huge investments made and the commitments of companies.

“Access to location is becoming more risky and it is affecting the kind of output anticipated, especially from the agro allied sector, and it is putting a lot of pressure on companies in the FMCG industry because if they cannot get raw materials locally, they will continually rely on imports despite the unfavourable FX situation and current supply gap,” he said.

Francis Meshioye, president of MAN, said recently that manufacturers cannot easily access inputs abroad due to FX shortage, congested ports and policies, coupled with rising insecurity in the country, adding that these were slowing down their production process and affecting their ability to be competitive.

“First, general insecurity is affecting the ability of farmers to produce commodities and distribute it to the market,” Abiola Gbemisola, assistant manager, equity research at FBN Quest, said, adding that this affects the production process of FMCG firms and they are forced to explore alternative options.

He warned that as the rising insecurity takes a toll on local raw material sourcing and backward integration activities of these companies, it will cause ripple effects, including an increase in unemployment as the local supply chain suffers.

MAN has recommended that incentives be implemented to drive investments in the local development of raw materials, giving priority to the domestic production of active pharmaceutical ingredients and basic chemicals.

Some notable companies that actively engage in backward integration activities include Nestle Nigeria, which 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 and has over 30,000 farmers who supply 100 percent of the grain requirement for Golden Morn Maize.

Dangote Sugar Refinery Plc is pumping billions of dollars in sugarcane plantations across northern states to enable it to cut raw sugar imports. The sugar maker’s $700 million project in Nasarawa State is expected to see its plant in Tunga, Nasarawa State, producing 450,000 metric tonnes and generate 90 megawatts of power annually when completed.

Although manufacturers say this is expensive to operate, it reduces production costs and exposure to unnecessary foreign exchange risks in the long run. Many manufacturers are also working with their local suppliers, providing them with funding, technical support and market.

For example, Guinness Nigeria is supporting over 30,000 smallholder farmers, who supply it with sorghum, to enable them to move from basic to more efficient and productive yields.

Other than partnering with local suppliers of raw materials, some FMCG firms have pumped over $1 billion into land acquisition, nursery plantation and acquisition of expensive equipment as investments in its local sourcing of raw materials.

Flour Mills of Nigeria invested billions into oil palm, wheat, sugar and cassava, among others, the company in its agro-allied subsidiary has invested up to N15 billion supporting companies in the local value chain, while hoping to save up to $180 million in foreign exchange through its localisation effort.