Nigeria: Backward Integration As Catalyst for Economic Rebirth

22 August 2019

As more companies begin to look inwards, Raheem Akingbolu takes a look at efforts by some companies to take advantage of opportunities in the economy

The belief that 'tough times never last but tough people do' aptly describes the challenges manufacturers have been facing in the wake of the ban of foreign exchange for 41 items by the Central Bank of Nigeria (CBN) during the first tenure of the Governor Godwin Emiefele.

Rather than lament the imposing challenges to businesses, players in the manufacturing sector have since seen the period as a time for forward thinking as local investors and manufacturers now back to the drawing board and devise a working strategy to remain productive in the business landscape of Nigeria.

At the moment, things appear to be looking up for some manufacturers in the country. Three years ago, in a desperate move to bridge the gap following the foreign exchange crisis that hit the economy and in line with government call on companies to look inwards for untapped resources, more manufacturers started to source for raw material locally. Today, companies are yielding to the advice with many of them either cultivating their own raw materials by purchasing their suppliers or establishing farms to grow produce for their factories.

At the last count, manufacturing giants like Nigerian Breweries, Friesland Campina Wamco Plc, Nestle, PZ Wilmar; Dangote Group and Flour Mills of Nigeria, have shifted drastically to local inputs for their products. Others are; De-United Food, Chi Limited, Presco Oil, Okomu Oil, and BUA Group.

The subject of backward integration took center stage at the recently concluded Businessday Agribusiness & Food Summit with the question; 'Has backward integration been profitable for manufacturers using agricultural raw materials in Nigeria?' This of course led to several correspondence and different opinions from leaders of multinationals who were in attendance.

It is pertinent to note that a venture into backward integration is a cumbersome task, but the result is more profitable. The process of setting up the value chain for backward integration is capital intensive and takes time to actualise living the local manufacturer with the burden of paying back possible loans from commercial banks at 20 - 35% interest rate. However, importers do not suffer such fate as they import, pay duties and hit the market running (making money instantly).

Nosak Group as a case study

Undermining the capital intensive nature to backward integrate, many local manufacturers and multinationals in Nigeria like Nosak Group, an indigenous business Group with interests in key sectors of the Nigerian economy such as agriculture, agro-processing and manufacturing have taken a giant stride to invest in backward integration knowing that it will pay off in the long run.

One of the Group's Strategic Business Units (SBU), Nosak Farm Produce Limited located at the corridor of the Lagos Port produces refined vegetable oil, refined bleached and deodorized olein (RBDO), stearin and palm fatty acid distillate with an average of 60,000 metric tons (200 metric tons per day) of refined vegetable oil a year, which is only a fraction of the total demand in the market. In addition, the activities in the refinery are complemented with the existence of tank farms with storage capacities of about 50 million liters per month.

According to the management of the company, the idea of the factory was birthed in order to optimise the 1,300 hectares of oil palm plantation of Saturn Farms Limited, another SBU of the Nosak Group located in Edo state, which records a yield of oil palm Fresh Fruit Bunch (FFB) estimated at 105,882 per annum. The farm is equipped with a 3-ton per day milling plant that process oil palm into crude palm olein.

However, due to rising demands of vegetable oil, a recent research by experts, indicated that the oil palm from Saturn Farms Limited would not be enough to feed the vegetable oil refinery thus it became evident that additional crude palm olein would be required as raw material for processing at the refinery. This led to the search for a suitable location with good access to the port for easy access to raw materials.

Backward integration to the rescue

When the tides on the ban of 41 items ensued, the Group had no choice but to rev up efforts to backward integrate to sustain the investments in the refinery. As tedious and capital intensive this could be, Nosak Farm Produce Limited acquired additional 13,000 hectares of land in Edo State for oil palm plantation. This is geared towards the expansion of the refinery from its current 200TPD to 1,000TPD within the next two to three years.

From Q4 of 2018 to Q1 of 2019, the Group procured 400,000 seedlings of palm oil from Malaysia, Costa Rica and Indonesian, countries that have become well known in the production of oil palm. These seedlings have been planted in batches through the pre-nursery to the main nursery with some currently undergoing intense care by a team of plantation experts at Saturn Farms.

In a chat with the Chairman /Chief Executive Officer of Nosak Group, Dr. Toni Ogunbor, he explicitly shared insights into the journey to backward integration by the Group. "We are currently working with farmers in the entire value chain to source raw materials locally. This is poised to keep the factory running with the volume of raw materials required for production". He continued that this is the short-term plan put in place by the management pending when the new plantation fields of over 13,000 hectares in Edo state would have been matured to yield FFB of palm oil in the coming years.

As capital intensive as the project can be, the gains far outweigh the pains in the long run. Experts call on the Government at all levels to initiate favorable policies such availability of funds at single digit interest rates, corporation from local communities where these lands are acquired and low taxes. Dr. Ogunbor however called out the issues of land encroachments from locals, which results to court cases that drag for a long period of time. This he said should be investigated by the Government to enable hitch free operations by investors.

Commenting on the subject matter, the Managing Director, Nosak Farm Produce Limited, Robert Ogirri disclosed that the backward integration initiative is a right step in the right direction as it will give rise to availability of raw materials locally. For him, it will be more gainful to manufacturers, create jobs in the value chain, boost foreign exchange and enhance development across boards.

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