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Manufacturers, businesses adopt backward integration

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Manufacturers, businesses adopt backward integration

…as forex crisis bites harder

The worsening scarcity of foreign exchange is forcing many Nigerian businesses to look inward for local raw materials to reduce costs and remain afloat, Business Hallmark can report.

Due to paucity of foreign exchange at the official market, most businesses operating in the country needing foreign components for their goods have been forced to approach the parallel market for their dollar needs at cut-throat rates.

The forex crisis was recently exacerbated by the unexpected decision of market regulator, FMDQ OTC Securities Exchange, to revise the methodology for calculating exchange rates at the Autonomous Foreign Exchange Market (NAFEM) and Nigerian Autonomous Foreign Exchange Fixing (NAFEX) windows in December 2023 by adopting a transaction-based model.

NAFEM is the reference rate for which foreign currency trades are executed within the Investors’ & Exporters’ FX window and determined by prevailing market conditions for forwards and futures delivery, while NAFEX is the reference rate for Spot FX (daily) operations in the autonomous FX market.

The move has led to the depreciation of the naira against the United States dollar by over 50 per cent at the official foreign exchange markets, selling $1/N1519.46 at NAFEX and $1/N1537.96 at NAFEM at the close of trading on February 16, 2024, compared to N805.60 at the end of November 2023.

This has constrained a growing number of businesses to adjust their operations by looking inward for local supply of raw materials as the dearth of hard currencies needed to fund their inputs from abroad bites harder.

Especially affected by the forex squeeze, BH gathered, are agro-allied companies, construction companies, cement manufacturers, brewers, producers of building materials and many other local manufacturers of consumer goods and other businesses that relied majorly on imported raw materials and feedstocks for the production of their goods.

One of the companies forced to look inward in an attempt to beat the persistent forex illiquidity is the BUA Group owned by Kano-born billionaire, Abdulsamad Rabiu. According to BH findings, industries under Abdulsamad’s BUA Group, including his cement plants and sugar refinery, have switched from imported coal to locally sourced coal and liquefied natural gas for their energy needs.

Multiple sources within the BUA Cement Sokoto plant confirmed a recent revelation by the Chief Executive Officer of BUA Cement, Mr. Yusuf Binji, that the cement maker had resorted to the use of locally sourced coal and liquefied natural gas in favor of imported coal to withstand the challenges faced in sourcing foreign exchange.

According to the sources, who spoke to our correspondent on the condition of anonymity, the Sokoto plant is now powered by a dual-purposed coal and gas-fired Independent Power Plant (IPP).

“The conversion cost the company (BUA Cement) millions of dollars to achieve. But it is quite worth the deal as millions of naira are saved daily from getting our fuel needs locally”, a source in the cement firm informed our correspondent.

The source’s account was corroborated by BUA Cement’s Corporate Affairs Manager, Mr. Otega Orgra, who described the move as a strategic decision made for efficiency gains and to reduce the firm’s foreign exposure on coal imports.

“We started the conversion of the plant in 2021 and it is now completed. The BUA Cement’s Sokoto plant now runs on locally sourced coal and LNG, rather than the previous mix of local and foreign sourced coal and LPFO. LNG will also be used to power engines used in generating electricity and will replace LPFO and AGO”, Otega stated.

BUA Cement is not alone in the ongoing abandoning of foreign coals for locally mined coals and liquefied natural gas. Lafarge and Dangote Cement companies, which incurred N263 billion in fuel costs from January to September 2022, have also cut down on their dependence on imported coals and fuel. For instance, Dangote Cement commissioned its alternative fuel feed system (gas and coal) at Obajana lines I and V, and Ibese line II in November 2023.

Apart from these, sources in Dangote Cement informed BH that the management of the company is also ramping up its investment in Compressed Natural Gas (CNG) to reduce its AGO usage.

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Other industries that have looked inward for survival also include the brewery/beverage and processed foods sectors.

Leading manufacturer of alcoholic and beverage drinks, Nigerian Breweries Plc, has further intensified its quest to achieve 99% of its raw materials local.

The company, it would be recalled, had in 2016, announced its intentions to get 99% of its raw materials locally by 2020, a target it largely failed to accomplish.

Sources told BH that at best, the company had only been able to achieve its target by about 55%, leaving behind 44 percent, which it sourced from abroad.

Sources also blamed the brewer’s inability to meet its production target on insecurity in several parts of the country, where its farms and partner farmers are located.

However, NB Plc, BH learned at the weekend, is aiming to overcome these challenges by changing tactics. One of the changes is the idea of relocating the majority of its farms and farmers from terrorists and bandits-infested states in the North West, North East, and some North Central states to relatively peaceful states like Kwara, Osun, Ogun, Oyo and Jigawa.

Some grain farmers in Odo-Oba in Oyo State, while speaking to BH on the development, said NB Plc officials contacted them through their WhatsApp group, asking them to make available their over 10,000 hectares of farmland in the 2024 – 2030 planting seasons for the production of sorghum and barley used in the production of beer and malt drinks.

“As we all know, sorghum, the major ingredient in the production of beer, grows better in Savanna regions. Fortunately, it is not only in the North currently plagued by insecurity that we have Savanna vegetation. We also have them in some parts of Oyo State, notably Ogbomosho and Odo Oba areas and Shonga,

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