That the Nigerian steel manufacturing sector, arguably the most critical element in the nation’s industrialisation drive, is massively threatened by smuggling and racketeering, is a development government should worry about. The whole industrialisation exercise seems to be one big joke, not only because the Federal Government has grossly neglected the moribund steel sector for long, but also because illegal importation of steel flourishes in many parts of the country today, with little or no government intervention.
The significance of an efficient and viable steel industry to any economy that takes manufacturing and its real sector seriously cannot be overemphasised. For one thing, it is fundamental to the industrial process and operations of many sectors of the economy, considering that literally, all the equipment used in production come from steel. Just as steel is crucial in the industrial space, it is highly relevant in the domestic front as well. Many home appliances and tools, ranging from electronics to things as basic as cutlery and kitchen utensils, not to mention building materials, have most of their parts fabricated from steel. Hence, it is safe to say that Nigeria’s pursuit of a meaningful infrastructural turnaround as a means of meeting its Millennium Development Goals might be a mirage after all.
The scourge of steel smuggling
A recent revelation by the Galvanised Iron and Steel Manufacturers Association suggested that Nigeria might be losing a whopping N53 billion to steel smuggling annually. A syndicate of saboteurs is alleged to import container loads of steel worth $5 million illegally into the country every week.
Apparently, the smuggling and bootlegging activities are facilitated by the Nigerian Customs Service’s abandonment of a procedure called pre-shipment inspection, which ensures that goods imported into the country are meticulously examined at the point of entry. The development is a further dent on Nigeria’s ill reputation for rudderless border management and control. Consequently, the steel market is saturated with a great many substandard products illegally imported from abroad at the expense of locally manufactured ones. Consumers generally prefer the smuggled products to the local ones on the ground that they are cheaper, even though the latter is superior in terms of quality.
How reforms are stunting local production
It is worthy of note that hostile government policies are limiting the sector’s enormous promise. The high cost of local steel, interestingly, stems from outrageous tariffs imposed by the government on raw materials used in steel manufacturing. That in itself, is a major challenge manufacturers have had to confront with the passage of time. For instance, 35% tariff is currently charged on a cold rolled sheet, a critical raw material in fabricating roofing sheets and a couple of other products.
For an industry that has suffered arrested development over the years, the current crisis suggests that a total sector collapse is imminent. Hordes of steel manufacturing companies are closing shop over dwindling patronage. The situation has also resulted in the retrenchment of thousands of employees in the sector in question.
When asked about the smuggling activities and other developments in the sector, a top official of Ajaokuta Steel Company Limited, who spoke to Nairametrics on condition of anonymity, said, “Even if companies are not folding up, production will be down. The steel sector is at its embryonic stage. Steel consumption in Nigeria is very high. Illegal importation is a flourishing business because of the high demand, and most of the steel that comes into the country is substandard. Illegal importation is a result of outright connivance of smugglers with customs officials.”
He went further to identify Benin Republic and some West African countries as the places where most of the substandard goods come from. He blamed the factors responsible for this crisis on government and its policies. Equally lamenting the atrocious neglect of the Ajaokuta Steel Company and Delta Steel Company, the two major steel mills in the country, he said no meaningful progress could be recorded in the industry without resuscitating the plants.
“The political will of the government is lacking. Obasanjo attempted to revive Ajaokuta in 2005 but he didn’t give it to competent hands. In 2008, Yar’Adua terminated the concession.”
The way forward
Our source further added, “We shouldn’t expect something significant to happen until government looks the way of concession or privatisation.” To buttress his point, he reiterated a myriad of benefits Nigeria could reap from an active and efficient steel industry.
“Imagine the impact that a project like the Dangote Refinery construction would have had on the steel sector and the local economy if all the steel being used had been sourced locally. Look at all the rail projects government is also doing in different parts of the country. Don’t forget also that everything in oil and gas requires steel.”
For the sector to be transformed to a robust and efficient venture, the government must take effective measures against the rampant corruption in the Nigerian Customs Service and secure our borders, in order to gain the confidence of local investors. There is also an urgent need to review the steel industry reforms, particularly the downward review of tariffs on raw materials used in producing steel.
Potential contributions of an effective steel industry to the Nigerian economy
The opportunities and potentials in the Nigerian steel sector are diverse. The country currently boasts of over 2 billion metric tonnes of iron ore reserves, making it the country with the second largest deposit in Africa and the 12th in the world, according to a statement made by the Vice President, Prof. Yemi, Osinbajo in 2016.
The industry is said to be capable of saving Nigeria at least $3 billion in foreign exchange every year if local manufacturing of steel is massively explored. Kogi, Abia, Plateau, Kwara, Nasarawa, Benue, Bauchi, and Anambra are among the states that have iron ore deposit in commercial quantities. Interestingly, industry experts have revealed that the first phase of Ajaokuta Steel Company alone can create about 500,000 jobs upon completion.
Champion Breweries, Raysun deal highlights disclosure shortcomings
Is Heineken taking over Champions Brewery?
Champion Breweries Plc informed the Nigerian Stock Exchange, last week, via a press release that an insider, Raysun, had purchased about 1.9 billion shares at a price of N2.6 per share.
The disclosure was part of the stock exchange’s requirement that listed companies must reveal deals made by insiders of the company for the benefit of shareholders and the investor community.
That’s about how far the press release went. It did not reveal why Raysun was purchasing? Who they purchased the shares from and why the deal is being consummated? In terms of corporate disclosure, this was a dud.
Raysun is the largest shareholder and majority owner of Champions Breweries. Raysun is also an entity owned by Heineken, the majority shareholder in Nigeria Breweries Plc – the largest brewer in the country. Thus, Heineken is an indirect shareholder of Champions Breweries.
These relationships give this deal enough scrutiny to warrant a better disclosure starting from the actual purchase of shares revealed in the press release.
Here are some contexts;
Champion Breweries shares breakdown
- Champions Breweries has a total of 7.82 million shares outstanding at the time of this purchase
- Raysun held about 60.4% shares in Champions Breweries according to disclosure in its 2019 annual report.
- Asset Management Nominees and Akwa Ibom Investment Corporation own 12.3% and 10% respectively. The rest of its shareholders own about 17.3% or 1,351,954 units.
- At the current share price of N1.12, Champion Breweries is valued at N10.57 billion by the market.
- However, Raysun’s purchase of 1.9 billion shares at N2.6 per share (valued at N4.9 billion, almost half of the current market capitalization), now values the company at about N20.3 billion.
Where did the shares come from? This is a vital question and here is why.
Going by the number of shares they bought last week (24% of equity), they only could have been able to purchase that many shares by buying up all the shares owned by the Asset Nominees (12.3%), all the shares owned by Akwa Ibom Investment Corporation (10%) and another 3% from other regular shareholders.
It could also be that either or both Asset Nominees and Akwa Ibom IC sold part of their shares and then they made up the rest by purchasing some from the market. Why is Heineken, through Raysun, acquiring so many shares? Is there a takeover deal in the offing? Do they plan to merge Champions Breweries with Nigeria Breweries or still keep it as a standalone company? Will Champions Brewery cease to exist if there is a merger or will they delist following this massive acquisition of the shares of their subsidiary?
The speculation is palpable.
This is what happens when listed companies refuse to properly disclose transactions involving mega share purchases of this nature. How does a majority shareholder go from 60.4% of shares to 84% and an announcement is not made explaining or clarifying who sold and if this is a takeover bid.
But investors seem not to mind at the moment, if the momentum of the share price is anything to go by. A 57% year to date gain is a testament to this. It appears investors expect a mandatory takeover announcement to be made anytime soon and are scrambling for the shares ahead of any announcement.
Unfortunately, this is not how markets should work anywhere, and the sooner it stops the better. The Nigerian Stock Exchange has made massive progress with compliance to disclosure requirements and we believe strongly that they will at some point bring Champion Breweries to order and have them disclose all the requisite information about this transaction. Better late than never.
Downstream players suffer revenue declines due to Covid-19, forex, fuel subsidy
2020 has no doubt been one of the most challenging years for players in the oil and gas downstream sector, having to deal with several issues.
Nigeria’s downstream oil and gas players are in the midst of one of the lowest revenue declines in their history of operations. In an industry used to the highs and lows of economic and commodity price cycles, 2020 poses one of the greatest challenges to oil and gas companies.
Total Plc, 11 Plc, MRS, Ardova and Conoil are some of the major downstream players (all quoted) that have suffered revenue declines and margin drops in one of the worst years in modern history.
- Conoil Plc, one of the major downstream players reported its 2020 9 months results revealing revenue declined 21.84% YoY t0 N88.1 billion.
- 11Plc, another major player in the sector, also saw its topline revenues plummet from N141.5 billion in the first 9 months of 2019 to N114.7 billion in the corresponding period in 2020.
- Total Nigeria Plc, one of the largest players in the downstream sector also recorded declining revenues. In 2019 it reported total sales of N181.6 billion compared to N117.3 billion in 2019. The 35% drop was the largest of the lot.
- The only outlier of the lot was Ardova Petroleum which somehow managed to record revenue growth with 2020 9 months revenue rising to N116 billion compared to N110.7 billion same period the year before.
In general, revenues for the major oil and gas downstream players in the country fell by a whopping 21% from N646.8 billion in 2019 (9M) to N514.2 billion in the corresponding period in 2020. What is to blame for these declines? Covid-19!
The Covid-19 pandemic triggered a nationwide lockdown for most of 2020 that has negatively impacted demand for petroleum products across the country. The lockdown has grossly affected volumes for downstream oil and gas companies hitting their margins and profitability.
Businesses across the country such as manufacturers, airlines, restaurants, schools, the transportation sector and motor vehicle owners have all reduced their demand for fossil fuel.
The downstream sector has also struggled to take advantage of the drop in oil prices as they still need to deal with the multiple devaluation of the naira and being able to gain access to foreign exchange. Their inability to access the forex market leaves them with little choice but to continue to rely on NNPC, the sole importer of petroleum products for their inventories.
In a recent comment, the Chairman of Depot and Petroleum Products Marketers Association of Nigeria (DAPPMAN), Mrs. Winifred Akpani, lamented that “the inability to source FOREX from the official CBN FOREX window by independent marketers is continually hindering the effectiveness of the principles of DEMAND and SUPPLY market forces to correct the current inefficiencies in the pricing mechanisms adopted in the deregulation process.”
Mrs. Akpani also explained that inability of marketers to source FOREX creates a situation which can be described as “pseudo subsidy” in the market, suggesting that being forced to sell petroleum products at fixed prices means they cannot recover their importation cost, most of which is paid for in US dollars.
This is further exacerbated by the fact that the federal government regulates pricing irrespective of the unique operating costs of these private oil companies. Also, being the sole importer of petroleum products means the NNPC will likely pass on inefficiencies in managing cost to petroleum marketers, eliminating any chances of efficient pricing that can be obtained from increased competition. The effects of these are low profit margins and ‘never-shifting’ revenue positions, except for exceptional cases.
Last December, the Federal Government revealed it was ending its subsidy programme, increasing fuel to reflect its market cost. However, it balked after pressure from the labour unions, reducing prices without recourse to sector players.
Despite these challenges, the sector will likely eke out some profits largely due to cost cutting initiatives and income from ancillary businesses. However, dividend payment might be a challenge as it will be advisable for these companies to set aside cash for what could be a pivotal year.
The Petroleum Industry Bill (PIB) will likely be signed into law this year and will produce new investment opportunities for the downstream sector if things go as planned. The government will likely relinquish its hold on the sector and fully deregulate the downstream before the end of the year.
When it does, those with a strong balance sheet will be winners.
Notore Chemicals is swimming in debts – company to access equity market in Q2 2021
Notore is swimming in debts and this will stifle any chances of profitability at least in the short to medium term.
The story of Nigeria’s 24-year privatisation journey cannot be complete without mentioning the National Fertilizer Company of Nigeria (NAFCON), established in 1981 to produce and sell fertilizer.
The company began fertilizer production 6 years after it was incorporated, followed by years of mismanagement and corruption which forced the company to shut down 11 years later in 1999. The company resurrected again in 2005 following its privatisation, resulting in a sale of $152 million to new owners and then rebranding itself to Notore Chemicals.
Today, the company manufactures, treats, processes, produces, supplies, and deals in nitrogenous fertilizer and all substances suited to improving the fertility of soil and water. The Company has a 500,000 metric tonne Urea Plant in Onne, Rivers State, Nigeria, generating circa N18.7 billion (2019: N21.4 billion) in revenues as reported in its 2020 audited accounts for the period ended September 30, 2020.
In 2020, the company embarked on a massive Turn Around Maintenance (TAM) programme for its plants, which it targets will help boost its production levels to 500,000MT nameplate design capacity. The company further claims that 70% of the revenue earned from the operation of the plant post TAM filter into its bottom line, hence boosting profitability.
The importance of its TAM cannot be overemphasized. Notore earns 97% of its revenues from fertilizer sale of Urea and other chemicals. About 17% of the revenues are generated from export, thus the potential is there to improve sales and perhaps bottom line locally and within Africa.
But to achieve its TAM plans, Notore has doubled down on its debt binge. Total borrowing for the year spiked from N79.9 billion in 2019 to N108.3 billion in 2020. Whilst most of the loans came from new loans, the rest was due to a devaluation. Notore is swimming in debts and this will stifle any chances of profitability at least in the short to medium term.
Out of its N108 billion loan, it owes Afrexim $38 million (N14.75b); $5.1 million is due within a year as it reported in its audited financial statements. The dollar facility came at a steep 12.7% interest rate and is repayable over 84 months (7 years). There is also another $72.86 million (N29.08b) facility, out of which $5.85 million is due this year – also at an interest rate of 12.7%.
Thus, the company will have to find at least a whopping $10.9 million (excluding interest rates) to fund all its external loan obligations that fall due in one year. How it intends to achieve it this year is anyone’s guess.
Another N16.79 billion are BOI-CBN loans obtained at concessionary rates of about 7%, add commercial bank loans of N44.46 billion at an interest rate of 23%, you start to understand how much debt the company is swimming in. These are unsustainable figures and is weighing down negatively on its balance sheets and profitability.
Interest on loans is now the company’s highest cost driver coming at N23.4 billion last year alone, topping cost of sales and operating expenses of N21.6 billion and N5.9 billion, respectively. In fact, finance cost was higher than revenue in 2020.
Notore recognizes this challenge and restructured some of its loans in 2020. There are also plans to raise capital in 2021 through a rights issue or public offer. Whilst that seems like a plausible route to go this year, the size of equity it will require will depend on its share price and how far it wishes to go in terms of being diluted.
At the current price of N62.5 per share, it will have to sell equity worth half its market capitalization of N100b to pay down just 50% of the debt. This will be a significantly expensive offer for potential investors considering that it has negative retained earnings of N29.1 billion and is unlikely to return to profitability anytime soon.
The company can, however, take solace in the fact that its outlook for its mainstay, Fertilizer, is brighter than its capital structure woes. Nigeria needs fertilizer if its to expand its Agriculture revolution plans. As the company stated “the consumption of fertilizer per hectare of arable land in Nigeria is still far below the 200kg per hectare recommended by the Food and Agriculture Organization,” buttressing the potential to grow topline. Export opportunities also exist especially with the start of the African Continental Free Trade Agreement.
Notore only needs to find a better way of financing its TAM programme and it cannot be sustained with the current capital structure.