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Covid-19 reignites calls for local raw materials sourcing

China is a major supplier of input for manufacturing companies around the world, including Nigeria. The spread of COVID-19 globally has caused an unprecedented slur in the manufacturing industries’ supply chain. Many manufacturers and service providers are hit by acute shortage of raw materials and intermediate input. Will operators working with relevant authorities seize the opportunity of the crisis to reconfigure their supply chain by revisiting backward integration to encourage local raw materials sourcing? Assistant Editor CHIKODI OKEREOCHA asks.

Nigeria’s import bill for raw materials and finished products is mind-boggling. For instance, between 2000 and 2015, the country spent N49 trillion on the importation of raw materials and products. As if this figure was not scary enough, experts also projected that the nation’s over-dependence on importation will gulp N36 billion this year alone, if nothing is done to halt the huge capital flight.

However, the Covid-19 outbreak, which started in China, before spreading across continents, has inadvertently opened a window of opportunity for Nigeria to significantly reduce the import bill and, possibly, halt it and also stimulate the competitiveness of operators, particularly those in the manufacturing sector.

With China as a major supplier of input for manufacturing companies around the world, Nigeria inclusive, operators are hurting at a result of the pandemic.The crux of the matter is that China, which is the epicentre of the Covid-19, is the second largest economy in the world. The Asian giant is also a major supplier of raw materials, equipment and machinery for manufacturing companies around the world, including Nigeria.

Expectedly, the outbreak of the crisis early this year has thrown many manufacturers and service providers into confusion, largely because their supply chain is closely linked to China; other countries where manufacturers could have turned to for alternative sources for raw materials are also under lockdown.

For instance, over 70 per cent of manufactured goods in Nigeria are imported, with China representing Nigeria’s biggest trading partner, according to Partner, KPMG, Mr. Ajibola Olomola. With about 19 per cent of Nigeria’s imports sourced from China, he said the Covid-19 has significant impacts on retailers and consumers in Nigeria.

The Director-General, Lagos Chamber of Commerce and Industry (LCCI), Mr. Muda Yusuf, gave more details of the impact of the crisis. He said because of the disruption in the global supply chain caused by the coronavirus pandemic, many manufacturers and service providers in Nigeria are experiencing acute shortage of raw materials and intermediate input.

The obviously worried LCCI chief, who spoke at a forum on the “Implications of Covid-19 outbreak on the Nigerian economy” organised by the Chamber in Lagos, last week, added that this has implications for the sector’s capacity utilisation, employment generation and retention as well as adequacy of products’ supply to the domestic market.

 

Inward-looking opportunity beckons

The KPMG expert, who was also at the LCCI forum, did not mince words when he said: “The crisis has given rise to both challenges and opportunities.” He said, for instance, that due to the outbreak, many brick-and-mortar retail businesses, shopping malls and department stores have taken a considerable hit in China and other countries affected by the virus.

On the other hand, emerging community shops and online shops, according to Olomola, are increasing their trading volume and attracting a mass of new customers. He, however, hit the bull’s eye when he specifically said the crisis has necessitated the need to “Reconfigure the manufacturing sector’s supply chain (e.g through backward integration for inputs that can be sourced locally)”.

Indeed, with China, Nigeria’s biggest trading partner and major raw materials and equipment supplier, forced on its knees by Civid-19, manufacturers in Africa’s largest economy naturally would turn to alternative suppliers for succour.

They are doing that already, with the President of Manufacturers Association of Nigeria (MAN), Mansur Ahmed, noting that most manufacturers can always get alternatives to keep their factories running.

Ahmed said: “Obviously, our members have had to deal with the issue (Covid-19) in the best way they can. They have started looking elsewhere for importation of raw materials, equipment and machinery. For many of these items, they do have alternatives. Maybe the Chinese products would be a little cheaper, but they can always get an alternative if they need to.”

That was at a press conference in Lagos that heralded the recently-concluded fifth Nigerian Manufacturing and Equipment Expo (NME 2020) co-located with the sixth Nigerian Raw Materials Expo (NIRAM Expo 2020), where Ahmed said: “We have been engaging government … to ensure that the virus does not get into our shores …”

Unfortunately, while the MAN chief stood on the platform of the February 26 press conference to speak about plans to explore alternative sources of raw materials, he probably never knew that the virus was already here. The index case of an Italian was confirmed that same day, after he flew into Lagos the previous day onboard Turkish Airlines.

Since then, the rampaging virus has, in a remarkably short time, spread like wildfire across continents from mainland China, its roots, to Asia, Europe and America. The crisis has, no doubt, cast a spotlight on the shortcomings in the economy, especially the manufacturing sector’s supply chain, because of its heavy dependence on raw materials import.

But it is also seen as an opportunity for Nigeria to force a paradigm shift from over dependence on imported raw materials and products to local raw materials utilisation via backward integrationin areas where she has comparative and competitive advantages.

Interestingly, Nigeria’s potential for production of raw materials and products has never been in doubt. The country boosts bountiful human and natural resources and good climatic conditions to support the production of agro-raw materials and products required by industries.

In other words, all the basic raw materials to feed the industries are available locally. However, they are not available in sufficient quantity and quality. Most of the raw materials are said to be in unusable form, requiring value addition before they can be used by industries.

The Nigeria Export Promotion Council (NEPC) believes that increased value addition will turn the sector’s supply chain around. According to the Council, local raw materials in their natural forms do not have any value and would not attract any market demand without processing them to meet internationally accepted quality and standards.

The Council, therefore, insists that there is need for stakeholders to encourage local supply of raw materials, noting that this will halt the huge foreign exchange being spent on the importation of raw materials that can be sourced locally.

Between 2000 and 2015, the country spent N49 trillion on the importation of raw materials and products, according to Minister of Science and Technology Dr. Ogbonnaya Onu. The nation’s over-dependence on import has also been projected to gulp N36 billion this year alone, if nothing is done to halt the huge capital flight.

The Nation learnt that the value addition that would help cut the enormous import bill is done mostly by Small and Medium Scale Enterprises (SMEs), because they are the off-takers, taking the materials from the unusable form to the next intermediate stage. It is the intermediate raw material that industries require.

However, because of the low capacity of the SMEs to add value to available local raw materials, coupled with lack of access to capital to set up processing facilities, process technology and techniques, and spare parts, among others, they have not been able to fill the gap.This is why most of the local raw materials are being exported and later imported back as finished products with the addition of certain additives at great cost.

 

 

To change the narrative

To reconfigure the sector’s supply chain as canvassed by Olomola and other industry experts and operators, the need to address the lack of means of intermediate processing has become imperative.

One of the viable ways to go, according to them, is for the government to encourage the drive for local substitution for raw materials through some sort of incentives and provision of infrastructure, especially electricity supply.

The Raw Materials Research and Development Council (RMRDC) has also been pushing for a paradigm shift from over dependence on imported raw materials and products to local raw materials utilisation and backward integration in areas where Nigeria has comparative and competitive advantages.

The sixth Nigerian Raw Materials Expo (NiRAM Expo 2020), which held in Lagos, was one of the Council’s platforms for manufacturers to source raw materials locally and also benefit from RMRDC’s research and development breakthroughs.

RMRDC Director-General/CEO Prof. Hussaini Doko Ibrahim said since its conception in 2012, the NiRAM expo has created awareness on agricultural and mineral resources for which the country was endowed and has comparative advantage in value addition.

Although the Covid-19 pandemic renewed the push for local raw materials sources, local raw materials utilisation in the manufacturing sector has maintained downward trends even before the outbreak of the killer virus.

MAN traced the downward to the first half of 2017 when the Central Bank of Nigeria (CBN) started policy intervention in the official forex market.

“The relatively more available forex resulting from the intervention may have been rubbing off negatively on backward integration agenda as firms are preferring to import raw materials as against inward looking,” the association said.

It, however, said in the first half of last year, local sourcing of raw materials in the manufacturing sector increased marginally to 57 per cent, from 56.87 per cent recorded in the corresponding half of 2018, representing 0.13 percentage point increase over the period.

It, however, declined by of 6.7 percentage point when compared with 63.7 per cent recorded in the preceding half. ”The retained average performance of local raw materials utilisation in the period is due principally to poor access to credit and adequate economic infrastructure needed for inward development of local input,” MAN said.

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