One sector that is yet to completely exit recession is the flour mill industry where operators are in dire financial straits, no thanks to the poor operating business climate which has rendered virtually every productive sector of the industry prostrate, reports Charles Okonji
Nigeria, the most populous black nation, is a huge market for wheat flour served by some of its biggest flour milling companies in a highly concentrated industry. But high local production cost and a number of other factors means it is largely dependent on imported wheat supplies to keep its mills going.
Industry still battling recession blues
The country may have exited recession but the rippled negative effect of the recession period still lingers on the economy, predominantly the manufacturing sector where flour millers are the worst hit as they are still battling to remain in business.
In order to stay competitive in Nigeria’s price-sensitive market, flour millers increasingly blend the lower quality/lower cost wheat mostly from the Black Sea region, with the higher quality/high cost U.S. wheat, as the freight paid on wheat imports from the Black Sea is also lower compared to that from the United States. For this purpose the US market share dropped.
But the United States was determined to regain market share in the country, so the U.S. Wheat Associates on June 28-29 this year took 10 participants from Nigeria and South Africa to the IGP Institute Conference Center in Manhattan, Kansas, U.S., for training on flour milling, with lectures and hands-on training exercises led by Kansas State University faculty and staff.
The group included Hakeem Alabi from Flour Mills of Nigeria, Emmanuel Elechukwu of Dangote Flour Mills Ikorodu-Lagos and Olayode Muhammed of Honeywell Flourmills Plc amongst others.
Dwindling fortunes of flour mill industry
Statistics revealed that manufacturing contributed 1.5 percent growth in the Nigeria economy recorded year-on-year in the second quarter of 2018, slowing from a 1.9 percent expansion in the prior period of 2017. This depicts the weakest growth rate since the third quarter of 2017, as oil output shrank while non-oil sector continued to rise which flour milling sector is part off.
Research has shown that the industry is dependent on imported wheat. In April, the U.S. Department of Agriculture attaché forecast Nigeria’s 2018-19 imports of wheat at 5.4 million tonnes, up 200,000 from the previous year. Domestic production is estimated at 60,000 tonnes.
Also, locally produced wheat is not economically suitable for milling wheat flour for producing bread, spaghetti, etc., consumed in Nigeria.
Capacity:
Olam:
Olam acquired Crown Flour Mill in January 2010 and it has grown to become the second largest miller in Nigeria.
Olam announced on Jan. 11, 2016, that it was acquiring Amber Foods Ltd. from the BUA Group at a value of $275 million, with wheat milling and pasta manufacturing capacities of 3,760 and 700 tonnes perday, respectively,” the company said.
“Nigeria is a high growth milling market with volumes expected to reach 5 million tonnes in 2020 as population growth and urbanisation increase the demand for wheat-based products,” said Keshav Chandra Suresh, managing director and CEO of Olam Grains.
At Lagos, Crown Flour Mill has a milling capacity of 1,580 tonnes a day, along with storage capacity of 48,000 tonnes, while at Warri it has milling capacity of 800 tonnes a day, with storage capacity of 20,000 tonnes.
“Olam has identified grains as one of the six prioritised platforms for investment and accelerated growth,” Suresh said.
FMN, Dagote rebounding
Flour Mills of Nigeria Plc presented its results for the year to March 31, 2018, with a reminder that the company has evolved from a single mill in the port of Apapa over 50 years ago to a vertically integrated agri-food and logistics business. Its turnover was up 3.5 percent at N542.7 billion ($1.5 billion), with profit before tax at N16.5 billion.
In a March 24, 2017, update, Paul Gbededo, group managing director and CEO of Nigerian Flour Mills, bemoaned the effect of Nigeria’s recession, triggered in the last quarter of 2014 by a fall in the price of oil, on the economy.
“The recession of Nigeria hit everybody unexpectedly,” he lamented. “Nobody foresaw it. We were affected, and our performance was too, but within 12 to 15 months, we readjusted.”
Dangote Flour Mills recovered from “years of losses” with a profit in 2016, according to a report on its financial affairs on June 25, 2018. The company made a profit of N15.1 billion ($42 million) in the year ended Dec. 31, 2017, up from N10.5 billion ($29 million) in 2016.
In a report on the company’s annual general meeting, Asue Ighodalo, chairman of Dangote Flour Mills, said the company will “continue to develop strategies to harness opportunities occasioned by improvements in economic indices while mitigating the adverse effective of the continued and emerging threats to the performance and growth of our business.”
He promised an aggressive marketing and branding campaign. The company’s reported turnover of N125.4 billion ($346 million), up 18.6 percent.
Moreover, the AGM report for the year ended March 31, 2018, shows that Honeywell Flour Mills achieved rising turnover up with 34 percent at N71.5 billion ($198 million). However, higher energy costs caused by disruptions in gas supplies meant that the cost of sales rose by 37 percent to N55.4 billion ($153 million). Operating profit rose by 15%, but interest expenses and taxation meant that profit after tax was up just 3 percent.
Honeywell has invested in a big new production complex at Sagamu, on Sept. 18, 2016, on a visit by shareholders to the new plant. Nino Ozara, executive director of manufacturing at Honeywell Flour Mills Plc, called the new site, “proof of the company’s
Capacity improvement:
Over the last two decades, the U.S. wheat industry (through the U.S. Wheat Associates) invested in numerous capacity-building activities for Nigeria’s flour millers, bakers and pasta manufacturers through training in the United States and Nigeria, as a result, the U.S. market share reached about 90% in 2011. But the market share of U.S. wheat dropped to about 35% in 2017.
Big operators in the sector like the Dangote Flour Mills, Flour Mills of Nigeria, Honeywell Flour mills and others have had to battle the has operating environment remain in business. Others especially the small and medium scale businesses in the sector had to close shops due to the hash operating conditions. Instability of exchange rate, monetary and fiscal policies associated with taxes, industrial, and economic planning variables as well as the developing stage of the country, contributed to the challenges of the economic adverse effect on the industry.
Owing to insurgency in some parts of the country, manufacturing sector including the flour millers food and beverage manufacturing sub-sector have lost significant share of their sales as it seemed almost impossible to penetrate some parts of the country.
The Apapa gridlock has also contributed to the plight of the sub-sector, as Honeywell Plc, attributed the key impediment to growth during its first quarter result to the Apapa traffic gridlock, which has virtually crippled business activities in Lagos State and its environs.
Honeywell management said the dilapidated road infrastructure and chaotic traffic situation in and around the nation’s premier port made it inordinately difficult, and enormously expensive to transport goods out of the factory in Tincan Island, adding that the challenge resulted in an effective freight cost increase of about 25 percent.
Other challenges:
Challenges facing the food sector range from inadequate power supply, to lack of road infrastructure, a tariff system that does not support manufacturing but encourages importation rather than manufacturing as well as unbridled smuggling through the Seme border and the nation’s ports.
The biggest challenge of cost to manufacturing is far too many. Some medium scale enterprises have closed shops because of lack of adequate supply of power, because the capital required to invest in generating capacity and to maintain a regular production quality is just too high.
Road Infrastructure is a major problem for the Nigerian companies most of which either operates from the troubled Apapa axis of the ports on rely on the road from the ports to take delivery of its imports. The congestion at the ports has considerably eroded the capacity of the companies to timely take delivery of and distribute its products.
Marcus Adiele, is an Executive Director in one of the flour mills company. He expressed the frustration of the companies on the problem of logistics occasioned by the bad roads and the dwindling economy.
According to him, the flour companies are just struggling. Apart from Dangote Flour Mills that depends on the parent company transport unit, for its transportation obligations, the transport sector also lacks capacity in terms of ability to invest in quality trucks for movement of goods and services.
Furthermore, the purchasing power of the people have been decimated and so sales are affected which will eventually affect the bottom line. That some of the flour mills are still in business is because of the various growth strategies initiated by the management to mitigate the effect of the bad economy on their business.
The President of the National Union of Food Beverage and Tobacco Employees (NUFBTE) Lateef Oyelekan equally decried smuggling as one of the problems of the food sector. Smuggling in the Northern part of Nigeria and the Seme axis of the Nigerian border with Benin Republic.
Despite the ban on importation of flour based products like noodles and spaghetti, smuggled products dot the shelf of many markets and stores in Nigeria.
A visit to Balogun Market (Trade Fair Complex) revealed that Bonita, a variety of spaghetti is the toast of buyers especially for those cooking for sale. Bonita is smuggled through the Seme border with the security agents turning a blind eye to the activities of the smugglers. Rather than confront them, the security agents line up along the route and various bustops for their settlement.
Visits to various markets within Lagos indicated the abundance of imported and smuggled flour based products which continuously erode the market share of the domestic producers.
Chief Dawodu Ajisafe, an investor and administrator lamented that the economic distortions and the inability of the government to fix critical infrastructure would certainly erode the profitability of the food businesses.
According to him, increase in international price of wheat, the flour companies major raw material combined with slight devaluation in the official foreign exchange market would out more pressure on the companies’ margins, because it is not all the cost that could not be passed on to customers.
“Logistics issues especially the worsening road network at Apapa, a major business hub will impact negatively on the ability to supply raw materials to factories outside Lagos and finished products to its Lagos area customers.
“Within the last nine months, one could notice a drop in demand for flour products, largely due to the availability of cheaper agricultural produce and the slowdown in economic activities as a result of the upcoming election.
Also we have Influx of foreign Pasta products. These are available at lower prices, which come back to issue of appropriate tariff.
However, stakeholders are optimistic that economic activities would pick-up with the completion of Apapa road project, expected before the end of 2019, stability in the international price of wheat and cyclical enhancement in flour products demand and the conclusion of the 2019 elections.
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