Nigeria: How Dangote re-invented his supply chain

Kelvin Ayebaefie Emmanuel
By Kelvin Ayebaefie Emmanuel

Co-Founder, CEO at Dairy Hills

Posted on Thursday, 9 September 2021 14:44, updated on Thursday, 23 June 2022 12:28

A view of the Dangote Oil Refinery under construction in Ibeju Lekki district, on the outskirts of Lagos
View of the Dangote Oil Refinery under construction in Ibeju Lekki district, on the outskirts of Lagos, Nigeria July 5, 2018. Picture taken July 5, 2018. REUTERS/Akintunde Akinleye

Nigerian entrepreneur Aliko Dangote believes his use of backward integration could help Dangote Industries Limited save a third on their total operating expenses; the new refinery is a key part of that.

In the year 2016 alone, Dangote Cement Tanzania reported that the company spent $48m at $4m per month for 6 million litres of diesel per month, to power a 3 million metric tonnes cement plant, two thirds of the Tanzania’s market demand for 4.5 million metric tonnes of 42.5 grade cement every year.

The company disclosed that due to the high cost of power they had to stop operations for a while, as it was in the midst of negotiating gas supply contracts with the Tanzanian Petroleum Development Company (TPDC). In Nigeria, at Obajana plant in Kogi State, the company has had to adopt the use of coal (a natural resource that emits a great deal of green house gases and contributes to global warming) for power generation, as a tool to reduce its power bill.

So, when in 2014, the Chairman of Dangote Industries Limited, announced an ambitious goal to build a 650,000 barrels per day processing capacity refinery to produce premium motor spirit, AGO, Jet A1 and other derivatives including petrochemicals for refining Urea, polypropylene and polyethene crystals, one of the major considerations must have been the total cost of power and gas to his daily operations.

The government’s backward integration plans are now active in several economic areas; companies involved in sugar sector backward integration are Flour Mills of Nigeria and BUA Group.

Dangote Sugar Refineries, which began its operations in 2000 and currently controls 80% of the Nigerian market, imported $651.4m worth of unrefined raw sugar from Brazil in 2020.

The National Sugar Master Plan (NSMP), spearheaded by the Ministry of Industry, trade and Investment in Nigeria), that has seen the Central Bank of Nigeria (CBN) award Dangote Sugar Refineries a 5-year pioneer status (based on the National Industrial Tax Relief Act of 2011), imposed a 20% duty and 60% tariff on imported refined sugar, and a 10% duty and 50% tariff on imported raw sugar.

In exchange, Dangote Sugar Refineries is doing backward integration in its Savannah sugar plantation in Adamawa, and Tunga sugarcane plantation in Nasarawa state that has a combined acreage of 72,000 hectares or 385,000 metric tonnes per annum (this is 25% of the 1.6m metric tonnes Nigeria needs per annum).

…backward integration for the entire group operation has the capacity to save the company between 30-35% in their cost to income ratio for operating expenses.

Adopting the backward integration policy of the NSMP to grow the white and brown sugar his plant requires for both vitamin A fortified and unfortified refined sugar will help him avoid costs. Those include: 17% of Cost & Freight, port handling charges, VSOP premium, duties and tariffs, a loss impairment that’s factored into the handling costs typically calculated as Insurance, and sugar development duty that comes to 30% of the cost of shipment.

Again, managing the supply chain to cut costs.

Another example: Dangote Cement as a customer of Flour Mills of Nigeria’s Bagco, that makes polypropylene and polyethene bags.

Bagco buys Polypropylene and polyethene crystals from Notore Chemicals (a Petro Chemical plant based in Southern Nigeria). In June 2021, Dangote announced that it had begun exports of the same primary raw materials FMN required to produce the bags it uses to package its cement.

What this means is that the company is going to set up a bagging factory that will make all the bags it needs for its cement business or basically exchange the raw materials for its finished product at a steep discount.

Dangote has about 14,500 trucks in its fleet that averages about 100 litres each per day. At N230 per litre, the CFO is having to pay $667,000 for automotive gasoline oil (AGO) or as Nigerians like to call it ‘diesel’.

This brings me to the statement Aliko Dangote made at the recent Qatar Economic Forum, where he said his plan and efforts at backward integration for the entire group operation has the capacity to save the company between 30-35% in their cost to income ratio for operating expenses.

When Aliko Dangote first conceived the idea of building a refinery, he looked at his supply chain critically and realised that the ultimate solution to run a global group diversified into fast moving consumer goods and cement successfully, was to set up a refinery and petrochemical plant.

The Nigerian Government announced on 6 August, after a federal executive council meeting, that the NNPC has been approved to take a 20% stake in the Dangote Refinery & Petrochemical plant, which received widespread criticism.

A lot of Nigerians say that Dangote gets an unfair advantage and state support, and that is the only way he has come this far. But I say Dangote is doing what he knows how to do best, which is: negotiate for a supply of feedstock to his refinery at a steep discount, so that he doesn’t have to put the $39m he needs per day at $60 per barrel to buy inputs for refining.

When the refinery finally turns on in the Q2 of 2022, his team is going to look through the entire supply chain, do a cost benefit analysis and ask themselves questions:

  • Do we continue buying gas from the Tanzanian Petroleum Development Company (TPDC) or do we export diesel from the Lekki Ports to Dar er Salaam?
  • Do we continue buying bags from Bagco or do we set up our own bag manufacturing subsidiary to produce packaging bags from polypropylene and polyethene crystals for the entire group?
  • Do we continue using cement for road construction in our ‘construction for tax credit’ programme with the Federal Government, or do we use asphalt from the refinery of which we produce 3.3 million litres daily ?

The entire business model has been built around backward integration in vertical and semi horizontal structures that makes it possible for one subsidiary to rely on another for another primary or secondary inputs for production and distribution.

Under the Executive Order number 007 of the Road Infrastructure and Refurbishment Investment Tax Credit Scheme, Dangote can use the Asphalt for bitumen binders he refines daily to engage in the reconstruction of federal roads of which Nigeria has a deficit of 138,000 kilometres and requires an average of $90bn in bitumen binders to fix.

The 3.3 million litres of bitumen binders or asphalt he refines daily is equivalent to 33,000 metric tonnes of asphalt on a daily basis, of which you need an average of seven metric tonnes per kilometre for a single carriage road, and 14 metric tonnes per kilometre for a double carriage road.

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