Nigeria’s a weak player in global commodities play, but investment bankers can drive growth by creating viable financial instruments

Commodities trading is huge globally. For many years, Nigeria has been trying to create more organised and formalised commodities trading platforms for soft, wet and hard commodities, with emphasis on agricultural commodities. Such a system offers tremendious opportunities for individuals, groups and the economy. Last Thursday in Lagos, at the monthly business a.m./GTI Finance & Investment Dialogue (FID), AKIN AKEREDOLU-ALE, Managing Director/CEO of the newly licenced Lagos Commodities and Futures Exchange (LCFE) was the guest speaker, and he gave great insights into the opportunities that can be tapped from a well organised commodities market, which LCFE is working to establish. On the sidelines of the Dialogue, he fielded questions exclusively with PHILLIP ISAKPA. Following are excerpts.    PHOTO CREDIT: JAYEOLA ISAAC

Thank you for giving us your time. We would like to know, given the global play of commodities, how you see the Nigerian market, what’s your take on the Nigerian market at the moment?

The Nigerian commodities market plays on two sides, like [you’ll see from] the presentation that is going to be done. On the demand side, that is the import side, we are a very big player, while on the supply side, the export side, we are very weak, both in the Pan African sense, West African sense and the global sense. It is a fact that people have said that Nigeria is a consuming economy and even the rub of effect is happening to countries that are very close to Nigeria; so, in that sense, we consume more than we produce. Now, since we consume more than we produce, efforts have not been put into standardization and certification of products that are being generated by the way of commodities, for those commodities to qualify as export produce. As it were always in cotton, we have not focused on the issue of certification and standardization. If you want to go into certification and standardization, it starts from the seeds, because the seeds determine the yields.

Now, we have a lot of seeds that have technology in them, we have seedless leaves, and all of that, but since we are not exporting, we are not bothered about it. So, effectively, in the global community, Nigeria is placed among the 2 percent of that commodities space, while in Africa, agriculture for example, employs 95 percent of people; even in Nigeria, agriculture contributes substantially in terms of employment.

To the question that you asked, we are a very weak player in that space. We have a lot of policies that have not allowed that space to grow and then the government has not been there before. The simplest policy that you look at in anything has to be the legal part, the Land Use Act does not support agriculture, and commodity production really. We have so many lands in silos that are unused and used. Unused in the sense that nobody is using them, and used in the sense that, if you try to use them, someone will lay claim to them. So, effectively, people that actually want to do agriculture, both from outside and locally, come to Nigeria and see so much land, but they do not have access to them and even if they are going to have access to them, they don’t have the legal backing to be able to support the title to those assets. It makes it difficult for production to happen in Nigeria. So, as far as Nigeria is concerned, the only way we can get commodities now, is to rely on all these small-scale farmers who can’t go into mechanized farming; then you have to visit open markets to see everything. But it doesn’t remove the fact that Nigeria has a capacity to be a commodities hub for West Africa, and the financial hub also. These are some

of the things that we are looking at, it is not as if we are experimenting, it is something that goes on everyday in Nigeria, the only thing is, it has not yet been formalized. So, what we want to do is introduce structure into what we are doing, formalize it so that we can harness data from there and actually know the level of activities that is going on.

What we see is that, even though there is no structured commodites market, in the past, there have been efforts: Abuja Commodities Exchange has been talked about for many years, and then there’s the Tony Elumelu’s effort in that space. Talking about this formalized nature of the commodities market, do you think volume is an issue?

We don’t have enough volume to drive [it] and, for example, people that want to invest in logistics and haulage, if they want to do big investment in haulage, they will want to see if they have a product to evacuate and deliver. Even the Nigerian Railway that we are talking about that can evacuate and move things, the volume is not there; so why would I do something if it is not there? The volume is not there, the only thing that is easy for us is the volume inwards, which is from internal to the port. Most of the investors that come and bring products along, go back empty, they don’t take things back.

On the issue of volume, the issue of moving from small scale farming to mechanized farming comes into play, and then also, private sector involvement is also very key. When you have a situation whereby everything is always government, that means you will have to face the bureaucracies and inefficiencies and all of that. For example, the Anchor Borrower Programme that the federal government initiated is supposed to have had a lot of impact, because a lot of money has gone into it; I am sure that if it was a private sector thing, the impact would have been more visible than what we are seeing now.

The biggest thing about private sector people is that they put their money where their mouth is and monitor it more easily, and then also, when it comes to succession planning, if you have a particular person in government and after four years the person moves and someone else comes in with a different ideology, then everything changes. And you know agriculture is medium-long term, some of this things take about 3-4 years before they start producing, some of them 6 years. These are things that we have to look at. We have issues of financing too, access to funding, liquidity, off-takers and then the quality of fertilizers. If those things are efficiently harnessed it will make it easier to drive volumes.

Now, that is one leg, when you start driving the volumes, and you have the volumes, do you have the storage facilities, do you have the technology to store it, do you have the warehouses that can handle it? And when you have that, you look at how you maintain it till it gets out of Nigeria. I had an experience of a company that produced and then it took them 2 months to get to the port from Mile 2 [in Lagos], and by the time the truck got to the port, the ship that was supposed to evacuate had gone. Now, the goods had to wait another 3 months for another ship to come; effectively, by the time the produce gets to the destination, it becomes stale. So, those are the issues and inefficiencies that play a big role in the outcome. We have not gone into technology, warehousing; we have not talked about seed, also we don’t have very active middle players, that can actually work on all these things. There are things that can do all this; by the time we introduce technology and people can easily see each other from all over Nigeria, it makes it easier for you to start with the aggregation, and when you can aggregate, and put your goods together, and you now have fund and liquidity for it, it makes it easier to do business.

I wanted to ask about the potential of the commodities market; we know about oil, but we know that there is a lot to be harnessed from this market, so what is it in terms of size, if we were to put money on some of these commodities?

Like I mentioned earlier for the commodities, for some of those companies look at them and compare their balance sheets or take a look at their turnover, which is equivalent to their sales and contracts that have been done during a particular period, it is something. If you look at the oil and gas sector, what you will be looking at is what is the balance sheet of Nigeria, what is the volume of content that has been traded, now, because you know that we do 1.2 million barrels per day (bpd) and the balance that is tradable is about 400,000 bpd, we can do a projection on 400,000 bpd, that if you were selling, how much would be made? And that is one aspect of the oil and gas [sector]; you have the refined products, those refined products come in and they go to the tank farms. So at the end of the day, what you need to do is, let’s take the CBN for example, CBN said that as at 2015, we had $49 billion in the domiciliary accounts, effectively, it means that at least one week, there would be turnover of $49 billion, and if it is once in a year, it means that we are contributing in that space and we can make a projection based on $49 billion; our excess crude oil is about $50 billion and it did not get there overnight, there were contracts traded for the money to have been moved over. Now, divide that by 4, that is the potential for the oil and gas to participate in it. So, you see that it is a big sector with a lot of potentials.

You will notice that Nigeria is doing swaps; some people are taking crude and are giving us petrol. What is wrong with us taking up the contract of the swap and show it to the federal government? So, these are things that could help. Why I am not giving you a particular figure is because it is not static anymore, the figures are changing on a daily basis, but the potential for commodities trading is there. Nigeria is a commodities country, the equity part is just little, the greater part of our turnover in this country is to generate import, and for you to import those goods, it means that money is good, so if you look at the value of import, it is equivalent to contracts that have been traded for those imports and we are talking about 200 million people in Nigeria; we should look at how we can tap into this industry and grow it.

Often times, we hear about the financial market being awash with liquidity, and then, but then you hear there are no bankable projects. You have also said that the instruments have not been created to drive commodities financing and you seem to lay emphasis on investment bankers. Now, how can investment bankers recognise or realise that a lot is on their plate and they need to wake up?

It is sensitization. They say, a journey of a thousand miles, starts with the first step, you have to let them know that these things are possible because, the lads that are generating and raising capital all over the world are mobilising fund from this sector too in their own country, they look for investment outlets and bring them to Nigeria and Africa to invest. So, it is better for us to start generating those products and instruments, start marketing them to people, and you will be surprised by the response, if it is properly done and properly structured whereby, the various variables that will make it bankable, the cash flow, the security is there, insurance is there and there are professionals to manage it, people will invest in it. Like I mentioned earlier, for Islamic finance, if you say that you want to do farming using Islamic finance and you took it to DMO, who is going to stop you? But has anyone come up with such?

Is it a question of capacity, or they are not just extending themselves?

That is why I asked earlier: “Who is afraid of the world?” I am not afraid. I think we just kept quiet that some people should lead and we follow, but we should take the lead and move; there is nothing stopping us, we have qualified people, the resources, we have the underlying assets, government backing, we have the Debt Management Office, we have government guarantee, what else do we need, we have exchanges, people are mobilising towards FMDQ now, because they have been able to put the various stakeholders in the ecosystem together, tell them that it is possible to raise a bond to fund infrastructure and some people have taken the bond for infrastructure and have listed it, and infrastructure is being deployed, if some people can raise bonds for infrastructure, why can’t they raise bonds to develop agriculture.

Across the value chain, there are different snags along the way, how can these shortcomings be put right for an effective working of the market?

The major things about effectiveness of anything is to put it through the process, the moment you put it through the process and checklist, it is supposed to align things. For example, you want to get a product, and it goes through an issuing house, a broker, goes through a trustee, goes through a legal adviser, goes through an accountant, an auditor, before the instrument comes back to you, you will discover that all the loopholes would have been covered and it becomes a bankable project and the business is okay, the cashflow is good, they will all sign up to it and people can invest in it, but we have not done any at all, that means we have not started, so what we are saying is let us start.

We often talk about the money market and government involvement as crowding out the private sector; we have also seen government’s strong intervention especially in the agricultural side of the commodities market, we still have solid mineral that are undeveloped. Do you think that, against the private sector participation in this commodities chain, that government is in a way crowding out the private sector?

By way of funding, government is crowding out the private sector, because if the government say that they are doing 13 percent for minimum rediscount rates, effectively for you to be able to crowd out the government, you must do 13.5 percent. Now, imagine that you went to the bank to borrow N1 billion for a project that will take 3 years and annually you are paying N130 million, the second year you pay N130 million, the third year, another N130 million, that is N400 million if you compound it, now do you think in the third year when you are breaking even the company would have made N400 million? Already, the company is bound to fail from the beginning, because you have to benchmark whatever interest rate on what the government is doing. The government is not into any production, do you understand what I am saying? So, because of that, they crowd out other people and a lot of those projects fail. Sooner or later, the market will try to move to a single digit interest rate and that will make it easier, for even equity, the dividend yield cannot compete, so the government is crowding them out, and by way of policies and laws, there are some things that are still in government favour and you have to get approvals for them, some of these approvals take forever.

What we need to be doing is to focus on the aspects of agric trade or any other commodities trade that you have less government intervention in and try and source for single digit fund, if not, it is going to be dead on arrival no matter how much money you are making, if you like have N1 billion and you pay N400 million in the next 4 years, you can’t break even. However, some people go into it with the notion that they are going to succeed, but for the commodities sector the private sector will make it easier for people to raise capital in such a way that people will be looking at none of the terms; instead of interest rate and it gives them a little bit of space to do better, in the long run, maybe 5 – 10 year period, the thought might come again.

I talked about your exchange being based in the commercial and financial hub of Nigeria, and it being critical to galvanise the commodities market. How prepared is Lagos Commodities and Futures Exchange to take on this responsibility, given the fact that we have seen failures in the past?

All the issues that other institutions faced, we have addressed. First of all, government intervention was too high in the other ones, our is a purely private sector exchange, So, that has been taken care of.

The second thing is the deployment of capital, some have deployed a lot of capital on warehouses but we are deploying our capital on technology and human capital to be able to make sure that we spread the information and it activates in the mind of people, so that they can be able to participate. For us, we have dealing member firms on our side, which other people don’t have, I have the financial industry on my side and I am explaining my case to each of them, for them to be able to understand and start funding people that want to participate in that space, not necessarily give money to me, but to be able to understand that if you give money to those people, it will trickle down to my own organisation.

There is the aspect of investment bankers who can create the instruments that will go to the exchange, but for those who are on the other side, the producers, who are looking to see if they can be listed on this commodities exchange, how can they have direct contact with you and if they do, what can you do for them?

Like I said, we are building capacity for stakeholders, some of the major players in the commodities market are already into it, but investment bankers have to look after those people and tell them that this thing they are doing, your capacity can be scaled up by 50 percent by putting structure into it, they won’t come and meet the investment bankers, they have to fish them out and do it with them.

Our own model is that, when you come to the exchange, you trade and make money, we are not going to start putting many instruments together, the only thing is we would build capacity and sensitize people to go ahead and do it so that they can come back to us.

So, for example, if investment bankers don’t reach out to the farmers and aggregators, the ones that come directly to us we’ll still arrange to introduce them to investment bankers, who will assist them and they will come back to us, as far as we are concerned there is still a lot of learning curve to cover.