Finnfund

Nigerian economic growth is expected to top seven per cent this year. Forecasters believe Africa’s second-largest economy will continue strong next year, too.

Good economic development is reflected in demand for steel products. Now is a good time to invest in new production capacity, says chairman Raj Gupta of African Foundries Limited (AFL), a Nigerian company.

AFL is currently constructing a steel mill in Ikorodu, near the commercial centre of Nigeria, Lagos. The investment project, worth about 123 million US dollars, is in three parts, Gupta says. Construction of the foundry where scrap iron will be smelted is expected to be ready in the early part of 2011. The second and third parts, the rolling mill and power plant, are due to be complete by the end of this year.

The mill will concentrate on making hardened steel reinforcement bars (rebars) of 8-32 millimetres. Its production capacity will be 225,000 tonnes per year.

Growing Nigerian demand for quality steel

Raj Gupta calculates the size of the Nigerian market for steel products at about 2.5 million tonnes annually. Of this, 1.77 million are long steel products like rebars.

Domestic output in these product groups is estimated at 1.2 million tonnes. The rest, supplied from abroad, consists mainly of higher quality steel products.

AFL is starting to manufacture harder, thermo-mechanically treated (TMT) rebars, of which there is hardly any production in Nigeria at present. The mill investment will have major knock-on effects for the national economy as the need for imported steel products, purchased with foreign currency, declines.

The market outlook for AFL products is positive, Gupta believes, because foreign construction companies operating in Nigeria used almost exclusively TMT rebars. Also local building companies are moving to higher quality steel. For example the government generally insists on hardened rebars in the infrastructure projects it finances.

By international standards, steel use in Nigeria is still at a low level.

“Consumption per capita is expected to grow from 8.4 kilos today to 9.2 kilos over the next decade,” Gupta says. “There’s plenty of growth potential because average world steel consumption is 21.4 kilos per head.”

Four decades of business experience

AFL is part of the Nigerian conglomerate Parco, which also produces and sells industrial gases, glass and fertilisers and imports products, mainly from Asia. Parco is owned by the Indian Gupta family, which has operated in Nigeria since the mid-1960’s.

In Raj Gupta’s view, AFL’s main competitive advantage is its long experience in producing and selling steel. Its previous major plant investments have stayed on schedule and within budget, he says.

When it is complete the steel mill will offer employment to about 500 people. It will also provide extra income for about 1000 families in ancillary mill services, in scrap metal collection, and so on.

Gupta sees the main risks as economic development in a country dependent on oil income, and the effect of business conditions on demand for steel products. Steel production currently enjoys tax concessions but in a politically uncertain country government policies may change.

Material supplies seem guaranteed. Scrap metal is readily available in Nigeria. AFL will obtain its feedstock from various companies specialising in scrap collection.

Power plant from Wärtsilä

The power plant being constructed alongside the mill will reduce operational risk.

“Having our own plant will safeguard electricity supplies around the clock at a lower price than from the state power company,” Gupta says.

Wärtsilä is supplying the 40 MW gas power plant, which will be connected to a nearby natural gas pipeline. Gas is a by-product of oil production, which is often flared in developing countries. In accordance with international environmental agreements, Nigeria now insists on recovering and utilizing gas from the oil fields.

Steel production contains many hazards for the environment and the health of employees. Raj Gupta promises that the dangers have been minimised by installing modern equipment in the mill.

“In these matters, we intend to observe IFC and World Bank guidelines. We are also applying for international ISO 14001 and OHSAS 18001 certifications for the mill.”

Financiers look out for the environment

The financial institutions backing the steel mill project have also set the condition that AFL observes IFC guidelines and standards and United Nations’ ILO conventions on the environment and working conditions.

Finnfund is financing the project with a loan. The other financiers include the Emerging African Infrastructure Fund, the Dutch development finance company FMO and Citibank. Together they have ordered an independent study on the environmental and social effects of the new plant, and AFL has promised to follow its recommendations.

Finnfund senior investment manager Mikko Kuuskoski notes that the forces behind AFL have a long history of responsible operations in Nigeria’s challenging business environment, which facilitated the investment decision. The project will have various positive effects on development.

“The new mill will encourage the use of scrap iron and improve occupational safety in a sector that is often dangerous. It will also have positive environmental impact, such as developing energy-efficient production, promoting the use of natural gas and reducing gas flaring,” Kuuskoski adds.

Market yet to discover for Finns

“The investment decision by Finnfund and Wärtsilä’s success in Nigeria are some of the many recent signs evidencing Finnish companies are finding their way into this challenging yet rewarding market”, believes Mr. Lauri Voionmaa, First Secretary at the Embassy of Finland in Abuja.

Voionmaa is in charge of building up the capacity of the embassy to promote Finnish businesses, a recent priority for the embassy. In this respect, the recent opening of Finpro in Abuja, will be crucial.

“These are all good signs, Nigeria’s size, demographics and potentials in many sectors as the economy industrialises and diversifies from an oil-focused economy, cannot be overlooked,” Voionmaa continues, and recalls that Nigerian market requires solid experience from challenging developing economies, risk-taking capacity, readiness to invest in it by being present, and long-term planning.

The embassy has gathered experience now from several business visits and delegations. The Minister for Foreign Trade and Development, Dr. Paavo Väyrynen, visited Abuja and Lagos in March 2010 with some 15 companies. In mid-October, a major Nordic business delegation of Swedish, Norwegian and Finnish companies in the power sector visited Abuja.

“The visit was a success. The host, the Federal Ministry for Power, is to thank for it, and also the Ministry of Environment proved that promotion of renewable energy is taken here seriously,” says Voionmaa.

During the four day visit many tangible projects were presented to the companies and they had access to key ministers and officials, agencies and other stakeholders at the federal and the state level. The delegation was received by the Honorable Vice-President of Nigeria, H.E. Arc. Namadi Sambo, and on the other hand they had the opportunity to meet Nigerian companies.

“When the Finpro office will be fully operational, which is soon, Finnish companies will benefit from a true Finland House at their disposal,” Voionmaa says.

For more information, please contact Mr Mikko Kuuskoski tel. +358 40 588 1917 or Ms Isabel Leroux tel. +358 9 3484 3345, firstname.lastname@finnfund.fi