The Dangote Freakout

Dangote's problems have nothing to do with importers

There’s a post going around with Akinwunmi Adesina’s name on it. It has also been posted by the billionaire, Femi Otedola, on his twitter account. The nature of social media is that it is always hard to tell if the post really originated from the person whose name is attached to it. At any rate, it can always be denied by that person later.

Still, it contains some arguments that offer a fascinating insight into the ongoing Dangote freakout where the billionaire businessman has been talking to the public like he has never done before. For the first time he seems to be facing genuine jeopardy as the pre-eminent businessman in Nigeria.

Here’s the post in full:

This whole issue on Dangote is shocking and creating bad waves for Nigeria globally. - Akinwunmi Adesina

Monopoly often exists where there are high barriers to entry or high capital costs.

How many individuals or companies can do railways? How many can do refineries of the scale of Dangote Refineries?

In a nation that has been importing refined petroleum products for several decades, the abnormal simply became very normal.

No smart investor would make a $19.5 billion investment and want it to be undermined by importers.

To manufacture is extremely expensive and risky. This is even more so in Nigeria, given the very challenging business and economic environment, fraught with policy uncertainties and policy reversals, and where the self-defeating default mode of “simply import it” is always so easily rationalized and chorused to solve any problem.

Competition is good for everyone. But is Dangote refineries anti-competitive? What is the evidence?

Has Dangote refineries prevented any other company from setting up refineries? Why have others not done so? How come they have not done so for several decades? Was it Dangote that held them back?

But Dangote refineries surely cannot be asked to ‘compete’ with importers of petroleum products.

That is not competition. Let the importers set up local refineries and compete by refining in Nigeria. That is fair and justified competition.

We cannot and must not undermine, disparage or kill local industries, talk less of one that is of this scale — a jewel of industrialisation in Nigeria.

It is more than simply delivering the cheapest product to the market. It is about domestic supply security, driving (and yes, protecting) globally competitive industries, maximizing forward and backward linkages in the local economy, job creation, reducing forex expenses and shoring up the Naira.

We must not be myopic.

This whole disparaging of Dangote is uncalled for. It is self-defeating. And it is very bad for Nigeria. Who will want to come and invest in a country that disparages and undermines its own largest investor?

Investing is tough. Pettiness is easy.

It sadly sends a signal that the price for sacrificing for Nigeria is to get sacrificed.

Akinwunmi Adesina

Important to stress that it is the arguments in the post being addressed and not necessarily the person who said them.

Made in Concrete

The first thing to understand is that cement has shaped Dangote. It has transformed him from any other businessman into the face of African business and the richest black man in the world. Astonishingly he has made an incredible fortune from cement without mastering the technology (as I keep saying - Dangote today cannot build a cement plant on his own without Sinoma, the Chinese company that builds and runs his plants for him) or adding a single thing to the world’s knowledge about how to produce or improve cement. The entire fortune has been built on a cruel partnership with the Nigerian government that has allowed him to charge astonishing prices for his product. This meant that the government blocked off any competition from him while he made margins unseen of anywhere else in the world. Here’s a piece from The Economist in 2014:

Cement is a cheap, bulky product. Plants typically need to be near both limestone and customers if they are to make money. So there is a logic to making it in Nigeria, a big market with the raw materials at hand. That said, the business would doubtless be less profitable if imports were unrestricted. Dangote’s margins in Nigeria are 63%, compared with the 30-40% margins typical in other “frontier” markets. And after several years of stability, the firm is set to raise its domestic prices further.

One reason why he could get away with this kind of obscene pricing was because the problem of high cement prices was not really visible. In the sense that if cement prices are too high, it is future houses that will not get built i.e. it has no impact on houses already built. The only visible part of the problem is the sheer number of uncompleted buildings dotted around Nigeria or the frequent building collapses around the country typically caused by builders cutting corners around expensive products. But these are second order problems that most people might struggle to connect (the number of uncompleted buildings in Nigeria only really hits you when you travel outside the country and see that it is almost non-existent even in other poorer countries).

One way to illustrate this is that Dangote made his fortune by selling a relatively small amount of cement. Here’s a graphic from the same Economist piece:

That picture has not really changed much over the last decade. He simply sold a small amount of cement to a small number of Nigerians and charged the highest possible prices for it.

Capital Misallocation

Having found such incredible success with cement, he decided on his piece de resistance: a giant refinery in Lagos which has cost the best part of $20 billion so far. It is not far fetched to say that when you have had more than 2 decades of easy money from cement, you are highly vulnerable to capital misallocation. Easy come, easy go. His strategy of generating above market returns is what defines him as a businessman and his most prominent business ‘successes’ from cement to urea to sugar. And now he has put all that money into refining.

So it is important to ask a simple question - who did Dangote build his $20 billion refinery for? Was it for Nigerians? If the answer to that is yes, then we have a serious problem. Because there is currently no logical path to above market returns in Nigeria on a product into which he has invested $20 billion.

Nigeria: Fuel Subsidy with a country attached

As any Nigerian who has been alive in the last decade and some will agree, the biggest (and most damaging) story about the country has been fuel subsidies. These subsidies (actually, a naked hedge) have ruined the country’s finances and caused serious turmoil whenever the government tried to remove them. In simple terms, the government kept the price of petrol fixed at the pump which meant that it was subsidising not just the product but also the exchange rate used to purchase it. The bill grew and grew and grew until it ran into trillions and became the single largest item of government expenditure. As a recent FT piece put it:

Despite suggestions of backsliding by the IMF, the government remains committed to eradicating a fuel subsidy that was costing $10bn of a $34bn federal budget and encouraging illegal activity, says Edun. “The president is determined to remove the most expensive, wasteful and corruption-inducing fuel subsidy that supported antisocial behaviour like smuggling,” he adds, referring to the arbitrage created by buying subsidised petrol in Nigeria and selling it in other west African countries.

Forget above market returns, Nigerians have never been able to pay just the actual price of the petrol they consume anytime in the last 3 or 4 decades. Even after ‘removing’ the subsidies with a flourish (“subsidy is gan!”) in his inauguration speech in May 2023, current reports suggest that they are now higher than when Bola Tinubu ‘removed’ them last year.

So to go back to that post which said “No smart investor would make a $19.5 billion investment and want it to be undermined by importers” - we have to ask again - who was this refinery built for? Because thinking about it logically for 2 mins will tell you that there is no path to any returns from selling a product to Nigerians who cannot pay the market price for it. Where will above market returns come from? Will the government ‘subsidise’ the product to a level that allows healthy returns?

The question of ‘importers undermining’ the refinery is therefore completely irrelevant. This is not cement where Nigerians will only build 10 houses instead of 100 due to high cement prices. Using the same approach for fuel will more or less cripple the economy. Importers are not the problem here at all. The only solution for Dangote is to get the refinery’s products out of Nigeria as fast as he can and sell them to people who can actually afford to pay for them. Of course there is no chance of above market returns in a highly efficient global market for refined products, but it is better than nothing.

The ‘importers’ meme has of course generated the most outrage since it is the easiest Nigerian button to press. Saying anyone who wants to ‘compete’ with Dangote should set up a refining operation in Nigeria is senseless since not everyone has a huge chunk of capital available from a government created market like cement to misallocate into a high risk low reward venture like refining. In Europe for example, what has kept refiners alive has been a boost from the war in Ukraine as well as several refiners exiting the market after they collapsed, leaving the survivors with a bit more room to breathe. From an investment point of view, there is zero attraction in a country like Nigeria where people simply cannot pay the price of the product you want to sell to them.

The only person who could commit $20 billion to such a safari in Nigeria is Dangote and he has done so. But the hard facts are the hard facts.

The sooner the Nigerian government and Dangote sit down together (they are still best buddies after all) and map an export strategy for the refinery’s products, the better for everyone involved. Ideally they should leave Nigerians out of their drama since the revealed preference of Nigerians has always been to pay below the market price of refined oil products (regardless of whatever else they say). Dangote can cry all he wants (and I must confess to mildly enjoying his tears), there is really no way to do a cement with a refinery.

The choices, for him and Nigerians, are pretty clear. Turn on the refinery and get the refined products out of Nigeria as fast as possible. As a dearly departed Twitter personality might put it - anything you see, you have to take it like that.