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February 09, 2009

Nigeria’s cocoa processing sector faces collapse

by Crusoe Osagie

Fears about the vulnerability of the Nigerian economy have heightened ith the announcement of the imminent collapse of the close to N40 billion cocoa processing sector.

The Cocoa Processors Association of Nigeria (COPAN), represented by Managing Directors of six of the cocoa processing companies still in operation, painted a dire picture of the situation.

Chairman of COPAN, Mr. Abimbola Oladapo, who spoke on behalf of the companies, said; “We now lose at least $2000 per tonne of cocoa we process in Nigeria for the international market. The market for our products mostly resides in Europe and the cost at which we can get out product to the international market is approximately $2000 above the prevailing market price. If urgent steps are not taken to save the industry in the next five to six months, it will collapse and all the factories will shut down."

He said most of the investments that flowed into the cocoa processing sector came as a result of the export incentive called the Export Expansion Grant (EEG) which was introduced by the President Olusegun Obasanjo administration to boost Nigeria’s non-oil export.

Oladapo said the EEG, which is supposed to pay Nigerian companies that export non-oil products about 30 per cent of the value of their export in the form of tariff and duty waivers, has been irregular; adding that since 2006 none of them had received the grant. He said while operators had asked for a meeting with the Federal Government on how to save the sector, most of them had began to strategize on how to avoid going down with the collapse of the sector in Nigeria.

He said an option being considered by operators included the relocation of their facilities from Nigeria to countries such as Ghana and Cote d’Ivoire. He said another option is for operators to resort to trading in raw cocoa beans, which, according to him, is fraught with its peculiar challenges.

Oladapo said other problems plaguing the industry had driven the sector’s capacity to an abysmally low level. He said capacity utilisation in the sector is now only 20 per cent.

"The problems we face have remained unsolved," Oladapo said. "The power problem is still there, penalties are still being imposed on our products in the international market, particularly in the European Union nations; and statutory incentives designed to support the industry have remained elusive."

He said the companies that are managing to operate at the present low capacity are doing so with serious loss to their businesses. According to him, all the operators sourced loans from banks using projections that seriously factored in the Federal Government incentives such as the EEG, which he said had not been received by operators for the past three years.

“How do we then fulfill our obligations to the financial institutions that gave us credit?” he asked.

He said it is disheartening that Nigeria, which had short changed its manufacturers and industrialists by failing to provide appropriate infrastructure had failed to announce a rescue package for its companies, a step which developed economies are already taking. He expressed doubt about the recovery of the sector unless the Federal Government took firm steps to reverse the scary trend in the sector.

Amid the woes which cocoa processors face, the European Union (EU) has sustained its penalty on processed cocoa being imported to its member countries from Nigeria. For failing to assent to the interim Economic Partnership Agreement (EPA) being proposed by the EU to the African Caribbean and Pacific (ACP) countries, processed agricultural produce being exported from Nigeria to the EU attracts an extra cost of a minimum of 6 per cent of the total value of products being exported.

Similar products being exported from countries such as Ghana, Cote d’Ivoire and others who have endorsed the temporary EPA do not attract this extra cost, therefore putting Nigerian products at a major cost disadvantage in the export of processed products to the EU.

However, export of raw agricultural produce that have not received any value addition does not attract this surcharge, supporting Nigerian exporters claim that the penalty is designed to subdue the industrialisation drive of ACP countries.

According to Oladapo, "the response of the Federal Government to our plight has been a bit cold, no action has been taken by government to save the sector from failure."

He said most cocoa processors were just maintaining low level production because of the banks’ credit facilities to kick start their operations and to meet their obligations to the banks.

Following the decision of Nigeria not to endorse the Economic Partnership Agreements (EPAs) with the EU, cocoa processing firms have been facing stiff export hurdles, resulting in multi-million dollar losses since the beginning of January 2008.

According to the processors and exporters of manufactured cocoa products to European countries and ports, the non-endorsement of the agreements by the Federal Government has been attracting stiff penalties in the form of higher duties on exports.

COPAN maintains that the survival of their operations is under threat. The body has since called on the government to give effect to all necessary incentives, which had been suspended.

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