Nigeria's federal government has extended the closure of all land borders across the country, following the partial closure of the Nigeria/Benin border earlier in August to tackle smuggling. The latest move is in line with the statements made earlier in the year by President Muhammadu Buhari, who suggested that a ban would be placed on importing food items into the country. The Central Bank of Nigeria (CBN) has acted similarly, through the inclusion of milk on its list of items restricted from accessing FX from the official market, as well as an outright ban on importing Cassava and its by-products. Having said that, we note that the announced closure is on land borders, while imports via air and sea ports, which are more controlled, are still allowed. We expect to see the following impact from this decision.
Trade activity and pricing pressures. Trading takes place mainly via seaports in Nigeria, accounting for 99% of exports and 94% of imports. Hence, we do not expect the land border closure to have a significant impact on trade activities. On pricing, although Nigeria is largely import-dependent (given its low domestic production), only 1% of its imports is carried out through land, but we still expect to see some opportunistic upward price adjustments, especially for food items. This is already reflected in the pricing of some staples such as rice (a mainstay in Nigerian diet) – the price of imported rice increased by 45% between August and September. Notably, we believe domestic producers will also take advantage of the situation to implement price increases, something we're already seeing with the price of domestically produced rice increasing by 19% within this time.
Our coverage: We believe the border closure could potentially be positive for companies in our commodities coverage, Dangote Sugar and Flour Mills, which had hitherto faced both pricing and volume pressures from imported products. More specifically, according to Dangote Sugar, c40% of sugar in circulation was smuggled into the country and this dragged prices over the past year. With the border closure, we expect to see a reduction in smuggled products, which should be positive for the volume trajectory of both these companies. Conversely, we believe consumers will be more inclined to adjust spending patterns to accommodate higher prices for staples, which presents a downside for companies in our branded and beverages segment that have products that are more discretionary. In light of this development, we are currently reviewing our earnings outlook for our coverage.