Nigerian Commodity Exchange: After 20 years hiatus NSIA’s having a go

About 20 years after the Nigerian Commodity Exchange (NCX) embarked on redefining the management of commodities trading in the country, huge capital flight, caused by stakeholders’ growing reliance on foreign commodities exchanges, has been steadily expansive, with the dearth of structural and institutional infrastructure stifling its delivery prospects. However, the government appears to be braving all the odds to ensure a breakthrough, with the mandate giving to the Nigeria Sovereign Investment Authority to fund its revitalisation. Yet, strong sentiments swell on the notion that the country remains unripe for the development, so long as production capacity for most commodities is not yet able to address current internal demands, writes TEMITAYO AYETOTO

Contrary to the 1960s, when population figures hovered in the region of 45 million, demand for a wide spectrum of commodities either locally sourced or of foreign origin has risen significantly.

In the same vein, productive activities in the extractive and agricultural sectors where the country mostly enjoys abundance of natural resources have grown substantially.

In 2017, for instance, the agricultural sector grew by 11.29 percent on the strength of increases in crop production, livestock, fishing, and forestry; higher than the 9.61 percent growth recorded in the preceding year.

On the flip side, the manufacturing sector contributed 9.18 percent of the total Gross Domestic Products (GDP) in 2017. Export data over the years show that oil and natural gas commodities have been the engine of Nigeria’s economic growth, accounting for 91 percent of total exports.

According to the United Nations COMTRADE database on international trade, Nigeria raked in $292.72 million from agricultural exports like cocoa beans and cocoa preparation, $116 million from oilseeds, fruits and grains; $31.64 million from aluminium and articles, $45.03 million from raw hides and skins and $38.1 million from rubbers and articles, among others, in 2016.

But these figures have not translated to a positive balance of trade, partly because of Nigeria’s failure to leverage the resourcefulness of a vibrant commodities exchange for higher yields and expansion of local production capacity.

Huge capital flights have continued on a monumental scale as the import bill recorded include $199 million for palm oil imports; $406 million for raw sugar; $388 million for sugar-preserved food; $84.7 million worth of processed tomatoes; soya bean meal of $63.5 million and $11.2 million worth of chocolate.

A commodities exchange is a useful mechanism emerging economies like Nigeria could deploy to make the most of agricultural yields, raw materials or any derivatives through trading of futures contracts.

This was acknowledged when the country, in 2000, established the Abuja Securities and Commodity Exchange (ASCE), the first exchange in Nigeria to enable electronic trading, clearing, and settlement for primary market and secondary market commodities.

This was eight years before the most prominent African example, the Ethiopian Commodities Exchange (ECX), came on stream in 2008.

However, about 20 years after the ASCE was converted to a full fledged commodities exchange under the supervision of the federal ministry of commerce (now called the trade and industry, trade and investment ministry), there has been little or no impact on its remits.

Zaheera Baba-Ari, managing director and chief executive officer (CEO) of the NCX, told business a.m. that the establishment was already crippled at birth by lack of requisite infrastructural and institutional frameworks.

“The exchange was converted from a stock exchange to a commodities exchange in 2001 without requisite supporting infrastructure by the Obasanjo administration. The lacking infrastructure, including warehouses, established national policies for quality and packaging standards, among others, hindered its operation,” said Baba-Ari in an email interview with business a.m.

According to her, running an efficient trading system practically goes beyond building physical frameworks, and that it covers the legal and regulatory system of grading standards, as well as a credible system of contract enforcement and governance in spot markets.

These aforementioned issues, among others, are factors fuelling strong sentiments that the country is still immature to peddle such development, even as the government appears to have renewed its commitment through a mandate given to the Nigeria Sovereign Investment Authority, to fund the exchange’s revitalisation.

The understanding among industry analysts who spoke with business a.m. was that driving an efficient exchange should concurrently run with the installation of a robust local capacity able to address voluminous demands of trade markets.

Their fear happens to be predicated on the fact that most of these demands, as available data reveal, were hardly met as a result of low output from producers who were constrained by different factors of production. There is also apprehension that even if there were sufficient volume of production locally to keep the exchange afloat, commodities might still have to grapple with fierce competition posed by a cheaper rate of importation.

The country expends $170 million on importing tomato concentrate annually to bridge the local shortfall of over 700,000 tonnes. It produces only about one million tonnes out of 4.5 million tonnes of annual wheat demand and struggles to meet a million tonnes of cashew production.

Paul Gbededo, the general managing director, Flour Mills of Nigeria speaking with business a.m. on the sideline of the presentation of Multi-Crop threshers to the Wheat Farmers Association of Nigeria (WFAN), said the country needed to attend to capacity building to realise the focus of the exchange.

“There is nothing impossible but you have to create the environment for such a model or system. If you tick the boxes, for instance, what are the policies, the enabling laws that will help to ensure there is proper compliance with rules and regulations? Who are the stakeholders? Are they all aligned? So I think you must tick those boxes before you can really say you want to run a commodities exchange.

There are proper crops that can really be traded but we are still building capacity. Nigeria consumes about five million metric tonnes of wheat industrially. The total production in this country is just over half a million.

So we are still building capacity in that area of production. Once we get to the level whereby we have sufficiently built capacity and it is now possible, then we will. For now, we are not ripe,” said Gbededo.

According to Rotimi Fadipe, the executive director Honeywell, a combination of government and private investment must interplay to encourage such level of trading. He said the NCX could further thrive on collaborations with Nigerian Stock exchange (NSE) as well as partnerships with key professionals in the agro-allied industry who can inject live and spur wider interest.