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Whilst most analysts believe that there has never been a better time to start doing business in Africa, finding customers in the African market can be a long process. Africa is huge, with 53 countries, so it is best to be well informed before you begin the challenge, and be wary of the reasons why not to start trading.

For example, most business sectors in African countries are relatively small and companies have established purchasing systems that differ from one sector to another. There are relatively few agents who serve a particular industry on an exclusive basis. Instead although they may be well established within one sector, they might also deal in many other sectors. For instance, a reputed fertiliser importer in Uganda may also be a major importer of cosmetics. Such behaviour may be counter-intuitive to the specialist traders of the West.

Moreover, Africa is not only different from the rest of the world, it is different within itself.

1. Differences.

Whilst markets may be open and relaxed in one country, the next may be completely the opposite.

As mentioned in part 1 of this blog, Tanzania has recently removed taxation on a wide range of agrochemicals, and yet simultaneously, the Kenya National Treasury has introduced a 16% import tax on imported agrochemicals.

This is expected to dramatically reduce the volumes imported, as the tax will raise prices by a total of $11.5 million dollars, which is expected to be absorbed by farmers. A pointed noted by Agrochemical Association of Kenya chairman, Kuria Gatonye who states that, “The import bill of agrochemicals is about $92 million and imposing a 16% tax will see farmers absorb [this cost] from our members.”

To take the fertiliser sector as an example, a study by IFDC researchers Julio Henao and Carlos Baanante showed that over 60% of Africa’s fertiliser is consumed in just five countries (Ethiopia, Kenya, South Africa, Zimbabwe and Nigeria), primarily in the commercial and export markets. They also note that, “Fertilizer use in Africa is less than a tenth of the world average of 100 kilogrammes [per hectare].”

So clearly, different countries have different needs and require different apporaches. In turn, global policies and events affect different African countries differently. A point supported by Peter Gibbon and Stefano Ponte in their book,’Trading Down; Africa, Value Chains and the Global Economy’, when they write, “Changes in global business strategies and trade rules do not affect all African countries in the same way. Local-level outcomes are markedly different due to different paths of domestic market liberalization.”

Clearly, being aware of these regional differences is vital, as a recent KPMG report called, ‘African Chemical Industry: A hidden Opportunity?‘ advises, “Developing a continental strategy is difficult; infrastructure and education are a long way short of minimum global standards; legal, political and regulatory regimes remain complex and business practices in many instances are not transparent. It is therefore wise to take a country-by-country and segment-by-segment approach to understand the market opportunity.”

2. Counterfeit Products

Another challenge facing agrochemical traders in Africa, is the large amount of counterfeit products that are on the market. Whilst some of these replica products do still offer some value, others are worthless, and have no positive affect on crops. Others even cause damage.

This is not an insignificant problem of a few rogue salesmen, but is a widespread occurrence. For example in Tanzania, a few years ago, as much as 40% of the products available on the agrochemicals market were believed to be counterfeit.

To combat this problem, the Tanzanian government has been encouraging legitimate traders and importers to supply sufficient, genuine products to limit the counterfeiters powers. Whilst this does impact the nation’s balance of trade, the benefits of having quality agrochemicals are thought to outweigh other economic disadvantages. As Christopher Kajoro Chiza, Minister for Agriculture, Food Security and Cooperatives states, “It is important to boost access to inputs [of overseas agrochemicals] to achieve sufficient agricultural production and growth to meet economic development, poverty reduction and food security and nutrition goals.”

The counterfeit problem is further impacted by the fact that Tanzania has eight land borders with other countries. This according to Africa Stockpiles Program Chair Dr. Vera Ngowi, “makes it difficult to control illegal trade in agrochemicals.”

The problem is so common, that many farmers and agrochemicals dealers hold on to expired genuine products, as they believe them more effective than counterfeit products, and can never be sure when a pest outbreak, such as a swarm of locusts, will arise.

Alongside a crackdown on counterfeiters by law enforcement, the obvious solution is to give farmers and local traders the equipment and the knowledge in how to recognise counterfeit products. Wilfred Thembo, Executive Secretary at UNADA (the Uganda National Agro-Input Dealers Association) agrees, but sees this information as only part of a wider range of resources that agrochemical dealers in the region need, stating, “Dealers need skills to detect fake inputs, but also to market new products, [as well as] handle and maintain their clients especially when prices are skyrocketing.”

Similar work is being done in Tanzania, by TANADA (the Tanzania’s National Agro-Dealer Association. As well as helping farmers become more commercially aware, and training them in how to test products, the association is developing a position of responsibilty and quality control in the supply chain. As Shem Oirere of FCI reports, “The dealers are trained on accessing financial services, how to output marketing, processing, value-adding services and policy advocacy through association development.“

This support is not unique, as another program, called TASP (Tanzania Agro-dealer Strengthening Program) which is being funded by the Alliance for a Green Revolution in Africa, is systematically training local agrodealers in how to test for counterfeit products, and has been doing so since 2007.

This training is greatly needed, as the lack of skilled traders has a serious impact on market performance. One recent study of the Ugandan agrochemical industry, acknowledged that the country has more than 2,500 agrodealers, but noted that of them only 50 were registered as chemical dealers. The government has been working hard to try and increase this number to 120 by the end of the year.

3. Logistics

Another problem that a prospective trader should be wary of in dealing with Africa are the problems with logistics. This is particularly true for chemicals traders as the chemicals industry is so international, and the volumes and distances involved significant. As a result the standard of logistics can often be the difference between making a profit or a loss.

This means that traders should be very careful not to make a loss in Africa. As LEADUG, the Livelihoods and Enterprises for Agricultural Development Uganda agency makes clear, “Domestic supply chain inefficiencies, poor infrastructure and the high cost of transport are the main causes of the above-world-market price Ugandans pay for agro-inputs.”

And the problems only increase as the further the product has to travel, often at a prohibitive cost, as Michael Fleshman, a self-proclaimed Independent Farming Professional from Sacramento, California, notes. He says that, “Heavy reliance on imported fertilizers, combined with high transportation costs and the absence of suppliers in the countryside, has meant that African farmers pay between two and six times the average world price for fertilizer — when they can find it at all. An IFDC study estimated that it costs more to move a kilogramme of fertilizer from an African port to a farm 100 kilometres inland than it costs to move it from a factory in the US to the port. With millions of African family farmers surviving on less than a dollar a day, imported fertilizer is simply unaffordable.”

LEADUG concurs that the costs caused by logistics prevent an increase in agrichemical use, noting that, “In addition to low penetration of agrodealers in rural Uganda, input use is stymied by the high cost to farmers.”

This is a situation that numerous private initiatives and government agencies are trying to aleviate. For example, the Uganda National Agro-lnput Dealers Association (UNADA), a national organization for agrodealers, is working hard to streamline supply chains (as well as assisting in educating farmers and traders in detecting fake products).

Other problems are outlined in a recent report, by Aggrey Atuhaire  of the PHE (Pesticide Use, Health and Environment) Uganda Project sponsored by Uganda National Association of Community which states that, “Pesticides are increasingly sold through informal networks of small distributors and hawkers, many of whom have no technical knowledge of pesticide hazards or safe handling,”

Meanwhile, in Kenya, the Minister for Agriculture, Food Security and Cooperatives Christopher Kajoro Chiza admits that the situation is difficult. He knows the importance of agrochemicals to a healthy economy and a healthy populations, but also concedes that his ministry is limited by “weak quality control mechanism for inputs, weak input procurement and distribution system, low utilization of modern inputs in agricultural production and underdeveloped input manufacturing industry.”

Whilst H.P. Ngowi of the South African Institute of International Affairs, also comments on the many problems that the chemicals market has in Africa. He told a recent Tanzanian newspaper that, “The Tanzania pesticide market also faces a myriad of challenges such as the government’s central procurement system for agrochemicals, inadequate storage and proper stock management, uncoordinated roles by donors of agrochemicals and the absence of effective legislation on pesticides or inability to enforce the existing laws.”

All of which may make even a confident trader wonder if the profit of business there is worth the headaches. But if you do decide to find invest in the African chemicals market, is there any advice worth listening to?

So you’re thinking about trading chemicals in Africa. Great idea!

Africa has a remarkable opportunity for expansion and has shown consistent growth over the last 35 years. Despite uncertain politics, unstable energy supplies and volatile currency exchange rates, the chemicals industry is booming, whilst demand for fertilisers is certain to grow. This was shown in research by Frost and Sulivan that states that the African chemicals’ industry will grow by 10% by 2020, almost twice the rate of Western Europe and North America.

However, there are many challenges facing a chemicals trader wanting to profit from African growth, and with equally booming (and better developed markets) in Asia and South America. Most investors will ask; why sell chemicals to Africa?

1. Demand.

One of the clearest reasons to start trading chemicals to Africa is because they are needed there. The continent has a rapidly expanding middle class which, much like the rest of the world, will desire the luxuries of modern life, and will require the chemicals to make them, run them, clean them and dispose of them. As a recent Dow chemicals report stated, “A growing middle class in Africa has transformed it into a large emerging market for a wide range of products including consumer and construction chemicals.”

A point supported by Paul Victor, acting CFO at South African chemicals giant  Sasol, when he predicts that, “domestic [African] markets will become increasingly important in the near future. Africa has a strong rate of growth and the industry will benefit from expanding markets and trade well into the foreseeable future.”

Although his collegue, André de Ruyter, Senior Group Executive at Sasol is a little more cautionary, explaining that, “There is a tipping point in GDP per capita at which people become significant chemical consumers and Africa is still not yet at that point.”

But outside of this expectant demand, there is a very real and present need for agrochemicals in Africa. This is due to the vast amounts of undeveloped farming land that Africa has, which includes 25% of the world’s arable land and 60% of the world’s uncultivated arable land. Plus the African climate encourages an array of pests and problems, many of which have solutions on sale at low prices  in Western markets.

Demand for these products is clear, with the Kenyan Ministry of Agriculture estimating that about 30% to 40% of total crop production is lost to pre- and post-harvest handling and pests. Sometimes the conditions are so bad that the destruction is even worse, as the Ministry states, “The losses are even higher in the case of pest outbreaks that can inflict up to 100% crop losses if not controlled.”

As a result of this increased demand for chemicals, whether agrochemicals or not, many of the world’s largest firms have begun to invest in the continent. For example, a few years ago, Dow Chemical had only minimal presence in Africa, with offices in only Egypt and South Africa. But recently, expansion has begun, and Dow now has branches in Ethiopia, Nigeria and Morocco, as well as currently setting up a base in Angola, whilst sales reps are also present in Kenya, Ghana and Algeria. As Ross McLean, Dow’s president for the region said at the World Economic Forum on Africa in Cape Town, “We wanted to get closer to our markets and connect with our customers. We have been building foundations to get ready for a real growth take-off.”

At present the company is expecting to see Africa’s share of company sales increase from 3% to 5% by 2025. Revenue from sub-Saharan Africa has already increased by more than 10% each year for the past 5 years.

2. Government Support

Clearly, Africa need chemicals, either now or in the medium term, which is something that many governments there recognise and are increasingly providing support for, especially as food prices and supply is often a political topic in elections.

As Shem Oirere of FCI (Farm Chemicals International), reports when she writes of East Africa that, “The drive by … Tanzania, Kenya and Uganda to increase food production to meet the needs of the rising population – now estimated at 125 million – has pushed the supply of quality agrochemicals to the top of the region’s agricultural agenda.” And she continues to note the policies that have been implemented there to aid food production, giving the example of  Tanzania’s Ministry of Finance which recently announced “exemption from the 18% value added tax (VAT) for the supply of fertilizers, insecticides, fungicides, rodenticides, herbicides, anti-sprouting products, plant growth regulators and similar products that are necessary for use in agricultural production.”

Action like this, can give trading chemicals to Africa a real advantage over other regions, and should be taken as a real sign that Africa is open for business.

3. The Importance of Imports

Moreover, governments are often aware of the limitations of domestic producers, and actively encourage foreign companies to import. The significance of these importers is acknowledged by the Kenyan Pest Control Products Board (PCPB), which notes that up to 90% of the pesticide market is based on imported products. However, Barasa Wanyonyi, PCPB Senior Registration Officer, does point out that, “The largest percentage of the pesticides sold in the Kenyan market are from international companies who have appointed certified local agents to supply the products on their behalf.“

Government statistics show that the most popular agrochems imported to Kenya are glyphosate, sulphur, amitraz, dimethoate, 1.3 dichloropropene, 2.4-D amine,  mancozeb, copper oxycholide and methyl bromide. Although Kenya is an net-exporter (mostly to Tanzania, Uganda, Burundi and the Seychelles) of cybermethrin, chrolofenvinphos and permethrin.

With demand for a multitude of chemicals rising, and a clear need for agrochemicals, maybe now is the time to consider expanding trade the dark continent. Government backing for foreign chemical companies and network of local agents waiting to facilitate transactions and logistics must also encourage traders who are still uncertain about branching out to Africa.

Or is there a reason not to trade chemicals with Africa?

Despite all the challenges facing the chemicals industry in South Africa, there is still the chance to do business there. Indeed, many analysts are confident that the industry will grow, as local economies grow. Whilst much of the continent is impoverished, conditions are improving, and as they do so they will require more and more chemical products. As André de Ruyter, Senior Group Executive at chemicals giant Sasol explains in the wider context of Africa as a whole. “There is a tipping point in GDP per capita at which people become significant chemical consumers and Africa is still not yet at that point. Our [Sasol’s] local production is built upon the parts of the South African market that do behave like Western European or North American markets. At the same time, it is clear that the policies currently instated in many Sub-Saharan African countries are indeed conducive to economic growth.

The political stability, adherence to sound market policies, and respect for democracy found in most Sub-Saharan African countries reflect that countries understand the need for business-friendly policies to attract investment. This is coupled with the potential for market growth and access to natural resources. Moreover, there has been the development of markets such as agriculture in which we can introduce our fertilizer products and minerals extraction business; explosives in particular have been a focus area for us as Africa’s mineral wealth is increasingly explored and developed.”

Frost & Sullivan analyst, Dilshaad Booley agrees that local demand will foster growth, stating, “Petrochemicals growth will be driven by the demand from end-users, such as the paints and coatings, automotive, mining and construction sectors, where large amounts of chemicals are still procured locally, as the local refinery capacities meet the bulk of local demand.” He continues by adding that, “The market for petrochemicals is expected to grow at a compound yearly growth rate of close to 2%, owing to limited investment in local refineries and old technology limiting efficiency.”

This positive viewpoint is echoed by global market analyst, Hilton Lazarus, Head of Chemicals and Allied Industries at IDC, who writes when asked about the future said, ““There are many opportunities in the sector in the near future and I believe that, in order to successfully explore these possibilities, South African companies must start looking beyond the borders and enter into new countries on the continent.”

And according to Paul Victor, acting CFO at Sasol, the growth will be widespread, as he believes that, “There are a number of key industry subsectors, including explosives, agriculture products, such as fertilisers, and polymers that will drive new growth and development.”

Prof. Thokozani Majozi of the University of Witwatersrand, Johannesburg, is more cautious. Whilst agreeing that domestic demand will grow, albeit steadily for the next few years, he still maintains doubts over South Africa’s lack of domestic raw material production. He states that, “The chemicals industry still relies on imported raw materials, which are subject to international levies that reduce manufacturers’ profit margins.” He also has fears over the countries fossil fuel usage, saying, “The renewed emphasis on green economies implies significant reduction in both gaseous emissions and liquid discharges, which does not bode well for an economy that is largely based on coal.”

As discussed earlier, these challenges do need to be addressed, but could provide a chemicals demand (from the need for fuel additives or bioethanol mixes etc.) as much as they could drive business away. More significantly than the problems, is the way that industry leaders and government handle them, as André de Ruyter, Senior Group Executive at Sasol states, “With the appropriate policies there is significant room for investment in the South African chemical industry”.

Paul Victor offers some good advice for potential investors in South African chemicals, listing a number of potential problems that businesses need to manage, including, “Compliance with local regulations, addressing government policies and protecting investments with proper financing. In addition, foreign investors need to understand that, much like China, patience is required to establish good relationships with government and business stakeholders. Africa has a strong rate of growth and the industry will benefit from expanding markets and trade well into the foreseeable future.”

So it seems that the South African chemicals industry is currently a slowly emerging waiting game. Both distant and recent history has been difficult, but it now seems that domestic recovery is on the way, at the same time as the opportunity for exports is arriving.

Victor confirms this, stating that exports will be the most important market for all African chemical products, although adding that, “domestic markets will become increasingly important in the near future.”

Which of these revenue streams arrives first, and which will be the most successful remains to be seen. However, it does appear that there will be demand for products. Despite the challenges that the country faces, and there are many, if end users require, then someone will supply. Will that supplier be you?