Nigeria Plan to Link Mines to Steel Mill Seen as Buhari Test

LAGOS (Capital Markets in Africa) – Nigeria’s plan to build a railway to supply iron ore to its idle Ajaokuta steel plant could be the biggest sign yet that President Muhammadu Buhari is implementing his policy to diversify away from oil.

The project began in 1979 with what the World Bank in 2002 called obsoleteSoviet technology, and has never been finished. Authorities want to revive it as part of Buhari’s efforts to lessen the economy’s dependence on crude, which accounts for 90 percent of export earnings and the price of which has dropped 62 percent from a 2008 record. Ajaokuta cost more than $4.5 billion from 1979 to 1993, according to the World Bank.

If successfully executed, it “would be one of the strongest indicators to date of the government’s stated commitment to economic diversification,” said Manji Cheto, senior vice president for West Africa at New York-based Teneo Intelligence. “How the government deals with this will be important to watch.”

The 275-kilometer (171-mile) railroad will link the plant to an iron-ore mine in the central Kogi state, the port city of Warri to the south and Kaduna state in the north before 2019, Transport Ministry Permanent Secretary Sabiu Zakari said in an interview this month. It will award the operating concession after that, he said.

Dilapidated Infrastructure
The project spans 24,000 hectares (59,305 acres), almost the size of the Maldives islands in the Indian Ocean. Besides the 800-hectare plant, Ajaokuta was designed to include a town comprising 10,000 houses, a hospital, and school. But almost nothing has been completed since building started 38 years back, and most of the infrastructure and equipment is dilapidated.

A blast furnace, conveyor belts, and crane-like structures with “Made in USSR” labels are surrounded by bushes, while weed-covered roads are littered with dung from cattle that graze on acres of land meant to stock materials such as coal.

“We stopped hoping — all we can do now is pray,” said Isah Onobere, 58, who started at Ajaokuta Steel Co. as a trainee in 1982 and is now the head of the plant. He manages a workforce of 3,000 people that make wire rods using billets, or semi-finished steel castings, brought in from elsewhere and keep the never-used main plant in “serviceable condition,’’ he said.

The blast furnace, while 98 percent complete, has never been commissioned, Onobere said. This can’t be done “until we have external infrastructure to guarantee supply of inputs like the iron ore and coal, and take out products.” The furnace must operate for at least seven years without interruption to make economic sense, he said.

Funds Required
Getting Ajaokuta to produce at full annual capacity of 5 million metric annually will require $2 billion, Mines Minister Kayode Fayemi said in an August interview.

“An inherent risk with these kind of brownfield investments is that investors underestimate the turnaround cost to start production,’’ said Malte Liewerscheidt, a senior Africa Analyst at global risk consultancy Verisk Maplecroft in London. “Protectionist tariffs on steel or even an outright import ban are certainly on the cards to shield the Ajaokuta plant from international competition. This would lead to a rise in costs for building.’’

The West African nation spends about $3.3 billion on steel imports every year. Eighteen of the 30 steel manufacturers in Nigeria are active, producing about 2.2 million tons a year using scrap and billets imported from countries such as China.

Ownership, Management
Ownership and management have also been problems for Ajaokuta complex. The government revoked a $3.6 billion, 10-year accord with Solgas Energy Ltd. in 2003 and then with India’s Global Steel Holdings Ltd. in 2004, according to government documents.

After renegotiations last year, the government took over Ajakouta and Global Steel retained Nigeria Iron Ore Mining Co., known as NIOMC.

Under the new agreement, NIOMC’s primary business will be supplying iron ore to Ajaokuta before offering the raw material to other steel producers.

“We will recruit a competent company with financial resources able to operate Ajaokuta,” Fayemi said in August. More than 10 companies including some from Russia, China and Ukraine have expressed interest in operating the plant, he said, declining to identify them.

While there is a 100-megawatt power plant at the complex, the company will have to deal with unstable supply that plagues businesses nationwide due to cuts in fuel and gas to generators.

“We have left a lot undone over the past two to three decades,” Olumide Awe, head of research at Investment One Financial Services Ltd., said by phone from Lagos. “If they get the plant up, it will bode well with the government’s economic diversification agenda.”