Interview with Titus Gitau, Executive Director of MEA Fertilizers

What is your assessment of the sector in Kenya? What are the latest trends? Is the market competitive?

The sector itself is very competitive. We have many players importing fertilizer into Kenya and East Africa. It is a commodity driven game so it is largely volume and price. It is cutthroat. It is a question of differentiating oneself from others. That is why we have other services even on the straight import side. We do soil analysis, fertilizer analysis, and we have a specific lab for that. We have also gone into bio organics as well. MEA has differentiated itself quite a bit in this sector, and not just from the longevity of 40 years’ experience in this sector in Kenya and East Africa.

Are your competitors also producing?

We are the only producers in this sector in terms of manufacturing blends. Toyota has recently entered just as a blender in the last two years. But we combine both straight imports and blending. Now, we are going into the actual manufacturing of NPKs for the first time in sub-Saharan Africa.

What are your competitive advantages?

We must set up local manufacturing to address the needs of farmers for coffee, maize, potatoes. We need to address those core crops because that is the natural food for this part of the world.

Our first competitive advantage is brand loyalty. Farmers are very conservative. They will go with the brand they trust. There have been instances where farmers have not gotten value for their money by using just any brand because speculators also come into this sector. So, farmers want to go with the brand that they know. Secondly, the volumes that we bring in allow us to be competitive. Thirdly, we have built up a very good track record with both manufacturers and suppliers over the last 20 to 30 years. That gives us a distinct advantage and a good distribution network within Kenya and East Africa. We have built up a trustable distribution system. In Kenya alone, we have 6,000 wholesalers and distributors. That is a very key component to making sure you are getting your product out into the market at the right time and at the right price.

Is this enough?

It is never enough. The dynamics of the market are always changing. Fifteen years ago, there would have been a very limited number of companies that had the ability to open a line of credit for 8 or 10 million dollars. Now, with the growth of containerized cargo, someone can bring in five or six containers of fertilizer, maybe be not at a competitive price, but the barrier to entry has come down at that level. The sector itself is constantly evolving and that is why we are shifting our thinking as well more towards manufacturing as opposed to straight trading. If you look at our breadbasket in the Rift Valley for instance, we have been using the same fertilizer formulations for the last 20 to 25 years. Now, the soils are depleted and sedified. We need to lime the soils and we need new formulations so the farmers can get their yields. So, the farmers are not outcrying as much about the price of fertilizer but using the correct type of fertilizer to give them the yield that they need, whether it is in maize, sorghum, sugar, tea, or in any other sector.

What is your international reach?

Our principal market is Kenya, but Kenya is the gateway to Uganda, Rwanda, and Burundi. We serve Kenya, the Ugandan market, the tea, the sugar estates. We have also supplied on contract to the government of Burundi. We did a physical blend for the government of Rwanda three or four years ago. We have also participated in tenders in Central Africa as far as Malawi. The fertilizer sector is a logistics business as well. It is not just the product. For instance, how do you move the product from Mombasa 500 kilometers inland to Kitale? I can bring a vessel from Morocco. It is 55 dollars per metric ton to move it all the way from Morocco around the cape to Mombasa. I move it inland 500 kilometers and it is doubled to 100 dollars. For fertilizer, one has to understand the logistics of clearing and moving product upcountry. Our railway system is also not as efficient as it used to be so it is largely road transport. There are a lot of challenges. It is not just getting the product at the right price, but how do you move it?

So, you have decided to move away from what you used to do. What is your route now?

Six years ago, we looked at the trends and we saw the future. Africa is growing, especially East Africa. Right now, we are looking at a population within East Africa – Tanzania, Kenya – of already about 100 million. When you add the rest of the region it is about 160 to 180 million. In the not too distant future, we will see a population in East Africa of a quarter of a billion people. People have to eat. We cannot address that through imports. We must set up local manufacturing to address the needs of farmers for coffee, maize, potatoes. We need to address those core crops because that is the natural food for this part of the world. We have to address the issues of food security. One of the ways to do that is providing the right fertilizer. We have not done that very efficiently in the last few decades. This is the first time we will be doing that because we need to boost those outputs to match the growth in the population, otherwise, the food bill will be extraordinary. With climate change, there is the potential for disaster when you are looking at that many people and not enough food grown locally. We cannot rely on food imports. The plan is to set up manufacturing entities that address those issues, the soils, and the outputs that come with the correct fertilizer usage. That is why we have set up a plant and we should be onstream the first quarter of 2020. We will now be able to address some of those larger issues. In the Rift Valley for example, the soils are so acidic that we need to bring in components of liming and using the right NPK formulations. The issue is addressing the output, not the input. The plant we are setting up will address 20% of Kenya’s needs. We are consuming just over half a million tons of fertilizer per year. The capacity here is 110,000 metric tons per year. Across the board, whether it is sugar, tea, coffee, maize, sorghum, we will be able to address all of those issues with the correct fertilizer formulations, not a set prescription for a European farmer. These are specific formulations for our crops and our soil types. That is the game changer with this new NPK granulation plant.

The farmers are your clients, but are you in contact with them directly? Do you teach them how to use the input?

In Africa, we have had a challenge since the 80’s structural adjustment. We do not have as many agricultural extension offices going out and teaching farmers about the correct seeds and fertilizers. We, as the private sector, in our own individual capacities run many of our own field days or barazas. Every month, we run a field day whether it is cotton, sugar, rice, maize, etc. We go to the farmers and we explain to them the benefits of using fertilizer and the correct fertilizers. There are crops growing two or three months before so that the farmer is able to see the benefits of using NPK triple 17, for example, as opposed to not using any fertilizer. The correct procedures are given to the farmers. However, at a public policy level there needs to be more emphasis on this. We really need the government to step up the agricultural extension activities. But at the end of the day, it is a funding issue.

Do you have a system where you finance the farmers?

It does not work like that because our system is based on a wholesale system. We will bring in product at the right price, from North Africa or Saudi Arabia, etc. and we will price it correctly, whether it is Mombasa, Nairobi, or Kitale. At that point, it is the job of the wholesalers to uptake the product and bring it closer to the market. Other than the field days, we do not do daily interaction with the farmers. On the financing side of it, the farmer gets paid for his maize or his potatoes and he comes and purchases it from the wholesale system on a cash basis. However, I agree that that is something where the system needs to be more efficient for the farmer. But that is a different sphere from our core activity. Other markets have more of a warehousing receipting system. If you could have a place where farmers could deliver their maize, get a receipt for his 100 bags and he knows that is the value of his maize at that moment, then he can go straight to a local bank and borrow. Kenya is very close to setting up this kind of warehousing receipting system for the farmer.

Are you looking for technological partnerships or strategic investors?

Absolutely. With the new plan that we have set up, we are working in partnership with a Dutch equity group. We have also sought long-term debt from IFC. We are also talking to a local bank and looking at the terms and conditions on the same issue. We have been very successful at tapping the market. We had a good transaction advisor who brought the right parties to the table. We were able to sift through and saw who took a long-term view and saw the potential of Kenya and Africa in general. We have been very fortunate in that aspect. Many times, we have a lot of challenges with the local banks because they are all asset based. How many private companies can bring in assets of 15 or 20 million dollars in this part of the world? We have been able to do a combination of equity and long-term debt financing on this project. We are just signing off on the last parts of it.

Project yourself to one year after you have finished the project, the medium term. What is your vision for the company?

Setting up an NPK granulation is only one component. Fertilizers are what we call BaSO and nitrogenous. Plants need both the phosphate component and the nitrogenous component. My idea is to set up more production. For instance, we are bringing in a lot of tea fertilizer from Europe and this can be done locally. We want to engage the tea sector in setting up specific units for that. We also want to look at setting up a nitrogenous facility in Kenya because we do have deposits of gas offshore. Perhaps when we address our energy needs, we will then be able to put a lot of emphasis at a public level on how we can convert some of that gas to fertilizer so we can set up a urea plant or CN plant. If we can do that, we will be 100% self-sufficient. We may have to import some raw materials here and there, but as long as we have 40% to 50% local component then we will have addressed the issues of NPKs and nitrogens in this part of the world. Cumulatively, with a market of 250 million people, we are in a position to set up plants which are as big as 500,000 to 800,000 metric tons because the market is going to grow. We are at half a million in Kenya, maybe 750,000 within the region, but soon, we will be at one million tons. So, having big plants for this part of the world will make sense. Food security is a big issue for the government right now and going forward it will be even more critical. That is one of the ways of addressing it and it is part of our vision as a company going forward. If we can achieve that, it will be a fantastic legacy on our part.

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