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Dangote refinery and the downstream oil industry

What the you think will be Dangotes strategy on penetrating the downstream oil industry knowing his penchant for getting to the last mile? I suspect he might acquire one of the debt laden major marketers most likely mrs down the line, but will probably just sell to the majors for a few years to recoup investment and deleverage abit before going for the jogular

Great question Admiral. If you check Dangote Group's records, it rarely acquires companies. Largely, acquisition is necessary when new investments would see massive competitive forces.  The downstream sector in Nigeria is still at infancy with fuel crises coming up regularly. So, technically, they have not demonstrated great accumulated capabilities that would help them build a moat for new entrants. In other words, there is no need to buy companies which have consistently demonstrated they cannot deliver top-grade services, when you can use them in new ways.

Yes, Dangote would not need to acquire the downstream companies because he can easily replicate what they do. He is fixing the upstream challenge which is refining the crude. The distribution, marketing and retailing would not be very hard for him. Those present entities are deleveraged within the broad nexus of Dangote Group: they would become customers to Dangote Group in future since DG products would be cheaper than imported fuel. Bailing them out via acquisition would not make sense. All DG has to do is to provide new standards for any fuel station that wants to be in its network to operate on.

If not Dangote, any other person could have simply focused on refining. But as I have noted, DG uses a business framework which looks for market inefficiencies across a vertical market ladder. He goes to fix them, making it nearly impossible for any new player to come in. So, to win and build a defensive strategy, the refining would not be enough if the marketers continue to under-perform. Preventing that paralysis would be investing fresh capital in the downstream even when working with present marketers and fuel stations. The efficiency he would build would make it nearly impossible for anyone to see any opening to rewire the order in the downstream petroleum sector.

Yes, refining - done. Distribution - done. Then, nothing remains. That is what he did in cement. He would do the same in fuel. He would not acquire anyone because those external players are downstream which he would need to expand the distribution. And once he begins operations, Nigeria will freeze fuel importation over time.

 

Ndubuisi Ekekwe has reacted to this post.
Ndubuisi Ekekwe

while I agree with your analysis, I do remember that when he built his first cement plant, he used the existing cement distribution channels and logistics providers perhaps it was because he mentioned taking loans of above 20% from the banks and was highly leveraged then. when he was up and running he then took over the logistics and then distribution. Why I am leaning towards him acquiring mrs petroleum is because of his cousins connection with the business, and when amcon acquired it as is inevitable he 'll likely get it for a bargain. remember that at least for now most stations in prime locations are owned by the major marketers, and replicating that network would require some time, as well as autocratic bottlenecks like approvals etc.I suspect he would sell to the majors or anyone interested at a discount from importation, first displacing importation using other people's distribution channels before developing his whichever route he takes. I hope we don't have a reoccurance of apapa like gridlock around his refinery when all the trucks in the country converge there as we have neither effective rail not pipeline incountry. I think the regulatory framework is more to be blamed for the industry state than the industry itself.