Socialist industry 101

In the early 80’s I was posted to ran a steel service center in Lagos, Nigeria. Steel is used in all industries, and over there all was imported for lack of local manufacturing facility. Our landed cost price per metric ton was world price plus shipping plus expenses peculiar to Nigeria, what we called Nigerian Premium: We had to pay so much to the officer who allocated import permits, so much more to the officer who approved it, more and the officer who oversaw the process will be fair and corruption free. Same was paid to the officer who allocated the foreign exchange. It may sound odd to those who live in open and free market economy, nevertheless that’s how it worked there and probably at a half of the world.

Than we had to pay the harbor master to let our ships in. At at that time local diesel oil for ships engines was heavily subsidized so ships used to call, drop one container and stay for the day to bunker with world cheapest oil. It created an anomaly where all derricks were idle but yet jetties were packed with vessels, like suckling piglets. It was still better than a decade earlier when the world’s largest cargo vessels flotilla anchored at the high sea by Lagos, where the best business in town was to supply the ships with necessities of life: food, booze and hookers.

Back to the steel extracurricular costs. Once ship had docked we paid the customs officer to approve import documents describing the load as animal feed that carried no duty, and thereafter paying the stevedores union so offloading will continue unhindered.  Thereafter we looked after the sergeant at each police checkpoint that peppered the city roads with no real reason, so cargo on our trucks will not be found to be contraband. Maybe this was the reason.

The world steel price was say 400 $/MT, so Lagos price, before adding shipping cost was about 600 $/MT. It was the accepted paradigm as all importers went same routs. The other aspect of this was that all involved at the receiving end went to bed with full belly and spent the money locally.

Now, the Nigerian government decided to build local steel industry. Two companies got the contract to build mini mills, Austrian and a Russian (then Soviet).

Steel profiles are rolled from 6″x6″ billets , that are heated and pushed through rolling stations. Each station shapes and reduces the metal till it gets to the required size. The thinner the final product is, the more stations it has to go through.

The most popular item we sold was ‘bed angle’, a 1- 1/2” equal angle, used for making beds.  Nigeria is home to 120,000,000 people, a third if sub-Saharan Africa population. All need beds, so we could barely cope with the demand.

Back to local mills. To produce a run of 1.5″ x .125′ steel angle from the 6″x6” billet it has to pass through say 24 roll stations till it done.

The total capacity of both mini mills should have covered the market needs. Each got a quota of so many thousand tons a month.

Now import permits have dried up and we as distributors were dependent upon the mills.

Now we come to Soviet ingenuity. Instead of going through the trouble if running the steel via 24 stations, they run it through 6 stages only, producing say 5″x4″ angles, which saw little demand, if at all. But they made the tonnage quota to the dot.

At the same time Austrians fully sold all the installed capacity, to the quota, making only products of high demand. But as the market was thirsty, and with no price control, their prices soared to be much over the earlier prices, warts and all.

At the very same time the Soviets yard was piled up with thousands of tons with no takers. I pleaded with them to make what we needed, but they were very content as they made the tonnage quota in full. They were very polite, but sure thought I am nuts.

The Austrian’s profit mounted up, and all went back to Austria as per their contract, which is only fair.  However, the food chain we supported earlier was cut. Now the ‘Nigerian Premium’ had left the country, with benefits to local directors and other top officials being expatriated.

All that, to show how centralized social economy works well in theory, but fails reality.

 

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