Cashew Nut Processing in Mozambique

The major reason for analysing this dimension in this research work is the fact that the design and conceptualisation of the survey questionnaire for the qualitative method, we were based on the elements described in this section of the work. According to Nitidae’s (2020) analysis, land can be considered relatively cheaper in Africa, in general, and in Mozambique in particular, than in Asian cashew processing countries, as a consequence of lower population density and lower living cost.

Researchers estimate the cost of land acquisition to build a cashew factory in industrial or rural area to be between 1 and 5 US$ per m² for a 50-year concession in Mozambique. An equivalent size of a piece of land for the same purpose would cost between 5 and 15 US$ per m² and between 10 and 20 US$ per m² in Vietnam and India, respectively. The cost of land provides a small advantage for Mozambique compared to Asian countries, as it can represent 2 to 6% of CAPEX in Mozambique against 12 to 24% of total CAPEX in Asia. The cost of land in other African cashew processing countries is almost the same, with the exception of Nigeria, where the cost of land is much higher.

Earthwork, construction of buildings and connection to networks (water and energy) are relatively more expensive in Mozambique than in Asia (Nitidae, 2020). The main influencing factor is the import of part of the building materials compared to Asia, given the reduced presence of construction material producing companies capable of and equipped to construct industrial buildings. Construction costs in Mozambique are estimated to be 20% higher than in Asia. For a cashew plant with a processing capacity of 5,000 MT of in-shell cashew nut per year (±50,000 m² of earthworks and

±5,000 m² of buildings), the construction price is estimated to be between 1.2 and 1.6 US$ million in Asia, while in Mozambique that is estimated at between 1.4 and 2 US$ million, depending on the choice of materials and optional buildings (extraction of cashew nut shell liquid - CNSL, day-care centres, restaurant, among others).

Almost every single piece of equipment for cashew processing is imported. Given the importation costs and negotiation disadvantage with foreign suppliers, the cost of processing equipment imported in Mozambique is estimated to be between 5 and 10% higher than in Asia. A fully automatic cashew plant with a processing capacity of 5,000 MT of in-shell cashew nut per year would cost, depending on the technology, organisation and chosen suppliers between 650,000 and 1,050,000 US$ per MT in Mozambique, while in Vietnam and India it costs between 550,000 and 950,000 US$ per MT.

The other initial costs (vehicles, stock of consumables and project design) are also higher by

±10% compared to Asia, as a result of higher import costs and less local offer from suppliers and service providers.

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Finally, the cost of land, construction, and equipment would come to total CAPEX costs in Mozambique that are quite similar to those in India and slightly lower than in Vietnam, where the highest cost of land surpassed the lower costs of construction and equipment. But the CAPEX differences between Mozambique and its two main competitors are relatively limited and do not exceed 10% (Nitidae, 2020). The total CAPEX for a fully automatic cashew plant with a capacity of 5,000 MT can vary between 2 and 4 US$ million in any of the 4 countries under comparison, basically depending on the location, technology and organisation of the factory. The main cause of differences is the OPEX and the Risk assumed by the Mozambican industry.

In the domain of variable costs, the price of in-shell cashew nuts is the strongest advantage of the Mozambican industry (Nitidae, 2020). Thanks to the tax on in-shell cashew nut exports and the saving of the export costs, Mozambican processors theoretically benefit from a much lower price of raw material than Asian processors.

In February 2020, in-shell cashew nuts from Mozambique with an OTR of 46 lbs per 80 kgs bag delivered at an Asian processor’s factory would cost around 1,300 US$ per MT, while it would cost a Mozambican processor around 750 US$ per MT (45 MZN per kg), nearly 73%.

In reality, for Nitidae (2020), this difference is generally much smaller for two reasons: i) The Mozambican industry makes its procurement during a low supply period in the international market.

Around 80% of world production is concentrated in the northern hemisphere and available at the factories between March and September. The Mozambican cashew nut, generally available in Asian factories in January/February, pays on average a higher price than the same quality during the central season of the northern hemisphere. This peculiarity of the harvest schedule in Mozambique (also in Tanzania and Madagascar) considerably reduces the price difference between an Asian factory that buys only 10 to 20% of its annual needs during this period and a Mozambican factory that has to buy 100% of its raw material during this period of low-supply; ii) The average quality of Mozambican in-shell cashew nuts is relatively low. The quality of the cashew nut is expressed mainly through OTR, which is an evaluation through the analysis of a representative sample of the cashew nut yield of a batch of in-shell cashew nuts. In Asia, processing plants, mostly manual, are generally specialised in processing only batches of good quality cashew nuts. Other highly automated factories are only specialised in the processing of poor-quality nuts at low prices. In Mozambique, as companies only have access to local production, they have to process all types of quality and cannot specialize in a particular outturn. When, as in recent years, the average quality is less than 48 lbs per 80 kgs bag, they obtain very low processing yields (both in terms of daily yield, quantitative and qualitative yields). In addition, when processing is mostly manual, workers who have part of their wages indexed to the total yield of the whole cashew nut kernel are discouraged because they earn less by de-shelling empty nuts or containing damaged cashew nut kernels. Under these conditions, absenteeism rates tend to increase.

The only solution for processors who want to retain their staff is to increase the variable salary rate, which greatly increases their variable salary costs.

89 For the supply of their factories Mozambican (and Ivorian) processors rely on local traders or cooperatives. For an efficient purchase of in-shell cashew nuts, they must fund those suppliers before the start and during the season, and every year, some traders disappear with the money without bringing the nuts. Other suppliers deliver in-shell cashew nuts with a much lower quality than what was initially contracted, but to continue getting the product, processors cannot ask them for quality compensation. Researchers estimate that these losses of money during the purchases cause a loss equivalent to between 1% and 1.5% of the money invested in raw cashew nut procurement. For Asian processors who import in-shell cashew nuts from Africa, this risk is much less, since the Letter of Credit used in international trade is a secure way of payment based on the exact quantity and quality control during the container filling. Even if some losses may occur on Asian processors, mainly in terms of contracted quality, they are much lower than those of African processors.

The location of cashew processing factories tends to vary. Some are located in peri-urban areas, in industrial areas or even close to the population to facilitate access to labour. As a result, the electricity supply may not be properly constant, and factories must use generators to avoid production interruptions, which incurs additional operating expenses in the energy category. Electricity costs increase rapidly as a result of the use of a generator set. Energy costs represent an average of 13.5 US$

per MT of processed cashew nut, if 100% of the electricity come from the national grid. These costs can increase to more than 20 US$ per MT with the use of generator sets. Proportionally, the basic cost of electricity represents 1.3% of the total production costs in factories but may weigh more in factories that use generator sets, which creates a comparative disadvantage for Mozambican processors.

However, it would not be accurate to conclude that energy costs are a vital component in competitiveness. The energy problem stems from the quality of the electricity supply, rather than the cost. This is especially true in the case of factories around the city of Nampula. In fact, processors experience unpredictable production shutdowns as a result of power outages. This has a negative impact on the rhythms of production, and sometimes with consequences of malfunctions of the machines, as a consequence of voltage fluctuation (Nitidae, 2020). Some factories have decided to invest in voltage regulators to protect the most delicate equipment.

Therefore, the effects of power cuts cannot be measured only in the energy cost budget line. The most critical element in these power fluctuations is their negative impact on the power factor (cos φ), which can fall around 0.8. With a power factor of 0.8, only 80% of the electricity received by the factory is actually used, but the factory will be paying 100%. An electrical installation that took into account the contribution of rotating machines includes capacitor batteries to dampen their effects on the network, resulting in a correction of the power factor (values around 0.9 to 0.95). The investments associated with this energy efficiency measure are not very important.

In addition to the water and energy, most of the inputs used in cashew nut processing in Mozambique are imported, while in India and Vietnam, most of them are produced and available locally throughout the year in large quantities. The main ones are packaging (jute bags, boxes, plastic

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bags), spare parts and maintenance tools, packaging gas, clothing and tools for workers, and cleaning tools and products. The cost of inputs can vary from one factory to another, but it can lead to an additional cost between 5 and 10 US$ per MT of in-shell cashew nut processed in Mozambique, in comparison with Asian countries. In West Africa, some of these inputs are even more expensive, because the import cost is even higher, as they do not have the advantage of being able to buy them in South Africa, where their prices are very competitive.

The cost of unskilled labour is relatively lower in Mozambique than in Asia or Côte d’Ivoire. In an automatic factory, the difference of cost provides to Mozambique a slight advantage of ±5 US$ per MT of in-shell cashew nut processed in relation to Vietnam, by 15 US$ per MT in relation to India, and 20 US$ per MT in relation to Côte d’Ivoire.

The cost of export handling through Mozambican ports is one of the most expensive in the world (Nitidae, 2020). It is an advantage for local processors when competing with in-shell cashew nut exporters to purchase in-shell cashew nut, but it is a disadvantage when it comes to export cashew kernels exports in containers. The additional cost is about 25 US$ per MT of exported cashew kernels (5 US$ per MT of processed in-shell cashew nut), when compared to Vietnam, and about 20 US$ per MT of exported cashew kernels (5 US$ per MT of processed in-shell cashew nut), when compared to Côte d’Ivoire and India.

In Asia, cashew shells are a by-product that generates an additional income, but in most Mozambican factories, cashew shells are waste that costs money to be disposed of and burn them close to the factory or in a nearby area.

This cost may vary between 1 US$ and 5 US$ per MT of processed in-shell cashew nuts, depending on whether the factory can easily burn the shells within the plant area or have to transport them to another location, paying a service provider, or employing people and using their own trucks to move the shells. Most of the current processing in Mozambique has access to credit at an acceptable interest rate. However, all the financing is made at a higher interest rate than in Asia or Côte d’Ivoire.

In Côte d’Ivoire, a cashew processing factory gets an interest rate between 9% and 12%, in India, between 6% and 8%, in Vietnam, between 5% and 7%, while in Mozambique few factories are able to get loans below 10% even when they can provide considerable assets as guarantee and with the support of IAM. But the bulk of them get interest rates that can go up to 28%. Another striking fact is that loans needed by cashew nut factories in Mozambique are much bigger than those needed by Asian or even West African processors as the procurement period is much shorter in Mozambique (Nitidae, 2020).

When a factory that processes 4,500 MT of in-shell cashew nut per year in Vietnam needs a loan equivalent to a maximum of 1,000 MT of in-shell cashew nut, a factory based in Mozambique will need a loan covering all 4,500 MT of in-shell cashew nut to be able to purchase this quantity in less than 2 months. Consequently, interest paid by Mozambican processors for the financing of the acquisition of in-shell cashew nuts they process represents between 10% and 20% of the total

91 processing costs, while they are equivalent to between 5% and 10% of the processing costs in Asia and between 10% and 15% of the processing in West Africa where the procurement can be spread over 5 to 6 months.

Taxes on profits are much higher in Mozambique than in Asia. After the investment phase, they can reach around 20% of the processing cost, while they remain at around 8% in Vietnam and around 10% in India. The cost of highly trained and highly qualified and experienced labour is higher in Mozambique than in Vietnam and India, especially that of managers induced by the strong demand that accompany the growth of the extractive sector (mining and gas). This situation has led many factories to hire foreign managers and technicians to supervise the production.

Overall, the cost of qualified permanent staff is almost 50% higher in Mozambique than in Vietnam and 36% higher than in India. For an automatic cashew plant with a capacity of 5,000 MT per year, this cost represents 41%, 39%, 31%, and 28% of processing costs in Mozambique, Côte d’Ivoire, India and Vietnam, respectively (Nitidae, 2020).

The cost of maintenance and depreciation is also higher, given the need to import most equipment and spare parts. Most factories in Mozambique are forced to build up stocks of spares and even import additional machines that they will keep replacing the broken ones to avoid workflow interruption. In cashew processing areas of Vietnam and India there are many stores with spare parts and new machines are available and allow for a quick replacement of any broken equipment. As a result, the cost of maintenance in Mozambique is estimated at 40% higher than in Asia and it is comparable to that of Côte d’Ivoire, even though in this country, some stores of cashew equipment have recently opened to take advantage of the growing industry. Given their better knowledge, longer experience in the sector and continuous innovation in cashew processing equipment, Vietnamese and Indian processors are able to considerably decrease losses during the processing of in-shell cashew nuts.

The yield of the cashew nut processing is expressed through 4 important indices: i) Daily factory yield: Quantity of cashew nuts processed by the factory in one day of operation; ii) Daily income from work: Quantity of cashew nuts processed by a worker in an 8-hour workday; iii) Quantitative yield:

Quantity of marketable cashew kernel obtained at the end of each processing step and at the end of the entire processing chain. This yield varies according to the quality of the in-shell cashew nut stock at the supply point (outturn and moisture content) and the ability of the entire processing chain to limit losses (degradation during storage, small pieces broken during processing, cashew kernels that remain hidden inside the shells, product contaminated by the blades of the peeling machines); iv) Qualitative performance: Proportion of whole white cashew kernels at the end of the process. Each time a cashew kernel is broken, split or burnt, it loses a significant part of its value. To be profitable the factory must try to obtain a maximum of whole white cashew kernels. This yield also depends both on the quality of the in-shell cashew nuts purchased and on the factory’s ability to preserve as much as possible the whiteness and integrity of the cashew kernels.

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Much of the profitability of a cashew processing plant depends on the optimisation of the above-mentioned 4 yield indices. It is recommended to process as much as possible, with the fewest possible personnel, losing the minimum possible weight, and obtaining the maximum possible quantity of whole white cashew kernels at the end of the process. Vietnamese and, to a lesser extent, Indian processors are, on average, better in all 4 yield indicators, given their more specialised, experienced and, more efficient labour force, and also as a result of its technological advancement, even if there are important differences within the Vietnamese and Indian industries (Nitidae, 2020). Consequently: i) They get a larger quantity of cashew kernels for the same processed in-shell cashew nut stock; ii) In a batch of cashew kernels, they get a higher rate of white whole (WW) grains, which is the most profitable product in the cashew industry. This leads to an optimisation process that reduces losses in quantity and quality, thus generating more value for the same processed in-shell cashew nut stock than any other processing countries.

In percentage terms, the difference may seem small: 1% or 2% more of the final amount and 3% -4% more cashew kernels, White Whole (Full White), but these small optimisations substantially improve their income. With the same selling price, 1% more cashew kernels equal about 15 US$ per MT additional processed in-shell cashew nut, and 1% more white whole cashew kernels equals about 7 US$ per MT more processed in-shell cashew nut. It is these two accumulated advantages with better selling prices that provide the biggest advantage for the Asian industry. The sales prices of cashew kernels depend essentially on the certification obtained by the factory, and on the marketing strategy per position of the company. Most Mozambican factories already have the HACCP certification, but none of them has the BRC certification that allows to get good premium prices.

African cashew kernels’ sales prices are generally similar or very slightly lower than those in Vietnam. However, Vietnamese factories still get slightly better prices than the Mozambican or Ivorian ones as a result of the longstanding relationship with their clients (Nitidae, 2020).

Generally, Indian factories get higher prices for cashew kernels, for a few reasons, namely: i) Local market - The main reason is that they have access to the largest cashew market, their domestic market, protected from the import of cashew kernels from other countries by a very high minimum import price system. This local market has much higher prices for broken cashew kernels than the international market and slightly higher prices for whole cashew kernels. When their international buyers offer low prices, they prefer to simply sell on the local market; ii) Better reputation - Indian suppliers are considered more reliable and respectful of their commitments, and better suppliers, because they do not try to renegotiate prices after signing a contract, and their exports are rarely delayed; iii) Long-term relationship with their clients – Given that India remained as the main cashew processor for over 50 years, several importers in the world have become used to working with the Indian companies and prefer to continue buying from them at a higher price than starting to buy from new unknown suppliers whose cashew quality and flavour may be different from what they get from Indian suppliers.

93 In the meantime, with the higher prices they offer to the international market and with their less competitive processing in relation to Vietnam, Indian kernel exporters have been losing market shares in the international market for many years and should probably continue in the following year as they get more and more protectionist with their local market, disconnecting it from the international market.

The trade balance of cashew in India is negative since 2006 and its deficit is growing rapidly, which means that India is already a net importer of cashew nuts and will probably cease to be the second largest exporter on the international market after Vietnam in the next decade or so.

Overall, one can consider that Mozambican (and Ivorian) processors obtain an average selling price 5 to 10% lower than Indian processors and, of up to 4 % lower than Vietnamese processors.

According to Nitidae (2020), the cashew industry has the potential to be a “zero waste” chain, meaning that all materials can be valued in different processes and at different stages of the process. It can be compared to the sugar industry, where all the residual materials in the process chain (bagasse, molasses) can be used, either in the same process, or to feed other processes and industries. However, in the Mozambican cashew processing chain, little added value is currently given to materials other than cashew kernels. Only the cashew kernels are valid for commercialisation and a small part of the shells are valued. The value of cashew nuts is 30.5% of the weight on average.

In India and Vietnam, almost all cashew shells are sold or used. The largest factories extract CNSL and sell it to the chemical industry and the liquid-free shell (cake) to the industries that use it as fuel. Smaller factories and also those located in clusters, common industrial zones, sell the shell to companies specialised in CNSL extraction. Studies suggest that competitors in India and Vietnam obtain a benefit from the sale of the shell and its derivatives, from between 30 US$ to 60 US$ per MT of processed in-shell cashew nut (African Cashew Alliance, 2018).

Even cashew pellicle (testa) is sold to industries that use it to make products as diverse as food or textile dyes, food antioxidants or animal bedding. Too much damaged cashew kernels (mouldy, rotten or contaminated by insects) are generally used as food for animals (chicken, pig, cows). These cashew by-product markets are providing small, but additional, revenues to factories in Asia.

In Mozambique, few factories (Condor, Indo Africa, CN Caju) already value cashew shell and, for those that export CNSL, the price they obtain is very low, as a result of transportation costs, compared to the price that Asian factories get. This represents a major loss of income for the Mozambican industry. Some processing partners even sell some quantities of shell for CNSL extraction, at 2 Meticais per kg ( or 33 US$ per MT of shell, and 24 US$ per MT of in-shell cashew nut). Generally, neither the damaged testa nor the cashew kernels are valued in any way. Oilcake is minimally valued in the case of Condor, who sells part of the produce to a company that sells improved stoves adapted to this fuel.

The sale of shell by-products represents an opportunity for processors, which is only now beginning to be explored. Other by-products can also find a domestic market and create additional revenue. If these by-products were processed directly by the cashew processors, the benefit would be