How Malawi Leaf Limited lost billions

An on-going assessment of operations for the financially –struggling AHL Group has revealed how, one of its once competitive subsidiary, Malawi Leaf Company Limited (MLCL) lost millions of dollars due to unreliable international deals that ended up in exorbitant lawsuits.

MLCL is now in deep financial stress after posting a loss of about K44 billion and the board is contemplating to either close down the company or have it revived but with a better business model.

A mother carrying her baby on her back while working in tobacco fields in Kasungu.—Picture by ILO

A task force has since been instituted to analyse the performance of Malawi Leaf and make a recommendation to the board.

At the centre of Malawi Leaf’s fall is an unworkable business model that has cost AHL a huge fortune.

Based on inside sources we have been able to extract crucial information – on how a once – buoyant tobacco company has been brought down due to poor sales and accumulated interest and carrying charges.

How tobacco marketing works

Tobacco trading involves dealing with customers that fall into three major categories.

These are low, medium, and blue chip. The blue chip customer category works on a cost-plus costing model with their suppliers (tobacco buyers). The result is that the blue chip customers comparatively offer higher prices than other customer categories.

The suppliers for the blue chip customers usually have access to lower priced funds that are used for tobacco purchases. The customers also provide order indications in advance, a situation that helps with planning for tobacco purchases.

Usually, shipping and payment plans are adhered to by blue chip customers. This helps the suppliers for this category to manage carrying charges and cash-flows better.
The medium to small customers only offer prices they can afford irrespective of whether the supplier will make money or not.

‘Legal Battles’

The suppliers for such customers usually access financing at a higher rate. The customers usually do not provide order indications in advance. They prefer suppliers who have stocks at hand.

This means that the suppliers for these customer categories have to purchase tobacco stocks in advance before commitments are made by customers.

Usually, shipping and payment plans are not adhered to and this makes it difficult to manage carrying charges and cash-flows.

But Malawi Leaf between 2013 – 2017, according to the taskforce findings, had two major customers; medium and small customers.

“Customers who buy Malawi tobacco do so based on quality. They also buy specific qualities only that suit the type of cigarettes that they produce. This means that tobacco buyers can only buy the qualities and type of tobacco that a customer has ordered.

“However, some developments in the marketing system of tobacco, especially the introduction of the contract system of tobacco buying which involved buying 80% of tobacco through contract and 20% on auction, compelled the company to buy most of its tobacco through the contract systems and forced it to accumulate uncommitted tobacco stocks” explained one insider who did not want to be named.

The taskforce has noted that one major drawback with contract farming is that the buyer is required to buy all the qualities offered under the contracted crop irrespective of whether the buyer has a market for the tobacco qualities or not.

“In addition to the above, some customers whom the company supplied significant amounts of tobacco to did not pay for the tobacco. The company had to sue the customers in protracted international legal battles that took years to conclude.

“This made the company attract significant legal and interest costs which were not budgeted for” said a senior official working for AHL Group.

‘Accumulated Stocks’

A trail of communication, which the taskforce has analysed, shows that in a number of occasions Malawi Leaf had engaged international law firms demanding payment from some of its customers.n one lawsuit in 2017 Malawi Leaf was claiming about USD 9.9 million from Star Tobacco which was never paid yet the company had spent millions in legal fees and this was the case other years.

Narrow customer-base made things worse.

During the period that the company had been trading, it generally operated with a very narrow customer base despite aggressive marketing efforts by management to grow the customer base.

On average, most of the company’s tobacco had been bought by mainly one customer. This company had been buying about 60 percent of company’s stocks annually.

Despite the fact that the customer bought the bulk of tobacco, there were some challenges that were faced with the customer. These included delayed shipments and delayed payments.

“The above challenges contributed to the poor performance of the company because it kept on carrying over significant amounts of stock while incurring carrying costs.

“The company had on numerous occasions lobbied the customer through meetings, visits, and letters to ship and pay on time but with very limited success” said the insider.

In addition to this, according to sources, the company faced a major setback with its major customer in the period 2014 to 2017 when the customer’s country, faced a serious foreign currency shortage.

This was at a time when the company was holding high stock levels and had a bank loan that was approaching its due date.

“At the same time, there was a significant overdue balance that had to be repaid. It is also at a time when the stocks had accumulated significant amounts of carrying charges to the point where some stocks had a cost higher than the average market price” added the source.

The company made all efforts to offer the tobacco stocks to alternative customers but with limited success due to low demand and because most of them were either offering very low prices, or were offering to buy very small quantities.

“Therefore, the company eventually resorted to selling the stocks to its major customer, after the forex shortage had been addressed, since that was the only option that was capable to absorb the stock levels that the company had at the time.

The customer was persuaded to ship some tobacco and pay for it promptly to allow the company meet its outstanding bank obligations that were overdue. The company’s plea was not immediately successful since the customer continued with shipment and payment delays” added another official familiar with the deal.

The taskforce has also learnt that in the period running between 2013 to 2017, which is also the period that the company accumulated stocks, the sales prices and demand for tobacco on the international market continued to drop significantly in the medium to small customer categories.

Prices, we are told, dropped by over $1 in this period. This negatively affected both the margins and the rate at which the stocks were being disposed of.

‘Carrying charges’

From what we have gathered from the taskforce the tobacco industry apply a standard tobacco costing model which involves the carrying over of some costs related to the tobacco to the following year if the tobacco was not sold.

The company carried over significant amounts of stock to the following year between 2013 and 2017. This is due to low demand, generally delayed shipments by customers and low prices.

This led to the progressive increase in the cost of the tobacco during the stated period.

“This is the situation that the company found itself in as it tried to sell its tobacco above cost. Since the prices that were being offered were below cost, the company delayed selling the stock in anticipation of higher prices, since the trend on tobacco trading during the stated period was that a low price cycle would usually be followed by a high price cycle” said another insider.

This resulted in the build-up of the costs of the stock.

In order to salvage the situation, and with pressure from the banks to repay loans, the company decided to dispose of the stock to avoid further losses and quality deterioration of the tobacco.

The slower turnaround of the tobacco stocks resulted in the company continuing to incur significant interest charges on the financing accessed through bank loans for working capital tied up in the stocks.

“Therefore, according to sources, the company had to resort to additional borrowing to finance its operations over the period that the working capital was tied-up in stock and receivables, making the company incur almost double the interest that it would normally incur on normal seasonal borrowing” added an insider.

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3 years ago

Peter Makossa I always thought you were smart. How can you allow yourself to be used to churn out thus crap? Money was stolen iwe!

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