Exorbitant Energy Prices Substantially Exacerbating Nigeria Manufacturers Woes

As Russia military sustains its onslaught on Ukraine the ripple effect is causing collateral damages to Nigeria’s production industry with widespread anxiety over rising prices of petroleum products, YEMISI IZUORA writes

Businesses in Nigeria are beginning to feel the consequential effect of ongoing conflict between Russia and Ukraine.

Experts have initially expressed concerns that if the conflict sustains it would produce a profound and multidimensional implications for the Nigerian economy, especially if it gets unnecessarily protracted.

These include the escalation of energy prices diesel, aviation fuel, kerosene and gas, mounting petrol import and subsidy bill and the aggravation of petrol smuggling.

Economists also fear that those factors may lead to prices of locally manufactured products escalating.

Already the country is beginning to see high cost in energy demand as Nigeria largely depends on imported petroleum products.

Following the deregulation of the pricing of diesel, as well as Low Pour Fuel Oil (LPFO) and other ancillary products by the Federal Government, the prices of these products have continued to rise.

In the last few weeks retail cost of diesel at various filling stations jumped by about 24 per cent to N410 per litre and in other parts of the country especially outside Lagos, the products sold between N600 and N650 per litre.

A dealer told our Correspondent that ex-depot price of the product sells for N650, and that if depots retains the current price retailers would sell at between N700 to N800 a litre going forward.

Data obtained from Major Oil Marketers Association of Nigeria, MOMAN, confirmed that AGO prices averages N635 or $1 .539 per litre in Nigeria as at 8th Mar ch 2022.

Muda Yusuf, the Chief Executive Officer, CEO, of the Center For The Promotion Of Private Enterprise, CPPE, in a position paper shared with Oriental News Nigeria, he warned that the war would produce a profound and multidimensional implications for the Nigerian economy, especially if it gets protracted.

These include the escalation of energy prices diesel, aviation fuel, kerosene and gas, mounting petrol import and subsidy bill and the aggravation of petrol smuggling.

According to Yusuf, There are also significant macroeconomic outcomes which include heighten fiscal deficit, growing debt levels, spike in debt service payments, money supply growth, exchange rate depreciation and more intense inflationary pressures.

Yusuf, a renowned economist and former Director General of the Lagos Chamber of Commerce and Industry, LCCI, noted that Russia is the second largest producer of oil globally, even ahead of Saudi Arabia, producing 10 million barrels per day.

So he pointed out that in this case there is a good chance that the conflict in the region would disrupt oil supplies, reduce output and trigger higher prices.

Already, oil price is above $100 and the impact on energy prices is already being felt around the world.

In Nigeria, the deregulated components of petroleum products would witness sharp increases. These include diesel, aviation fuel and kerosene. Gas would suffer the same fate.

The escalation of these costs obviously has serious inflationary implications across sectors. The geopolitical tension of the recent weeks had actually bolstered energy priceseven before the current onslaught by Russia. The situation may get worse if the conflict escalates. This would affect cost of production, profit margins, purchasing power and may further worsen the poverty situation, said Yusuf.

Nigeria, he said would likely see an upsurge in petrol import and subsidy bill in coming months as the landing cost of petrol and diesel increases on the back of the rise in crude oil price. “Regrettably, we remain a major importer of petroleum products and typically when oil prices increase, petrol import bill and subsidy payment also increase. Only recently the NNPC made a request of N3trillion for petrol subsidy. With current turn of events, the subsidy bill would even be higher, creating serious fiscal challenge for government at all levels. These of course have serious implications for the budget and government finances.” noted Yusuf.

This may equally scale up petroleum products smuggling because of the impact of the crude oil price hike on relative prices.

Also, modular refinery operators could not offer better explanations if their output is being hampered by rising crude prices.

Understandably, modular refineries are very small refineries with 1,000 barrels per day bpd to 2,000bpd and usually small that they don’t have the catalytic cracking unit to crack the crude, so they don’t produce the lighter ends like petrol.

They produce mostly diesel and other heavier products and curently augument what marketers import.

On his part, Chairman of Heirs Holdings Tony Elumelu and the founder of Tony Elumelu Foundation (TEF), said the situation in Nigeria was getting “worse and worse” as biting fuel scarcity and worsening electricity supply, hikes in the price of diesel, frightening food inflation continue to pile pressure on the people.

Fuel now sell for about N180 to N220 in many petrol stations in Nigeria. Prices of the product at the black market is even higher.

President Muhammadu Buhari said he regrets “the inconvenience caused to citizens of the country following a prolonged shortage of petroleum products.”

Elumelu, noted that price of diesel have gone up with many Nigerian businesses mulling the idea of closing up shops temporarily due to the spiking costs of fuelling power generators.

“I have often said that access to electricity is critical for our development, alleviation of poverty and hardship,” Elumelu said. “And speaking of security, our people are afraid!” “Businesses are suffering. How can we be losing over 95% of oil production to thieves? Elumelu, who is also the chairman of Heirs Oil and Gas, blamed the shortfall in Nigeria’s daily oil production quota on the inability of the security agencies to protect oil installations in the Niger Delta. “Look at the Bonny Terminal that should be receiving over 200k barrels of crude oil daily, instead it receives less than 3,000 barrels, leading the operator Shell to declare force majeure.” “Why are we paying taxes if our security agencies can’t stop this? It is clear that the reason Nigeria is unable to meet its OPEC production quota is not because of low investment but because of theft, pure and simple!”

From a January average of N288 which is ($.70) per liter, diesel now sells for over N700 ($1.69) per liter in Nigeria thus causing widespread anxiety for businesses that rely on the product to power generators that make up for historically unstable power supply.

The Manufacturers Association of Nigeria (MAN), a trade group, declares, “It is getting extremely difficult to produce and I don’t know how we are going to cope, because 70% of industries are running on diesel,”.MAN unfolds 50th anniversary programmes

The situation with diesel further compounded the stress of a couple of weeks in Nigeria. The national power grid collapsed two times in three days a week ago causing blackouts.

In the first week of February, Government alerted that petrol imported into the country by oil marketers contained unsafe levels of methanol.

That led to an immediate scarcity at petrol stations as the bad products were recalled.

The Nigerian National Petroleum Company (NNPC), Limited, which superintends

petrol imports, has not held anyone accountable and long lines around gas stations persist in Lagos and Abuja.

Transportation costs have increased sharply since, with flight tickets reaching a N50,000 ($120) flat rate for one-way trips, from about $80 in February due to scarce aviation fuel. After threatening to shut down operations this week, local airlines have reached an agreement with Nigerian oil marketers to receive fuel at a reduced price, though the deal will be reviewed after three days.

Nigeria had continually failed to meet its OPEC output targets, and the shortage is made worse by theft to the tune of 50,000 barrels a day according to Tony Elumelu.

Lacking local refineries, Nigeria imports refined products at prices that become more expensive with events like the Russia-Ukraine war.

Unlike petrol, the Nigerian government does not subsidize diesel imports. As such, the pump price may yet go higher as the war in Europe continues to affect global markets.

Global oil prices scaled decade-long highs of more than $100 a barrel shortly after Russia invaded Ukraine on February 24, inflicting a hefty blow to many businesses south of the Sahara.

Both Ukraine and Russia are also major suppliers of wheat and other cereals to Africa, while Russia is a key producer of fertiliser.

The impact of the war and the West´s sanctions against the Kremlin are already starting to translate into higher prices for farm inputs and imported grain, AFP bureaus in Africa report.

For Lagos baker Julius Adewale, the crisis is a perfect storm.

Nigeria´s fragile power grid had recently been supplying just a few hours of electricity per day, forcing Adewale to turn to diesel-fueled generators for power — the cost of which has now soared.

“There is no light since yesterday and we´ve been running on gen since yesterday,” Adewale said this week, as workers stacked piles of loaves in his bakery.

“(The) cost of production has increased immensely.”

Nigeria is Africa´s largest oil producer and biggest economy, but it has little refining capacity.

The government subsidises the cost of petrol, but diesel and aviation fuel are sold at market price.

Several local airlines warned this month they were forced to cancel flights due to aviation fuel scarcities.

Diesel used to sell in Nigeria at around 300 naira (0.72 cents) a litre but now goes for 730 ($1.75) a litre.

“I don´t know how we are going to cope because 70 per cent of industries are running on diesel,” Lanre Popoola, chairman of Manufacturers Association of Nigeria (MAN), said.

Popoola, chairman of the association in the region covering Oyo, Osun, Ekiti and Ondo states, told journalists in Ibadan that it has become difficult ensuring production of goods as manufacturers now buy diesel for between N720 and N730 per litre.

“It is getting extremely difficult to produce and I don’t know how we are going to cope, because 70 percent of industries are running on diesel. There is no light,”

“There is no power supply. We now hav 30 percent of what it used to be, whereas the disposable income of people is not increasing and the costs of products are going up.”

Popoola said if the situation persisted, it could lead to bigger issues that would further affect the nation’s economy and increase hardship.

He added that there is also the challenge that manufacturers cannot pay diesel suppliers in instalments.

“They cannot again supply you with diesel and allow you to pay in two weeks. It is either you do cash and carry, or pay ahead, because they too cannot predict the cost of the product,” he said.

“And I don’t blame them. Imagine you bought diesel last week at N630 per litre and the next day, it is sold for N730 per litre. How will you replace your stock?

“Maybe the government can come in and do a kind of palliative for us. It is either we have light 24 hours per week to run our factories or do a palliative on diesel.

“But unfortunately, we don’t produce diesel in this country. If the refineries are working, it is a different ball game. The country would have had it better now if the refineries were working.

“So, the more the international prices of petroleum products go up, the higher the prices of what we are going to get from them.”BUA Cement grow's after tax profit by 19.4% to N72.3bn - 247 News Around The World

“Other businesses are also running limited hours on diesel as they cannot afford to use generators all day.”

If the crisis is sustained, said Eurasia Group analyst Amaka Anku, African countries which are big importers of fuel and grain will rank among the losers, although exporters of those commodities may be among the winners.

A weigh that is getting heavier for many businesses. It is the case for Samuel Salau, a construction engineer: “At the beginning of the year diesel would sell for, I think, about 270 Naira to 280 Naira then at a time we having like 310 Naira. But presently, within a month it has left that level to about 600 Naira something plus. Trucks that bring food stuff from the north to the south are running on diesel. Even trains run on diesel.”

The operators at the different levels of the supply chain therefore pass the costs on to consumers. It is the case for instance for sachet water. The Nigerian Association of Table Water Producers increased prices last year because of the prices of production components. This time the war in Ukraine is to blame. “We use to sell 120 Naira before so because of the Diesel now the nylon, the expenses of the nylon is too much, Moses Ustin a sachet water distributor says. That’s why we are selling 150 Naira now.”

The full extent of the Ukraine-fueled inflation has yet to be estimated. But it is already clear that African families will be impacted. Some countries will struggle with higher borrowing costs and conflict-torn states could face food insecurity.

Nigeria is Africa’s biggest oil producer but struggles to meet its energy needs.

Only about 47 percent of Nigerians have access to electricity when it is available, according to World Bank estimates.

The Federal Government in 2020 signed an electricity deal with German counterparts to improve the supply.

But analysts say the energy shortage is impacting citizens negatively.

“Somehow we’ve not been able to get the dynamics right,” said analyst Rotimi Olawale. “To be very fair and honest in the last couple of years we have not witnessed this fuel scarcity that we’re seeing now. The initial explanation they gave to us I don’t think it holds water anymore. It puts a lot of pressure on people.”

As the energy crisis continues, the MAN is also calling on the federal and state governments to rescue industries from the current unstable power supply and hikes in the price of diesel across the country.

Chairman, Kwara/Kogi states branch, Pharmacist Bioku Rahmon, said that there was the need to urgently rescue players and investors from the imminent orgy of unemployment and mass closure of companies currently looming in the country.

Rahmon, while the manufacturing industry was yet to fully recover from the monumental strangulations it suffered from the COVID-19 pandemic, the ongoing energy crisis is the exact antithesis of what the industry can’t contain at this time.

It explained that the National Grid-Supplied Electricity has recorded no improvement which is greatly affecting the activities of MAN.

To this extent, the association called on the state and federal government to bail it out and save the manufacturing sector from imminent collapse.

It also asked that the interest rates on industrial loans be reduced by commercial banks adding that the government should widen the window of Foreign Exchange (FX) to industries and a drastic reduction of interest rates as done with the COVID-19 palliative.

‘Renewed wave of inflationary pressures further plunged the buying masses into extreme depths of poverty with concomitant erosion of customers’ Disposable Income (DI) and hence culminated in low patronage of our industrial finished products.

‘Foreign Exchange (FX) scarcity has worsened significantly, even as industry players continue to experience a sharp and growing shrink in the FX windows. This has led to major downturns and stress in the purchase and acquisition of foreign components for production.

‘The above have long resulted to sharp depletion in the Key Performance Indicators (KPI) of the manufacturing industry such as capacity utilisation, unsold goods inventory, and sector contribution to the National Gross Domestic Product (NGDP) especially since 2020.

‘In 2021, the unfriendly operating environment and inconsistent business and investment policies of government further paralysed the manufacturing Industry leading to weak results in the sector, all of which were further exacerbated by the COVID-19 pandemic,’ the statement, noted

Rahmon appealed to the government to evolve measures that will address the challenges.

‘We appeal to the Federal Government of Nigeria and the Kwara State Government to rise to our urgent rescue to cushion the effect of this crisis on industries. We, therefore, recommend the following as vital matters and measures of utmost necessity and urgency.

‘A Gas-Powered Energy Distribution Plant exclusively supplying power to industries should be installed in a state like Kwara State.

‘The Central Bank of Nigeria (CBN) should give directives to commercial banks to reduce interest rates on industrial loans.

‘The Central Bank of Nigeria (CBN) should further widen the window of Foreign Exchange (FX) to Industries.

‘A significant and drastic reduction of the Interest rates charged on industrial loans and other loans released as COVID-19 interventions or palliatives to 2.5 per cent will be apt because the challenges arising from the ongoing energy crisis are far more biting than during the COVID-19 period.

‘The Bank of Industry (BOI) should approve and urgently roll out further reductions in the bank’s lending rates to Industries.

‘An executive task force should urgently be constituted with the mandate and power of state machinery to deploy aggressive measures of manhunt against saboteurs in the oil and gas industry and halt the spate of indiscriminate hiking of AGO (diesel) price and mindless extortion of end-users of the product. Others already constituted and mandated should be so empowered for action,’ Rahmon said.

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