Nigeria recorded total export revenue of $10.4 billion in 2019, the highest since 2008 which is farthest we can trace the country’s export data. According to the data from the CBN, total exports (Free on Board “FOB”) in 2019 was $64.9 billion. Thus for the first time ever, oil revenue as a percentage of total exports fell to 83.9% as against over 90% in previous years.
A big jump: Non-oil exports, which are considered a priority for the Buhari-led government, jumped over 100% from $4.6 billion to $10.4 billion. Non-oil exports typically averaged $4.7 billion in the last 11 years and hit its highest in 2013 when it stood at $7.2 billion. But as they say, you need to dig deeper to see the facts behind the figures.
A deep dive into the data revealed that a huge component of Nigeria’s non-oil export figures were “re-exports”. Note that re-exports is an economic term for items that were previously imported into a home country and then re-exported to other countries. By definition, re-exports are all imported goods (other than goods declared in transit or transshipment) which are subsequently re-exported. A good illustration is when Company A imports some products into Nigeria and then carried out further processing on them before exporting them to Ghana and other African countries. This often occurs when countries try to avoid trade barriers or duties.
Re-Export data: Nigeria’s re-export data for 2019 was about $6.2 billion, contributing to about 60% of total exports. This was about 4 folds higher than the $1.5 billion reported in 2018 and $280 million reported in 2017. Data from the National Bureau of Statistics provides better insight into the makeup of Nigeria’s re-export and which countries we exported to.
Examples of some of the items re-exported include vessels and floating structures to Ghana for N302 billion, floating and submarine drilling to Cameroon for N65.5 billion etc. Some exported items went to Western countries such as the US, Spain, Argentina etc. For example, Aeroplane Parts and Helicopters were re-exported to Canada and Ghana respectively.
Why this matters: In an era were African governments have agreed to sign the AFCFTA, imports into member countries of the African Union will need to become more scrutinized. This is important towards avoiding sharp practices. For example, goods could easily be exported into neghbouring Benin Republic from The Netherlands, and then re-exported into Nigeria at a cheaper cost, thereby diverting earnings that could have gone to the government from import duties.
It could also significantly affect locally made goods by inhibiting their ability to improve on design and quality if left to compete with superior imports.
How Nigeria can make more money from Oil?
A hedged economy might create additional revenue needed for the country to rebalance its reserves.
Crude oil still remains a major source of revenue for Nigeria despite a tumultuous 2020 for oil prices. The commodity contributes 90% of our export earnings and will still be a major revenue generator for the foreseeable future.
With this in mind, it is high time Nigeria explores other forms of revenues that can be derived from oil. 200 million Nigerians cannot be catered for with the proceeds of a country that has a production capacity of 1.4 – 1.9 million barrels per day (depending on the quota with OPEC). In contrast, Saudi Arabia has a production capacity of 11 million barrels per day and a population of 30 million.
This article does not only relate to the issue of macroeconomic stabilization, but highlights if the Nigerian government can make use of financial instruments ‘hedging’ to diversify and provide the government with added flexibility and additional tools to make more revenue.
Most countries who do not partake in this hedging programme, either have lower costs of production like Saudi Arabia and Russia, or do not want to take the risks associated with the programme.
Case Study: Mexico
Last year, when oil prices crashed and entered negative digits, Countries dependent on oil were adversely affected by the crash. But somehow, Mexico for the fourth time, cashed about $2.5 billion from its oil hedge program.
For over two decades, Mexico has guaranteed oil revenue via options contracts purchased from oil companies and Wall Street investment banks. Mexico’s hedging experiences of its oil exports is often used as an example for other countries to follow.
In 2009, after the financial global crisis, Mexico made $5.089 billion from it’s hedging position. In 2014, when oil prices plummeted and countries reliant on high oil prices were affected, Mexico was “unbothered”. The Ministry of Finance had purchased put options with one year maturity to hedge 228 million barrels of oil, about 28 percent of production, at a strike price of US$ 76.4 per barrel — US$ 31.1 above the actual average oil price in 2015. Mexico earned $6.4 billion from that hedge. In 2016, Mexico earned $2.7 billion from its hedging.
Since Mexico began running the hedge program in 2001, it has made a profit of $2.4 billion — payouts brought in $14.1 billion while the costs of running the programme cost $11.7 billion in fees to banks and brokers.
Last year, people argued that Mexico’s hard stance during the OPEC+ talks in April is directly related to the fact that it had a hedging programme in place. I must add that hedging gives you an edge in the markets but It’s far more technical, risky and in a few cases profitable. Sources within the NNPC say that the Nigerian government has not executed a hedging program yet.
So how does this programme work?
Mexico, a big exporter of oil and a member of OPEC, hedge their oil against declines that may occur in the market. Take for example, last year as a result of the pandemic and an unsuccessful OPEC meeting due to Russia and Saudi Arabia’s oil supply war, oil prices dropped to negative digits.
A government like Mexico, who hedges their oil with trading schemes would have been benefited from the drop. In this case, for every drop below the “strike price” (A strike price is the set price at which an oil derivative contract can be bought or sold when it is exercised) revenue is being made.
Hedging works both ways. It depends on who the hedger is. In the case above, Mexico is an exporter of oil, so it hedges against drop in prices. However, a country like Egypt, which announced it had executed its own hedging programme last year is a net importer of oil. Primarily, it hedges against the rise in prices. As oil prices rise, Egypt generates money despite naturally preferring low prices as an importer.
Additionally, the downstream sector needs to improve. This is another avenue Nigeria can take to make more money from Oil. The Nigerian downstream sector which involves petroleum product refining, storing, marketing and distribution has much room for development and can improve the fortunes of the millions of Nigerians. Oil accounts for 9% of Nigeria’s GDP and if we look at that, it’s very minimal if we take into context how important Oil is to our economy.
As I wrote in the earlier premise, this is not as straightforward as it sounds. There are insurance premiums to consider (the cost of the hedging programme), timing of the execution and general oil market outlook to examine.
For example, it appears that investors are going long on oil. All commodity analysts and banks are also favouring high oil prices as a result of vaccine availability and global supply cuts. Goldman Sachs forecasts oil to be $70 by Q2 2021 and Morgan Stanley also sees Oil at $70 by the third quarter. It would be highly risky to hedge against declining prices in this environment. (Recall prices going in the opposite direction doesn’t favor the hedger).
A hedged economy might create additional revenue needed for the country to rebalance its reserves.
PS. I am willing to discuss further with interested stakeholders on the possibility of carrying hedging operations for Nigeria.
Dapo-Thomas Opeoluwa is an Investment Banker and Energy analyst. He holds a degree in MSc. International Business, Banking and Finance from the University of Dundee and also holds a B.Sc in Economics from Redeemers University. As an Oil Analyst at Nairametrics, he focuses mostly on the energy sector, fundamentals for oil prices and analysis behind every market move. Opeoluwa is also experienced in the areas of politics, business consultancy, and investments. You may contact him via his email- [email protected]
Sell-off of shares by investors extend Flourmillers loss on NSE to N25 billion
Nigerian Flour millers on NSE suffer a decline as wary investors offload shares.
The sell-off of shares on the Nigerian Stock Exchange has triggered an N24.9 billion loss in the market capitalization of Flour Millers since the beginning of February, as wary investors offload.
It is important to note that the Nigerian Equity Market has been on the downward trend since the beginning of February, as wary investors sell off stakes in companies as the yields in the money market become attractive.
The results of this move led to a decline in the shares of companies listed on the Nigerian Stock Exchange, including a decline in the shares of Flour millers listed on the bourse.
A review of the performance of the stocks of these Flour millers on NSE revealed that the market capitalization of FLOUR MILLS, HONYFLOUR, and Northern Nigeria Flour Mills from the open of trade on February 1 till the close of trading activities on February 24 has declined from N154 billion to N129 billion.
How they have all performed
FlourMills has declined from N142.3 billion to N118.3 billion. However, the market cap of Honeywell Flour Mills has also declined, albeit marginally from N10.31 billion to N9.91 billion, while that of NNFM has declined from N1.72 billion to N1.25 billion. When added up, the three millers have lost N24.85 billion in market capitalization.
However, Flour Mills, the largest miller on NSE lost the most with N23.98 billion, as a percentage of market capitalization. Flour Mills is down by 16.85%.
At the end of trading activities on the floor of the Nigerian Stock Exchange, the shares of Flour Mills declined by 6.9% to close at N28.85 per share, as investors sell off 5,029,161 ordinary shares of the company worth N143,009,264.10.
Shares of Honeywell at the close of trading activities today declined by 1.6%, while shares of Northern Nigeria Flour Mills remained unchanged at N7.02 per share.
The Consumer good index to which the Flour millers belong has fallen by 6.1% year since the beginning of February, compared to the Nigerian Stock Exchange All Share Index -5.17%.
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