Before May 2016, the price of Premium Motor Spirit (PMS) stood at N87/liter. However, in May 2016, following the continued rise in the prices of oil across the globe, the Government increased PMS price to N145/liter. This price remained till March 2020, just before the pandemic lockdown.
At this point the world oil market had slumped to its lowest in many years, prompting regulators to take a second look at the price at which PMS was sold in the country. Towards ensuring a market reflective cost, the price of PMS slumped by as much as 16.2%, which meant that for the first time since May 2016, PMS sold below the N145/liter mark at N121.5/liter.
This was quite interesting as many players within the industry saw this as an opportunity for the regulators to put in place the right mechanisms towards deregulating the downstream petroleum sector of the industry. True to the words of the regulators, between March and September this year, prices of PMS have been adjusted about three more times culminating to a price of about N160/liter as at September 4, 2020.
In light of these happenings, many players and industry watchers are beginning to ponder as to the fact that maybe the Government has finally become brave enough to let the forces of demand and supply dictate the market, thereby creating the needed awareness for the players in the industry to start thinking about the future of the industry from a deregulated perspective and brace up to the challenges of delivering quality service in an almost moribund sector of the industry.
These new developments portend huge opportunities for players to start preparing for the needed investments in the full value chain of the downstream sector towards optimization of the marginal costs of managing their businesses towards increased marginal revenues that will bring about the continued investment in what is a multi-billion Naira business.
To this effect, the question now arises as to who will be the leaders in an industry with such huge potentials that have remained mostly untapped as a result of regulation. For us at Nairametrics, we see opportunities and believe that there are huge potential players who will help shape the narrative of this sector of the industry in a number of ways, which include but are not limited to the following.
- Managing supply chain inefficiencies through the right partnerships.
- Increased partnerships along the value chain, from procurement to customer end distribution as players will seek to harness the synergies and strengths of partners in the different segments of the value chain.
- Increased specialization by players in this sector of the industry, which lead to increased investments by players as well as other institutional investors towards optimizing the efficiencies with the value chain.
- (3) above for us would bring about huge reductions in the marginal costs of transacting along the value chain and huge increases in the marginal revenues across the value chain towards increased value and wealth creation.
However, we believe that to achieve all the above, major players within the sector must start to strategize on how to rebuild the downstream oil and gas sector in order to achieve the dividends of deregulation. As we continue to watch the goings-on with the industry, we wait to see who amongst the players will be the first to enlighten the public more about the dividends of deregulation.
Whoever is first to light the torch through that narrow path for all to understand how we can earn these dividends we believe will be the trailblazers of creating a more efficient Supply Chain Management System that would shape the narrative of how we do business in the Downstream Oil and Gas sector of the Industry.
In conclusion, we at Nairametrics believe that finally “PETROLEUM PRODUCT DEREGULATION FINALLY COME TO ROOST”. Our guess is probably as good as yours.
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Uade Ahimie is a chartered accountant and corporate governance implementation expert, with almost 3 decades of working experience in oil and gas downstream and upstream, banking and consulting.
He is also a member of the Nairametrics Editorial Board.
Are we heading towards a food crisis?
The government may need to review the protectionist measures in place in order to avert a food crisis.
Based on the selected food price watch data for August 2020 released by the National Bureau of Statistics (NBS), major consumer staples showed substantial increases between August 2019 (when the land border closure took effect) and August 2020. The steep price increases across the food items is consistent with the increase in food inflation from 13.17% in August 2019 to 16.0% in August 2020. Of more concern is the fact that rice, the most
widely consumed food staple among consumers showed substantial increase in the two variants; local sold loose (up 37.5% y/y) and imported high quality sold loose (up 40.7% y/y).
In our view, the predominant factor behind the surge in the prices of major food items is the closure of the land borders, which has been exacerbated by administrative controls employed by the monetary and fiscal authorities in rationing foreign exchange. We recall that in July, the CBN included Maize on the list of items ineligible for FX from official sources. Recently, President Muhammadu Buhari ordered the Central Bank of Nigeria (CBN) not to allocate foreign exchange to importers of food and fertilizer. We also understand that heavy rainfalls in the northwestern part of the country have also affected farmlands, as the head of Kebbi state branch of the Rice Farmers Association of Nigeria revealed that about 90% of the 2 million tons of rice to be harvested were destroyed.
The persistent increase in the prices of food items despite the protectionist measures implemented by the government suggests that local production still lags consumption significantly. Considering the weak harvest season due to the impact of the global pandemic amidst higher distribution costs linked to higher PMS prices following the deregulation of the downstream sector, we believe price of food items will continue to trend upwards.
Additionally, we expect the pass-through impact of the devaluation in the local currency to put further pressure on imported food inflation. Overall, we think the government needs to review the protectionist measures in place in order to avert a food crisis.
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Has the President erred in stopping CBN from funding food imports?
What implication does the President’s directive to the CBN hold for the economy?
The President of Nigeria, President Muhammadu Buhari, last week said, “I am restating it that nobody importing food or fertilizer should be given foreign exchange from the Central Bank. We will not pay a kobo of our foreign reserves to import food or fertilizer. We will instead empower local farmers and producers.”
Why is the president stopping the CBN from funding food imports? The answer is simple. The CBN Exchange rates are cheaper than autonomous sources. The CBN lists the exchange rate for the Dollar at $1 to N379, however the Naira is being sold on the parallel market at N440. Hence, importers prefer to access CBN funds to import, because it reduces the cost of those imports. In effect, at N379, the CBN is subsidizing those imports via a ‘strong Naira’
The President’s directive is thus in line with his new overall push to eliminate all subsidies especially subsidies funded by the scare US dollar. In this aspect, the President is simply seeking to protect the foreign reserves which are paying for other imports. So, he is right.
Is this a wise strategy?
Nairametrics earlier reported on the NBS recently released report on Nigeria’s total spending, which indicated that about N22.7 trillion was spent on food in 2019. This is 56.7% of the total spending (N40.2 trillion) for that period.
Where does the food Nigerians eat come from? Clearly Nigeria has a large agricultural base, but a significant proportion of Nigeria’s food is imported, and the cost of those imports have risen, as the value of the Naira has depreciated in relation to the US dollar.
According to data from the NBS, Nigeria’s spending on food and drink importation increased from $2.9bn in 2015 to $4.1bn in 2017, but dipped in 2018.
Have these imports plus local production met local demand on a consistent basis? The answer is no. Take rice for instance, the BBC reports that, “Between 2015, when the foreign exchange restrictions for rice came into effect, and early 2017, the price of a 50kg bag of rice went from $24 to $82 and fell in mid-2017 to $34, but in June 2019, the price stood at $49.”
The law of supply in economics, states that when the price of a commodity increases, its supply also increases. Hence, there is a direct relationship between price and supply of a commodity. In other words, if the price of rice goes up, more suppliers will enter the market to supply rice.
However, In Nigeria, as the price of food is rising, the NBS in the latest Inflation report, says the composite food index rose by 15.48% in July 2020 compared to 15.18% in June 2020. This rise in the food index was caused by increases in prices of Bread and cereals, Potatoes, Yam and other tubers, Meat, Fruits, Oils and fats, and Fish. (essentially everything). The NBS says, the average price of 1kg of rice (imported high quality sold loose) increased year-on-year by 37.72%.
So why has the supply of rice not risen to correspond with rise in prices? Well, because the supply of rice and other foodstuff have indeed risen, but the problem remains logistics processing & storage.
In Nigeria, you only eat corn during corn season, same with mangoes, and tomatoes. Prices fall during harvest, then rise after harvest. The problem is not just with the harvest, but getting that harvest to market, storing the excess, and processing its supplies all year round. Therefore, imports are needed to plug supply holes.
Nigerians in 2019 alone spent N1.9trillion or 4.7% of their budget on rice alone. When the President banned food importers from getting the CBN dollar at N379; he simply pushed them to import rice at N440; a N61 difference that will be added to the cost of imports, and will fuel imported inflation.
Where the president got it wrong is trying to fix a local logistics problem with a foreign exchange fix.
The solution is to go back to the various food supply value chains, de-risk and de-cost them. If food is cheap and plentiful, there will be no need for imports and inflation will fall.
Can Agriculture replace Oil in Nigeria?
To truly diversify from oil and create proper value, agriculture must give birth to an industry.
Over the years, Nigerians have clamored for a diversified economy, that is not over-reliant on crude oil. Recently there have been several talks about agriculture being on the front-burner of our exports.
But the reality is that there is a gulf in difference between the revenue agriculture can bring in and what Oil currently generates. Despite the steady growth in the value of Nigeria’s agricultural exports over three years (2016 to 2018), the country’s agricultural exports to total exports remained below 2%.
During the period of independence, Nigeria was a major exporter of food to West African nations; Unfortunately, she has morphed into a net importer. With the advent of oil in the 1970s, fiscal and economic policy was one-sided, and the country’s domestic and foreign investments were on oil, at the expense of other sectors of the economy. Inadvertently, Government revenue has increasingly come from oil and remains hostage to volatile oil prices.
In a recent report, the National Bureau of Statistics (NBS) claimed that Nigeria earned close to N289.3 billion from the exportation of the top 10 agricultural produce between April 2019 and March 2020. The report asserted that both commodities (sesamum seeds and cocoa) accounted for over 60% of the country’s exports as they are the most sought after internationally. Comparatively, the top 10 agricultural produce made N289.3 billion across three quarters. These figures are relatively low compared with the Q2, 2020 proceeds of crude oil which stands at N1.6 trillion.
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From the above diagram, Oil generated N1.6 trillion in Q2 2020, while the other commodities combined to record about N612 billion in Q2 2020. One trillion naira lesser (considering Oil prices were significantly low during that quarter). A 2018 report from PWC showed that oil revenue accounts for more than 80% of total value of annual Nigerian exports. Ironically, the agriculture industry contributed an estimate of 25% to total GDP in 2018, while the oil’s share of GDP was 8.6% over the same period. Since the agriculture sector is the largest contributor to Nigeria’s GDP, it has potentials to contribute a larger percentage of our annual export revenue.
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Agriculture toppling Crude oil as our main export might be a tall order, but if we want to truly diversify from oil and create proper value, agriculture must give birth to an industry.
If agriculture currently employs, say, one million Nigerians; the agro-allied industry can employ five million in the value chain. In a monetary context, if Nigeria produces cocoa beans, which recorded over N30billion revenue in 2018, an industry that processes cocoa to chocolates & beverages would produce double the revenue or more.
Oil would be the main commodity for a long time, but it is possible to create more financial values from other commodities.