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Energy

Suez Canal blockage may cause price increase in Nigeria

Growing concerns have been raised about the effect of the World’s largest maritime hold-up on the global economy, and Nigeria may not be left out.

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On the 25th March 2021, the flow of transportation in the Suez Canal was interrupted by a blockage from one of the World’s biggest cargo ships, ‘The Ever Given’- operated by the Taiwanese company Evergreen marine. About 12% of global trade dependent on effective transit through the Suez Canal which provides the shortest connection between Asia and Europe. Growing concerns have been raised about the effect of the World’s largest maritime hold-up on the global economy, and Nigeria may not be left out.

The Suez Canal can be seen as a major artery to global trade, and with the effects of the Covid19 pandemic still wearing off, the world may not be able to afford continuous interruptions to globalization. The Ever Given cargo ship is substantially bigger than the Eiffel tower and the empire state building. The ship is 400 meters long and wedged diagonally across a canal that is not more than 200metres wide.

READ: The Nigerian economy is increasingly dollarized but there is a way-out

In 2017, a Japanese container vessel blocked the canal due to some mechanical issues by which the response from the Egyptian authorities was swift in developing tug boats to rectify the situation, in hours. However, regular measures have yielded sub-optimal results. According to the Suez Canal authorities, nearly 9000 ships pass through the canal in 2020, averaging 51.5 ships per day.

Information contained in a Bloomberg report reveals the breakthrough in the rescue attempt came after diggers removed 27,000 cubic meters of sand, going deep into the banks of the canal. The authorities noted that while the ship is floating again, it wasn’t immediately clear how soon the waterway would be open to traffic. Nigeria is a highly import-dependent consuming economy with a large percentage of its revenue dependent on oil export, may find herself susceptible to globalization shocks.

Nairametrics had a chat with the Vice President and Head of Trade & Marine Operations, Gladius Commodities Limited, Okojie Larry on the impact of the blockage on the Nigerian economy he said, “For Nigeria as a country that is dependent largely on imports, we could experience a further rise in prices in goods in general, i.e., clothes, food, oil produce, etc. due to delays or inability for vessels to sail to their destination”.

READ: Nigeria now locally manufactures gas cylinders

Larry also suggests that clearing the Suez Canal blockage may take a while, saying- “This could take days or weeks at most. Companies will lose money as goods won’t be able to get to final consumers. Increase in demurrage leads to a high cost of the product. For a supplier that has a fixed price, the deal might end up being losing transaction. We will also experience a higher cost of freight as vessels/ships will have to take the longer route. Here, stakeholders in the maritime industry will therefore take advantage of the price hike.”

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Opeoluwa Dapo-Thomas, Private Oil Market Trader affirmed the Suez Canal blockage impact on the Nigerian economy but suggests that it may be negligible- “Geographically, the Suez Canal might be far away from Nigeria but Nigerian imports and exports which might follow that route will be delayed. But this is an issue where majority of the brunt will be on vessel owners and insurance companies. As it is a short-term hassle, there’s little effect it can have on the Nigerian economy”.

He also speculates that “companies that will benefit are those who can find faster routes or ways to deliver but it is a difficult arbitrage opportunity to profit from. The losers are insurance companies and consumers and sellers of the goods currently stuck. To evade that route through The Cape of good hope will require more expenses and time.”

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READ: Lake Chad: FG engaging stakeholders on recharging the Lake – Buhari

Sources near the canal claim that the ship has already refloated partially but shipping executives claim it does not mean anything unless the normal traffic resumes. Furthermore, even after the traffic recommences, conveyance of crude oil will now be delayed. Hence, the cascading effect of the world’s largest marine hold-up is more evident as crowding at the load and discharge ports will result in significant demurrage costs and also insurance claims. Moreover, fuel oil cargoes programmed to arrive in the second half of April could be tardy. Some analyst believe that the current impact of the Suez accident is not huge, especially due to mitigating factors from Asian refiners increasing their low sulfur fuel oil production because of high cracking margins.

A source in the oil ministry with knowledge of the matter informed Nairametrics that Nigerian businesses were already incurring demurrages due to the situation. “We are incurring demurrage on goods being transported through that route, also liquidity in terms of market switch is impacted,” the source said.

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When asked about the impact on the oil price, he had no direct comment. However, he did say, “There’s enough marine volumes already, Nigeria basically keeps inventory on the high sea”.

What this means:

  • Possible hikes in food prices in response to an increase in production cost caused by the Suez Canal blockage.
  • Further increase in oil prices due to speculative motive, however, this may be short term and market may correct to align itself with the forces of demand and supply.
  • Suez Canal blockage sheds more light on the shortcomings of Globalization and the need for a faster and more effective alternative route.

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Ubah,Jeremiah ifeanyi is a PhD candidate of Economics in Covenant university. He has held positions as the financial manager in Opera and is also a research ambassador in M&S research Hub. Ifeanyi is currently the financial market analyst for Nairametrics. Follow Ifeanyi on Twitter @ubahjc

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Business

NNPC says NO to petrol pump price hike in May

There would be no increase in the ex-depot price of Premium Motor Spirit in the month of May 2021.

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Crude oil market remains unpredictable- NNPC Boss

The Nigerian National Petroleum Corporation (NNPC) has assured Nigerians that there would be no increase in the ex-depot price of Premium Motor Spirit, popularly known as Petrol in May.

This was disclosed by the Group Managing Director of NNPC, Mele Kyari, on Monday via the Corporation’s Twitter handle.

It tweeted, “There would be no increase in the ex-depot price of Premium Motor Spirit in the month of May 2021.”

Ex-depot price is the cost of petrol at depots, from where filling stations purchase the commodity before dispensing to final consumers.

READ: Nigerian automaker raises $9 million despite protest against electric car in Nigeria

Kyari also added that Petroleum Tanker Drivers had suspended their proposed strike after the intervention of NNPC in the impasse between the PTD and the National Association of Road Transport Owners.

“We have given our commitment to both NARTO and PTD that we will resolve the underlining issue between them and come back to the table within a week so that we’ll have a total closure of the dispute,” he added.

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READ: Oil marketers give conditions to resume fuel importation

What you should know

  • NNPC has maintained an ex-depot price of N148/litre since February despite the hike in the actual cost of the commodity, hence incurring subsidy of over N120bn monthly.
  • Also in March, the NNPC said it would maintain its ex-depot price for petrol until the conclusion of ongoing engagement with the organised labour and other stakeholders.

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Energy

NCDMB’s Oil and Gas Parks and their many adversaries

New businesses within the NOGAPS will face intense competition from foreign OEMs that do not have to battle with tariffs, a harsh business terrain and different tax treatment.

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In 2018 the Nigerian Content Development and Monitoring Board (NCDMB), the body saddled with driving the development of Nigerian content in the Nigerian oil and gas sector, did a groundbreaking of the Nigerian Oil and Gas Park Scheme (NOGAPS), a scheme that involves the construction of sprawling oil and gas parks in Bayelsa, Imo and Cross Rivers State.

In a visit last week to one of the parks currently under construction in Emeya 1, Ogbia, Bayelsa State, the Minister of Petroleum for State, Chief Timipre Sylva, expressed delight at how the project was quickly progressing and was now at 70% completion. Mr Simbi Wabote, Executive Secretary of the NCDMB, during the visit also noted that the Oil and Gas Park project “is in line with the Federal Government’s mandate to develop indigenous capacities for the oil and gas industry.”

READ: NCDMB, BOI, won’t relax conditions to access $200 million NCI Fund despite complaint 

While this is highly commendable, as the project will indeed reduce Nigeria’s dependence on import of oil and gas equipment and provide jobs for local indigenes -which would likely reduce restiveness in the area-, there exist significant challenges to this project achieving its goals.

Perhaps one of the biggest of them is the African Continental Free Trade Area (AfCFTA) regime which is expected to open Nigeria’s borders to an influx of imports from other countries within Africa. Beyond opening the borders, however, the tax treatment given to domestically produced items will be no different from similar products imported, and the typical tariffs for imported items will be removed.

READ: Aiteo accuses Shell of theft of 16 million barrel of crude oil

This essentially means that large and established original equipment manufacturers (OEMs) from other African countries may on the basis of their economies of scale be able to supply the same products produced in the oil and gas parks at lower rates. A report by Dun & Bradstreet reveals that in Africa, countries like Guinea, Gabon, Burkina Faso and Ghana that flank Nigeria play host to various oil and gas OEMs.

With the large oil and gas market Nigeria has, these companies will seek to make inroads into Nigeria under the AfCFTA regime. This will mean that the new businesses within the NOGAPS will face intense competition from foreign players that do not have to battle with tariffs and different tax treatment. Additionally, the Nigerian culture of preferring imported products over domestically manufactured ones might play a role in this, particularly if the prices of the imported ones even up with domestically produced ones or only have a slim margin.

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READ: NNPC says local operators must improve capacity to achieve low cost of oil production

If the patronage for Innoson vehicles is anything to go by, in a market where there is no real difference in price between that and the domestically produced ones, we will see a preference for imported products.

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All of this will be further aggravated by Nigeria’s doing business difficulties. Things like delays in obtaining permits, approvals and licenses, the corruption that accompanies these processes, weak currency and dual exchange rates, poor infrastructure and lack of power supply abound. While the Nigerian businesses struggle with this, their foreign counterparts get to produce under more convenient conditions and are thus able to deliver within time and without the additional costs passed to consumers through these poor doing business practices.

While Mr Wabote has promised that the park in Ogbia will have dedicated power supply, it is hard to imagine that this power will not significantly cost the businesses if they are served at maximum capacity. At number 131 on the World Bank’s Ease of Doing Business Ranking, a park would not solve Nigeria’s problems, only a positive commitment to fix these doing business issues will.

READ: Seplat incurs N41.1 billion loss from OML 55, blames fall in oil prices

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The christening of a park as an “oil and gas park” in the 21st century, where countries of the world –and indeed private companies- are working towards achieving increased use of cleaner energy sources, is counterintuitive. The park should be an energy park that integrates significant research and development in its function as well as innovation and production of renewable energy equipment, both adapted to benefit from local conditions and standardized for export purposes.

It seems too, that not much consideration has been given to export of these equipment, as the parks earmarked so far are in landlocked Imo, port-less Bayelsa and Cross River that feeds into Cameroon, which is not a very prime market, although the DRC on the other end could attempt to compensate for this. It might be worth considering, the setting up of a park in Lagos – perhaps in the same vicinity as the Dangote refinery.

The park would benefit from being able to supply equipment to the refinery (especially as the refinery starts production in early 2023). It will also be able to tap into the global market through export via the Lekki port. This might also be a good time for the Agge deep sea port mulled by the Bayelsa State government to come onstream to open up the Ogbia park to a global market.

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