Nigerians may be in for difficult times as prices of diesel and kerosene rise dramatically, thus threatening companies’ earnings and employment. The development may also deflate government’s effort to contain inflation.
The price of Automotive Gas Oil (AGO), otherwise known as diesel, has jumped from N145 to N155 a litre from N90-N95 in 2010. This has translated to an average 35 percent increase in AGO price in the local Nigerian market. Low Pour Fuel Oil (LPFO) has also increased in price to N93.20 a litre, up from an average of N69 in 2010. Analysts believe the prices will remain high for a while.
Renaissance Capital predicts AGO and LPFO to trade at around N120-N140 and N80-N90, respectively in the short term.
The price increases followed the steeply rising price of crude oil in the international market, fuelled by the crisis in the Arab and North African countries. Since the deregulation of the sector, which allowed independent marketers to import refined products at the prevailing price, local prices have responded to global trends.
Industry operatives fear that fast moving consumer goods (FMCG) sector which is dependent on generators powered by AGO, LPFO, coal or, more recently, natural gas, may be the worst hit. Compared with the relatively cheap cost of power from the national grid but which supply remains unreliable, studies have shown that the cost of running a generator averages 30-45% of an FMCG company’s production costs.
Renaissance Capital said companies like UAC Nigeria which are solely dependent on AGO will have to absorb the increase in AGO prices, as the company’s ability to transfer increased energy costs to its customers is minimal. Analysts are also concerned that other FMCG companies such as Dangote Flour and Unilever, both of which generate power using diesel and LPFO, may be under pressure. Knut Ulvmoen of Dangote Group says the price of diesel which has gone up from N80 to N139 is affecting distribution cost.
Economists expect higher energy costs to eat into the disposable income of the average Nigerian, especially as a sizeable proportion of the population uses kerosene (which is deregulated and is currently priced at about N105 up from an average of N70-N80 in 2010) for its cooking needs, rather than more expensive cooking gas.
Analysts say the FMCG companies may find it difficult to pass on increases in the cost of raw materials and commodities to their customers as any significant price increase would result in consumers switching to cheaper alternatives.
The result may be a rise in their cost of production with some margin shrinkage in their first quarter results.
Funmi Ajose-Adeogun, managing director, Delina Bistro Café on Victoria Island, said she had to run on generator every time the café was opened.
“The high cost of diesel has reduced my business profitability and we cannot increase price so as not to lose our customers. What this means is that staff strength cannot be increased even when there is a need to, because the business must survive one way or the other. So, this high cost of diesel is actually contributing to the unemployment problems in the country. The only solution is for us to have constant electricity supply from PHCN.”
The situation with Clara Duke, chief executive of Fudminers in Surulere is not different as she lamented the high cost of diesel, which she said was eating into her profit.
“High diesel cost has increased the overhead and this, of course, affects business profitability. We now focus more on food provision service to customers at their own locations though we still have a restaurant. This has helped to sustain the business”, she said.
Keith Richards, managing director/CEO, Promasidor Nigeria Limited, says his company spends N80, 000 on diesel per hour “yet we are a low energy user. We use 40 percent of PHCN power supply and rely on generator for the balance. We will appreciate having 60 percent power supply from PHCN”.
Herbert Ajayi, president of NACCIMA, regrets that we are operating a “generator economy” and laments that the Middle East crisis is worsening the high price of oil and, by extension, that of AGO and LPFO. He believes we would fare better if our refineries were working. Ajayi does not know what the exact impact on the FCMG sector is now because he has not sought a reaction from the sector of late.
Joseph Makoju of the Cement Manufacturers Association of Nigeria, speaking on the cost of diesel which is also a problem in his sector, says: “The price of diesel has been up for three months. We have taken the matter up with Pipeline Product Marketing Company (PPMC) and this government agency has said it would do something about the problem”.
