ThinkBusiness Today - May 23rd

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Why Dangote Refinery does not mean an end to fuel subsidies

There are many things to celebrate about the Dangote Refinery – the audaciousness of the concept, the size and scale of the investment, the transformation possibilities it presents – especially changing the industrial landscape in the country, and the national pride it gives.

But there is one thing it does not represent – it does not end over 40 years of fuel subsidy in Nigeria. (See analysis).

Markets

• NGX All-Share Index (ASI) climbed 181.20 (0.35%) points to close at 52,369.13, representing a 1-week gain of 0.26%, a 4-week gain of 2.27%, and an overall year-to-date gain of 2.18%. Key share price movement yesterday include Cadbury (5.15%), GTCO (2.08%), NGXGROUP (2.86%), and PZ (6.25%).

• Oil prices traded slightly up on Monday as the market waited for news on the U.S. debt ceiling talks and as a stronger dollar offset support from lower supplies from Canada and OPEC+ producers. Brent futures for July delivery rose 0.56%, to $76.10 a barrel.

• The Naira rate was mixed in both markets. It depreciated slightly at the parallel market by 1.02% to close at N758.67/$. It appreciated by 0.28% at I & E window, which closed at N463.5

• Natural gas futures dropped about 7.23% to US2.40 on Monday on rising output and forecasts for less demand next week than previously expected. That was the contract's biggest daily price drop since falling about 8% in late April. The price decline came as US power generators have burned more gas in recent weeks to produce electricity due to low wind power, and as gas exports from Canada remain lower than normal due to wildfires in Alberta.

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Global Headlines

• Meta (Facebook) fined 1.2 billion Euros – Meta, the parent company of Facebook was fined 1.2 billion Euro by European privacy regulators over the transfer of users’ data to the US, according to CNBC. In the middle of this case, the US and the EU has reached an agreement that addresses the data privacy concerns of the EU. According to Statista, there are around 28 million Facebook users in Nigeria, about 12.7% of the population, most between the ages of 25 – 34. I am not aware if there is any such protection for Nigerian users. However, the government did engage Meta when it changed its privacy policies on the use of WhatsApp. Facebook acquired WhatsApp in 2014 but changed its policies in 2021 to share data with Facebook.

• US and Australia’s bilateral agreement on climate, critical minerals, and clean energy – The US and Australia has signed a bilateral cooperation agreement on climate, critical minerals, and clean energy. According to White house statement and Reuters, the framework will “accelerate the development of markets for established and emerging technologies”. For a country like Nigeria, this is another example of developed nations building alliances that secures their future in the supply of critical minerals and the technologies around renewable energy. I hope the incoming government will be more proactive in embarking on similar initiatives for Nigeria.

News Analysis - Dangote Refinery does not mean an end to subsidies

After the inauguration of the 650,000 barrels of crude oil daily refining capacity Dangote Refinery yesterday, it is widely reported that fuel production will commence before August 2023. The excitement is palpable, at least for two major reasons. First, it will mean the preservation of the foreign exchange used in the importation of refined fuel. Second, it is expected that queues at the pumps across the country will be a thing of the past.

However, for the average Nigerian, the thought is that this will also mean an end to the narratives by government officials that the government is subsidizing the consumption of fuel. Unfortunately, it does not.

What Dangote Refinery will do to the Nigerian Domestic Market?

Dangote refinery would guarantee improved supply of petrol in Nigeria’s domestic market. On the target market and petroleum sufficiency, the refinery could meet 100 per cent of the Nigerian requirement of all liquid products, including gasoline (petrol), diesel, kerosene, and aviation jet, and would also have a surplus of each of these products for export which will enhance the inflow of foreign currency.

Also, by reducing Nigeria's reliance on imported petroleum products, the Dangote Refinery will enhance the country's energy security. It will help stabilize domestic fuel supplies and reduce the vulnerability of the Nigerian economy to sudden shocks.

Furthermore, the presence of the Dangote Refinery is expected to stimulate growth in the downstream oil sector in Nigeria. It will attract investments in related industries, such as petrochemicals and manufacturing, which rely on petroleum products as feedstock. This can lead to the development of ancillary industries and the creation of additional jobs.

Dangote Refinery Will Not make Petrol Price significantly cheaper

Dangote refinery will not guarantee a cheaper price or necessarily bring down the cost of fuel pump/retail price in Nigeria. Using the most basic template by the Petroleum Products Pricing Regulatory Agency (PPRA), the retail price of PMS includes four main components: The crude oil Cost, averaging US $72 today and using the I & E exchange rate, freight cost, landing cost and Refining costs and profits. Using today’s international crude oil price, the average retail price with a Dangote refinery is estimated at N254 per litre, about N80 above the current average pump price.

The most important difference between imported fuel and the Dangote refinery fuel is the landing cost. Previously, Mele Kyari, the Chief Executive Officer (CEO) of the Nigerian National Petroleum Company (NNPC) Limited, said that Nigeria spends at least N13-N17 as landing cost on every litre of petroleum product imported. The devaluation of the naira against the dollar has, according to some insiders, pushed the cost to about N21. That will now be saved.

This Week

• The Monetary committee of the Central Bank of Nigeria (CBN) concludes its two-day meeting today. In the last meeting, the MPC hiked MPR to 18% and left other rates unchanged.

• The National Bureau of Statistics (NBS) is expected to release growth data for Q1 2023 on Thursday 24^th May 2022. The Q4’22 data shows that Nigeria recorded 3.52% growth.

• Other data from NBS this week are Company Income Tax (Q1 2023) and Sectoral Distribution of Value Added Tax (Q1 2023)

• The Central Bank Nigeria (CBN) will issue a total of rollover N180.45billion treasury bills on Thursday 25^th May 2023. The 91-days, 182-days, and 364-days will seek to raise N9.9 billion, N1.8billion and N168.7 billion respectively.

• Office for National Statistics (ONS), UK is expected to release its Inflation report for April on Wednesday 24^th May 2023. CPI eased to 10.1% y / year in March 2023, down from 10.4% in February but more than market expectations of 9.8%.