Nigerian manufacturers are being strangled by surging diesel prices, analysts say

By David Whitehouse
Posted on Tuesday, 26 April 2022 06:00

A diesel pump is pictured at a gas station in Lagos
A diesel pump is pictured at a gas station in Lagos, Nigeria September 10, 2019. Picture taken September 10, 2019. REUTERS/Temilade Adelaja

The doubling of diesel prices in Nigeria this year leaves the country’s manufacturing base fighting for survival.

While petrol prices in Nigeria are subsidised, diesel prices are unregulated, so the impact of higher crude is immediate and unavoidable. According to research from Chapel Hill Denham, diesel prices are up 129% so far this year, and the firm forecasts that prices will end 2022 up 123%.

The cost of diesel has become a regular dinner-table topic, says Mickael Vogel, director at the Hawilti research group in Lagos. The only alternative in Nigeria is to use gas, but many smaller companies can’t manage the required capital expenditure, he says.

A lot of companies “don’t have the cash to buy diesel, but they don’t have the cash to switch to gas either.” Neither are they able to borrow from the banks, Vogel says. For some smaller manufacturers, layoffs are the only possible option. “Many manufacturers realise that they should have switched to gas already, and some are now having to lay people off,” Vogel says.

Manufacturing, transportation and logistics will be the worst-affected sectors due to their high diesel reliance, says Abdulazeez Kuranga, an economist at Cordros in Lagos. Companies can reduce the impact by getting more employees to work remotely rather than in the offices, he says.

  • They can also front-load diesel demand to hedge against future price increases, try to pass the costs on to customers, invest in alternative sources of energy, and reduce operating hours, Kuranga says.

Central bank support needed

Diesel prices have a wider inflationary impact. Chapel Hill Denham calculates that food inflation in Nigeria has a correlation of 50.9% with diesel costs, while transport inflation has a correlation of 20.8%. Smaller companies are bearing the full brunt. The Manufacturers Association of Nigeria in March said that maintaining production was becoming difficult due to diesel prices and called for government support.

Major cement producers Dangote Cement, Lafarge Africa and BUA are shielded from the impact due to their energy diversification strategies, according to Chapel Hill Denham. The Dangote Group converted more than 5,000 of its trucks for dual fuel usage – diesel and natural gas – between  2013 and 2020. In 2021, Lafarge Africa took delivery of 52 tricks powered by LNG and compressed natural gas (CNG), while BUA has been replacing diesel generation capacity with LNG.

  • Flour Mills of Nigeria and Anheuser-Busch InBev have also made the switch, Vogel says.

For smaller companies, that is easier said than done. Scarce dollars are needed to pay for gas conversion equipment, all of  which is manufactured outside Nigeria. Finance is only part of the problem, and better infrastructure is also needed, Vogel argues.

  • Lead times for orders can be months or a year.
  • That’s excluding port delays: some of the new gas equipment which Nigeria needs remains stuck in the country’s inefficient ports, Vogel says.
  • “It’s a nightmare. Everyone wants to change to gas, but they can’t do it.”
  • Small manufacturers need financial help to switch to gas, and a solution would be for the central bank to step in and offer cheap loans, Vogel says. “That’s the only way forward.”

Bottom line

Getting off diesel is a question of survival for many Nigerian small businesses.

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