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Output Drops as Companies Combat Rising Energy Costs

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  • Output Drops as Companies Combat Rising Energy Costs

Operators in the real sector relying on diesel and gas for production now grapple with higher operational costs amidst drop in capacity utilisation levels. Nigeria’s foreign exchange earning is improving on the back of rising oil prices but manufacturers say challenges abound as energy costs rise above 40 per cent of operating costs.

Cost-cutting measures by firms will lead to job losses and slow down economic recovery. Having explored options of rightsizing and downsizing in the 2016 financial year as part of measures to stay afloat, many operators are considering further reduction in staff profile as they are having difficulty paying existing staff while rationing fuel consumption to cut down on operational costs.

With the ratio of output not commensurate with cost of input incurred by operators, capacity utilisation has dropped below 40 per cent from about 44 per cent recorded in the third quarter of 2016 forcing many services sectors to reduce numbers of hours spent at work.

Firms that had no previous challenges with energy costs have expressed worry about rising cost of operations amid lull in the economy, rising inflation and dwindling purchasing power of consumers.

Although the Automotive Gasoil (AGO) marketing industry, otherwise known as diesel has been deregulated, sustaining operations at N265 per litre for many businesses and $8 for one standard cubic metre of gas for gas users instead of $2.50 has become unbearable.

Already, some operators are exploring alternative energy like solar while those dependent on diesel are cutting back on the number of hours being used for operations.

Acknowledging these challenges, a communiqué issued at the end of the last monetary policy committee meeting of the Central Bank of Nigeria noted that the structural factors driving the sustained pressure on consumer prices, such as the high cost of power and energy, transport, production factors, as well as rising prices of imports are yet to abate.

For instance, latest data released by the National Bureau of Statistics (NBS) showed that there was cross-cutting price increase in all divisions and sectors nationwide, just as it said prices in communications and restaurant, hotels and hospitality sector recorded slowest pace of growth as at the end of 2016, many of whom are dependent on diesel to sustain their operations.

For manufacturers, it is a sorry tale as data from the association showed that capacity utilization is below 40 per cent while cost of providing alternative power, both for gas and diesel hit about N100 billion in 2016 compared toN58 billion in 2015.

With rising energy costs, President, Manufacturers Association of Nigeria (MAN), Dr. Frank Jacobs noted that the productive sector remains troubled due to various challenges in the operating environment.

“The absence of conducive manufacturing environment and basic infrastructure would continue to draw back the sector, except something urgent is done to reverse the situation. Power is a major cost for manufacturers and they will explore opportunities where it is cheaper to produce their goods.

“Conversion of diesel generators to gas is a viable alternative but it is not cheap for small scale industries, while gas supply has equally been hampered by continued destruction of oil and gas facilities by militants,” Jacobs added.

Explaining the plight of operators in the services sector, the Director-General of the Lagos Chamber of Commerce and Industry (LCCI), Muda Yusuf explained that the Federal Government is caught between managing the joy of rising oil prices and the negative effects of such on the productive sector.

According to him, government must be creative in tackling these challenges. Yusuf noted that businesses are being killed everyday through poor power supply and low purchasing power from consumers.

“Businesses are complaining. Petrol and diesel costs are unbearable at the current rates. It is a suffocating situation and I hope the issues of ease of doing business are addressed before opening markets to other economies,” he added.

Noting that business operators and Nigerians are patiently looking forward to the “change” that will bring about the economic turnaround of the country, the Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA), added that the real sector is reeling under the burden of rising costs of production in a state of near-economic stagnation, even as government seeks tax revenue from the sector to finance the economy.

The chamber noted that the rate of inflation has doubled, electricity generation reduced by almost 50 per cent, while the price of petroleum products has also doubled.

NACCIMA’s National President, Bassey Edem, noted that while the effort of the Federal Government in addressing the challenges can be acknowledged, the efforts have not translated into measurable positive indicators; rather it has led to a thing of worry to private sector operators.

The World Bank had in its latest report on the ease of doing business ranked Nigeria low among other countries.

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade experience in the global financial markets.

Crude Oil

Crude Oil Holds Steady Above $55 Per Barrel on Tuesday

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Crude Oil Holds Steady Above $55 Per Barrel on Tuesday

Brent Crude oil, against which Nigerian crude oil is priced, rose from $54.46 per barrel on Monday to $55.27 per barrel as of 9:03 am Nigerian time on Tuesday.

Last week, Brent crude oil rose to 11 months high of $57.38 per barrel before pulling back on rising COVID-19 cases and lockdowns in key global economies like the United Kingdom, Euro-Area, China, etc.

While OPEC has left 2021 oil demand unchanged and President-elect Joe Biden has announced a $1.9 trillion stimulus package, experts are saying the rising number of new cases of COVID-19 amid poor vaccine distribution could drag on growth and demand for oil in 2021.

On Friday, Dan Yergin, vice-chairman at IHS Markit, said in addition to the stimulus package “There are two other things that are going with it … one is of course, vaccinations — in the sense that eventually this crisis is going to end, and maybe by the spring, lockdowns will be over.”

“The other thing is what Saudi Arabia did. This is the third time Saudi Arabia has made a sudden change in policy in less than a year, and this one was to announce (the) 1 million barrel a day cut — partly because they are worried about the impact of the surge in virus that’s occurring,” he said.

Also, the stimulus being injected into the United States economy could spur huge Shale production and disrupt OPEC and allies’ efforts at balancing the global oil market in 2021.

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Crude Oil

Crude Oil Pulled Back Despite Joe Biden Stimulus

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Crude Oil Pulled Back Despite Joe Biden Stimulus

Crude oil pulled back on Friday despite the $1.9 trillion stimulus package announced by U.S President-elect, Joe Biden.

Brent crude oil, against which Nigeria’s oil is priced, pulled back from $57.38 per barrel on Wednesday to $55.52 per barrel on Friday in spite of the huge stimulus package announced on Thursday.

On Thursday, OPEC, in its latest outlook for the year, said uncertainties remain high in 2021 with the number of COVID-19 new cases on the rise.

OPEC said, “Uncertainties remain high going forward with the main downside risks being issues related to COVID-19 containment measures and the impact of the pandemic on consumer behavior.”

“These will also include how many countries are adapting lockdown measures, and for how long. At the same time, quicker vaccination plans and a recovery in consumer confidence provide some upside optimism.”

Governments across Europe have announced tighter and longer coronavirus lockdowns, with vaccinations not expected to have a significant impact for the next few months.

The complex remains in pause mode, a development that should not be surprising given the magnitude of the oil price gains that have been developing for some 2-1/2 months,” Jim Ritterbusch, president of Ritterbusch and Associates, said.

Still, OPEC left its crude oil projections unchanged for the year. The oil cartel expected global oil demand to increase by 5.9 million barrels per day year on year to an average of 95.9 million per day in 2020.

But also OPEC expects a recent rally and stimulus to boost U.S. Shale crude oil production in the year, a projection Investors King experts expect to hurt OPEC strategy in 2021.

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Crude Oil

OPEC Says Uncertainties Remain High in 2021

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OPEC Says Uncertainties Remain High in 2021

The Organization of the Petroleum Exporting Countries (OPEC) on Thursday said global uncertainties remained high going forward in 2021 but kept its oil demand forecast unchanged.

In the cartel’s latest oil outlook for 2021, oil demand is expected to increase by 5.9 million barrels per day year on year to 95.9 million barrels per day. The prediction was unchanged from December’s assessment.

However, OPEC and allies, said: “Uncertainties remain high going forward with the main downside risks being issues related to COVID-19 containment measures and the impact of the pandemic on consumer behavior.”

“These will also include how many countries are adapting lockdown measures, and for how long. At the same time, quicker vaccination plans and a recovery in consumer confidence provide some upside optimism.

Crude oil rose to $57 per barrel this week after incoming US President Joe Biden announced it would inject $1.9 trillion stimulus into the world’s largest economy.

But the recent rally in the commodity and stimulus announcement is expected to boost US crude oil output and disrupt OPEC+ production cuts strategy for the year.

The 2021 supply outlook is now slightly more optimistic for U.S. shale with oil prices increasing, and output is expected to recover more in the second half of 2021,” OPEC said.

Still, OPEC, in its forecast “assumes a healthy recovery in economic activities including industrial production, an improving labour market and higher vehicle sales than in 2020.”

“Accordingly, oil demand is anticipated to rise steadily this year supported primarily by transportation and industrial fuels,” the group said.

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