Nigeria Content Online

Experts have stated
that high oil price, which is expected to shore up the nation’s foreign
reserves, may also have harsh effects on consumers’ pockets and
companies books.

The high oil
prices, which experts foresee would last through March and April and
moderate sometime midyear at the expense of consumers’ disposable
income, would soon begin to have some indirect rippling effects.

Oil prices have
been rising especially since January, due to the unrest in the Middle
East and experts are of the view that high oil prices imply higher
Automotive Gas Oil (AGO) and Low Pour Fuel Oil (LPFO) prices.

“Our oil price
outlook suggests Automotive Gas Oil (AGO) and Low Pour Fuel Oil (LPFO)
prices will remain high. According to our economists, our base case for
the oil price is that it will stay at around $110 per barrel through
March and April 2011, before moderating to $90/bbl in the second half
of 2011,” Akintola Akinbamidele, research analyst, Renaissance Capital,
an investment bank, said.

In 2003, the
Nigerian government had deregulated the downstream segment of the
petroleum industry, with the exception of Premium Motor Spirits PMS,
permitting petroleum marketers to compete favourably and to import and
sell at market rates.

The deregulation of
the sector thereby created competitive scenery that forced down prices,
unlike when the Nigerian National Petroleum Corporation had a monopoly
on importing and selling. However, high oil prices are now implying
higher automotive gas oil and low pour fuel oil prices.

This, Mr. Akinbamidele said, has translated into an average 35 per cent increase in AGO prices in the local Nigerian market.

“The depot price of
AGO from an independent retailer averaged at N90-95/litre in 2010. We
have seen an uptick in prices, with the average price of AGO sold by
independent retailers now at N145-155/litre,” Mr. Akinbamidele said.

The gainers and losers

Many fast moving
consumer goods (FMCG) companies, like other industrial users in the
Nigerian space, depend totally on self-generated power, which can be
fuelled by AGO, LPFO, coal or, more recently, natural gas. Compared
with the cheap cost of power from the national grid, which remains
unreliable, experts say the cost of running a generator averages at
30-45 per cent of an FMCG company’s production costs.

Experts say these
fast, moving consumer goods companies that have invested in the
generation of power through the use of gas turbines are in a better
position to protect themselves from the price shocks expected for AGO
and LPFO and therefore, are in a better position to reduce the net
impact of the increase in AGO prices (assuming any attacks in the Niger
Delta do not interrupt the gas supply).

Mr. Akinbamidele said consumers are also going to feel the pinch.

“We expect higher
energy costs to eat into the disposable income of the average Nigerian,
especially as a sizeable proportion of the population use kerosene
(which is deregulated and is currently priced at about N105/litre, up
from an average of N70-80/litre in 2010) for its cooking needs, rather
than more expensive cooking gas. PMS is a regulated product segment, so
we do not expect any direct impact on its price, which we expect to
remain flat at N65/litre.

“We are of the view
that the ability of FMCG companies to pass on increases in the cost of
raw materials and commodities to their customers, in absolute terms, is
minimal, as any significant price increase would result in consumers
shifting to cheaper alternatives,” he said.

“These are
short-term setbacks, in our view, and we maintain our positive outlook
on the FMCG segment over the medium to long term,” he added.