Soaring diesel cost forces companies to adopt gas power

By AYOOLA OLAOLUWA

Nigerian manufacturers have started investing in alternative energy to tackle the challenge of poor electricity supply in the country, Business Hallmark findings have revealed.

It would be recalled that the power situation in the country had worsened towards the end of 2021 when the prices of crude oil soared above the $100 mark.

The resultant surge in crude prices pushed the cost of diesel, used by most manufacturers to power their generators, to over N400 per litre.
The situation further worsened in February 2022 after Russia invaded Ukraine. The imposition of sanctions on Russia, a major crude oil producer, by the United States and Western European countries, especially members of the North Atlantic Treaty Organisation (NATO), disrupted fuel supply, sending oil prices to 13 years high of $130.
The effect spilled over to Nigeria, with cost of energy, particularly diesel hitting the roof. While manufacturers were still managing the situation, the already poor electricity supply deteriorated, with Nigerians going on for work weeks without power, as the national power grid collapsed twice in a week..

Not surprisingly, the triple effects of rising crude oil, poor power supply and naira losing value, further pushed up the price of diesel.
As at Saturday, April 2, 2022, a litre of diesel sold for an average N800 across the country. In Lagos, filling stations that had the commodity were selling from N690 to N730, depending on the marketers location, while in some states the commodity sold for as high as N900.

Some of the manufacturers who spoke with our correspondent in Lagos, said the high cost of diesel has driven up the cost of production. The situation, they complained, is impacting on prices of commodities and profitability.

A manufacturer who operates a PVC plant Ikeja, Lagos, Segun Cardoso, described the development as antithetical to economic growth.

“The situation calls for urgent attention. We wouldn’t be in this mess if the government is living up to expectations. But no, the government is in a slumber.

“No electricity, no diesel. And when it is available, the price is out of reach of many. At the beginning of this year, we were buying fuel of about N32million to power our plants.
“As at March 31st, the amount rose to N57million. The most annoying part is that we can’t increase the price of our products. As it it, people are no longer buying.

“Since we can’t just be producing without finding buyers, I have to shut down two of the three production lines, hoping that the storm will soon pass over”, Cardoso lamented.

Meanwhile, most manufacturers, BH learnt, have started investing in alternative energy, epecially power plants, in their bid to overcome the power challenges in the country.

The Managing Director of Derox Industries Nigeria, a packaging company based in Oregun, Lagos, Stephen Elega, told our correspondent that his firm is in partnership with a power firm to help build a 2MW gas-powered plant.

“We hope that when the plant became operational, it will solve our power challenges and boost production and help us to expand”, declared Elega.

A 1MW gas-powered plant, some energy experts who spoke with our correspondent said, will cost between $1.5million to $2million, thereby pushing it out of the reach of small business owners.

But in an effort to get around the problem, small and medium scale manufacturers are coming together to pull resources together to be able to get their own plant.

The Group Managing Director (GMD) of Lubcon Lubricant Manufacturing and Blending Company based in Ilorin, the Kwara State capital, Adesoji Fagbemi, lamented that poor electricity supply has impacted negatively on his company.

There is electricity power challenge affecting the manufacturing industry in the country. The capacity of electric power being generated is not adequate. We share power among other sectors of the economy. It is even so difficult to achieve eight hours of supply daily.

We spent more than N93 million in a quarter on diesel because we run several manufacturing points. We had to purchase a 1,000KVA generator. We also expended about N157 million on 33KVA dedicated line to get 23 hours power supply by co-opting other neighbouring companies just to cope with the huge expenses. Thus, profitability is affected.

“We are going the cooperative route again. We recently signed a Memoranda of Understanding (MoU) with a consortia of firms on gas production in the Ajaokuta gas park.
The deal is expected to boost trade and investment, especially among Micro, Small, and Medium Enterprises (MSMEs) in and around the state,” Fagbemi noted.

Meanwhile, stakeholders in the country have warned that the rise in inflation would be driven by a higher cost of production for manufacturers who depend largely on diesel.
A development economist, Aliyu Ilias, said the increase in the price of diesel would contribute to inflation.

“Diesel is used by industries and big vehicles, such as those that convey goods. With the price increase, there would be a multiplier effect on the cost of products in Nigeria.
This is a similar case in the aviation sector. When the cost of aviation fuel increased, there was an increase in the cost of air tickets.

“The government needs to refine locally. There is no alternative to diesel. Many industries rely on diesel to power their generators,” Ilias advised.

Also, the Chairman, Infrastructure Committee of the Manufacturers Association of Nigeria (MAN), Ibrahim Usman, said the rise in inflation would be driven by a higher cost of production for manufacturers who depend largely on diesel for production.

“The rise in the price of diesel means higher production cost for manufacturers because most of us rely on diesel to produce. So when the cost of production is high, then manufactured products will be sold at a higher price; this is to enable the manufacturers to make a profit after sale and stay afloat.

“So, basically it will increase the inflation in the country which is already high, further compounding the problems and plight of Nigerians.

“To avoid these things from happening, the government should make sure that it creates a situation whereby the cost of electricity is reduced for manufacturers and that power supply is accessible to producers,” the MAN boss stated.

In the same vein, the President, Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA), John Udeagbala, said the rising prices of petroleum products, particularly diesel and aviation fuel, is worrisome.

“The implications of this situation for the Nigerian economy are far-reaching; the use of these petroleum products are entrenched in the production and transportation processes of both the public and private sectors.

“As the private sector adjusts to the current realities, we expect that unless drastic policy actions are taken, the rising prices of petroleum products combined with the issues of the national electricity grid will bring about increasing inflation, further erosion of the purchasing power of the populace, and the redistribution of wealth that plunges more of the population below the poverty line.

“As such, we use this opportunity to stress once again our call for incisive policy implementation within the energy sector to limit our economy’s exposure to global shocks and serve as a springboard for sustained economic growth,” the NACCIMA boss advised.

Also speaking, the Director-General of MAN, Mr. Segun Ajayi-Kadir, said the impact of the energy crises has led to a plunge in the capacity utilisation of manufacturers.

“The rising price of Automotive Gas Fuel (AGO) otherwise known as diesel is very worrisome as it is negatively impacting on businesses especially the manufacturing sector of the economy.

“There is a rise in price due to the increase in price of crude oil in the international market which has gone above $110 per barrel.

“Knowing also that diesel has been deregulated removes the question for a buffer to the cost. The law of demand and supply is at play here, and since we have historically lacked local refining capability, we are left at the mercy of the vagaries of international price and the geopolitics of it.

“Unfortunately, manufacturers who largely rely on diesel to run their factory, due to unreliable grid power supply, are contending with huge cost to sustain their production line.
The information from MAN members equally indicates that the production capacity utilization has been going down because of the unsustainable cost for running daily production on diesel.

“The direct implication of this trend, as many Nigerians are already feeling the heat, is the reflective high cost of goods in the market owing to the high cost of production”, the MAN DG noted.