Soaring cost of diesel is forcing businesses to switch to gas power
By AYOOLA OLAOLUWA
Nigerian manufacturers have started investing in alternative energy to address the challenge of the country’s poor power supply, findings from Business Hallmark have revealed.
It should be recalled that the energy situation in the country deteriorated towards the end of 2021 when crude oil prices rose above the $100 mark.
The resulting spike in crude prices has pushed the cost of diesel, used by most manufacturers to power their generators, to over 400 naira per litre.
The situation worsened further 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, particularly members of the North Atlantic Treaty Organization (NATO), has disrupted fuel supply, pushing oil prices to $130, a 13-year high.
The effect has spread to Nigeria, with the cost of power, especially diesel, skyrocketing. While manufacturers were still dealing with the situation, the already poor electricity supply deteriorated, with Nigerians working for weeks without power as the national power grid collapsed twice in a week.
Unsurprisingly, the triple effect of rising crude oil, poor power supply and devaluing naira has further pushed up the price of diesel.
As of Saturday April 2, 2022, a liter of diesel was selling for an average of N800 across the country. In Lagos, petrol stations that sold the commodity sold for 690 to 730 Naira, depending on the location of the traders, while in some states the product sold for up to 900 Naira.
Some of the manufacturers who spoke to our correspondent in Lagos said the high cost of diesel has driven up the cost of production. The situation, they complained, is impacting commodity prices and profitability.
A manufacturer who operates a PVC factory in Ikeja, Lagos, Segun Cardoso, described the development as counter to economic growth.
“The situation calls for urgent attention. We wouldn’t be in this mess if the government lived up to expectations. But no, the government is dormant.
“No electricity, no diesel. And when it is available, the price is beyond the reach of many. At the beginning of this year, we were buying fuel for around 32 million naira to power our power stations.
“As of March 31, the amount stood at N57 million. The most annoying thing is that we cannot increase the price of our products. As it is, people aren’t buying anymore.
“Since we can’t just produce without finding buyers, I have to stop two of the three production lines, hoping that the storm will pass soon,” Cardoso laments.
Meanwhile, most manufacturers, BH learned, have started investing in alternative energy, especially power plants, in their bid to overcome the country’s energy challenges.
The managing director of Derox Industries Nigeria, a packaging company based in Oregun, Lagos, Stephen Elega, told our correspondent that his company is in partnership with a power company to help build a 2 MW gas-fired power plant. .
“We hope that when the plant is operational, it will solve our energy problems, increase production and help us grow,” Elega said.
According to some energy experts who spoke to our correspondent, a 1 MW gas plant will cost between $1.5 and $2 million, putting it beyond the reach of small business owners.
But in an effort to circumvent the problem, small and medium-sized manufacturers are coming together to pool resources to be able to have their own factories.
The Group Managing Director (GMD) of Lubcon Lubricant Manufacturing and Blending Company based in Ilorin, the capital of Kwara State, Adesoji Fagbemi, lamented that the poor electricity supply had a negative impact on his business.
The electricity challenge is affecting the country’s manufacturing industry. The generated electric power capacity is not sufficient. We share power with other sectors of the economy. It is even so difficult to reach eight hours of supply per day.
We spent over N93 million in a quarter on diesel as we operate multiple manufacturing points. We had to buy a 1000 KVA generator. We also spent around N157 million on a 33 kVA dedicated line to get 23 hour power supply by co-opting other nearby businesses just to meet the huge expense. Thus, profitability is affected.
“We are going back to the cooperative route. We recently signed a Memorandum of Understanding (MoU) with a consortium of companies on gas production in the Ajaokuta Gas Park.
The agreement 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 rising inflation will be driven by a higher cost of production for manufacturers who rely heavily 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 large vehicles, such as those that transport goods. With the increase in prices, there would be a multiplier effect on the cost of products in Nigeria.
It is a similar case in the aviation sector. When the cost of aviation fuel increased, there was an increase in the cost of airline tickets.
“The government needs to refine locally. There is no alternative to diesel. Many industries rely on diesel to power their generators,” Ilias advised.
Furthermore, the Chairman of the Manufacturers Association of Nigeria (MAN) infrastructure committee, Ibrahim Usman, said rising inflation would be driven by higher cost of production for manufacturers who are heavily dependent on diesel. for production.
“Rising price of diesel means higher cost of production for manufacturers as most of us depend on diesel to produce. So when the cost of production is high, then manufactured goods will be sold at a higher price. high; this is to allow manufacturers to make a profit after the sale and stay afloat.
“So basically it will increase the inflation in the country which is already high, further compounding the problems and the plight of Nigerians.
“To prevent this from happening, the government should ensure that it creates a situation where the cost of electricity is reduced for manufacturers and the power supply is accessible to producers,” the boss said. from MAN.
In the same vein, the chairman of the Nigerian Association of Chambers of Commerce, Industry, Mining and Agriculture (NACCIMA), John Udeagbala, said that rising prices of petroleum products, in particularly diesel and aviation fuel, is worrisome.
“The implications of this situation for the Nigerian economy are considerable; the use of these petroleum products is embedded in the production and transportation processes of the public and private sectors.
“As the private sector adjusts to current realities, we expect that unless drastic policy action is taken, rising petroleum product prices combined with problems in the national electricity grid will lead to rising inflation, a further erosion of the purchasing power of the population, and the redistribution of wealth which plunges a greater part of the population below the poverty line.
“As such, we take this opportunity to once again underscore our call for incisive policy implementation in the energy sector to limit our economy’s exposure to global shocks and serve as a springboard for a sustained economic growth”, advised the boss of NACCIMA.
Also speaking, Managing Director of MAN, Mr Segun Ajayi-Kadir, said the impact of the energy crises has led to a drop in the capacity utilization of manufacturers.
“The rising price of automotive gasoline (AGO) fuel, also known as diesel, is very worrying as it is having a negative impact on businesses, especially the manufacturing sector of the economy.
“There is a rise in prices due to the increase in the price of crude oil in the international market which exceeded 110 dollars per barrel.
“Also knowing that diesel has been deregulated eliminates the issue of a cost buffer. The law of supply and demand is at play here, and since we have historically lacked local refining capacity, we are left at the mercy of the vagaries of the international price and its geopolitics.
“Unfortunately, manufacturers who rely heavily on diesel to run their plant, due to unreliable grid power supply, face huge costs to maintain their production line.
Information from MAN members also indicates that production capacity utilization has fallen due to the unsustainable cost of daily diesel production.
“The direct implication of this trend, as many Nigerians are already feeling the heat, is the high cost of goods in the market due to the high cost of production,” DG MAN noted.