You need to active Javascript on your
BusinessDay
Nigeria's leading finance and market intelligence news report.

Nigeria’s heavy import dependence opens it up to China’s energy crisis

China’s power shortages hit growth in the world’s second-biggest economy, threatening more pain for global supply chains and Nigerians would feel the heat this festive season.

Last week, Nigeria’s headline inflation rate slowed once again as it recorded a decline from 17.01 percent in August to 16.63 percent in September representing the 6th consecutive monthly decline and the lowest inflation rate in the last 8 months.

This trend, however, is likely to reach its point of inflection on the back of the upcoming festive season and China’s current economic crisis (shortage of coal and Evergrande real estate crash).

Unlike the popular Las Vegas anthem which says that “what happens in Vegas, stays in Vegas”; for China, the narrative is different. Whatever happens in China, does not stay in China, it spreads to various economies and Nigeria happens to be caught up in this mix.

The impact of the current Chinese debacle is most definitely going to be felt in the Nigerian economy during the coming festive season as prices of commodities ranging from food and gift items to electronics and automobiles would experience soaring prices at all levels.

Over 23 percent of Nigeria’s imports come from China and Nigeria’s heavy reliance on Chinese imports creates the perfect channel for imported inflation.

Read also: Nigeria’s inflation slows for 6th straight month in September

BusinessDay analysis revealed that statistics of China’s major exports to Nigeria include electrical machinery (27.4%), computers (17%), plastics (3.7%), vehicles (2.9%), toys and games (2.8%). Thus, if China crashes, these products would become scarce and a lot more expensive.

Demand pressures for these commodities during the festive period coupled with the possible deregulation of the downstream oil sector which is expected to accompany the implementation of the Petroleum Industry Bill would threaten the trajectory of prices by way of a higher cost of premium motor spirit (PMS) as the international oil market still remains relatively bullish.

China is halfway back to the stone age as Xi Jinping, the President of the Federal Republic of China has been struggling to keep the lights on. His hybrid economy is literally going dark.

Factories are not powered, homes are dark due to electricity unavailability; even traffic lights and street lamps are being turned off. This energy crunch started in pockets, a handful of factories began shutting down in August, now it’s a national crisis that is gradually transforming into a global one. All these could be owed to China’s overdependence on coal.

As countries around the world race to secure energy supplies as demand picks up and the festive season draws near, prolonged periods of high commodity prices, oil prices, natural gas prices, and coal prices should be expected.

The global energy crunch has been gaining momentum over last week with pricing fundamentals increasingly pointing towards a much more prolonged period of high gas and coal prices as electricity generation became a price concern across the Atlantic Basin and Asia.

Nigerian Petroleum Minister, Timipre Sylva stated that “European gas futures have already moved beyond a crude oil equivalent of $200 per barrel, boosting gas-to-oil possibilities wherever they remain available. Coal, too, has received a massive boost as conducive gas-to-coal switching economics compel producers to produce more amid global supply tightness.”

In 2003, China’s share in global output was 8.5 percent; however, in 2019 its share in global output stood at 20 percent (more than twice its output in 2003). The same story with global exports, in 2003, China’s share was 6.2 percent, today it stands at 14.7% (again more than twice its share in 2003).

The Chinese economy is more integrated with the world today. That is good news for China, not so much for Nigerians. Any melt-down in China always has a ripple effect on the rest of the world.

A recent example was Xi Jinping’s announcement to end financing any new coal projects offshore. The announcement was made at the 76th United Nations General Assembly (UNGA 76) last month. China’s BRI is currently the country’s biggest project in Africa, and energy projects account for about 44 percent of the BRI, a significant part of which is coal-driven.

Nigeria is not just a major BRI participant, but also has significant coal projects across Kogi, Enugu and Benue States with intent to further explore its coal deposits in other areas and has announced the construction of six new coal plants by 2037.

Most of Nigeria’s coal power plants have been undertaken with financing from China since most Western entities would not fund coal. This means that, if China should end coal financing, coal projects, as well as existing plants in the country, may soon become moribund.

“Global collateral to China’s opaque rise”, is what this anticipated Chinese economic meltdown could mean for us. In other words, for the world, it could be regarded as ‘THE GREAT FALL OF CHINA’.

Get real time updates directly on you device, subscribe now.