Fresh threat for Nigeria’s revenue as US-China trade war intensifies

Nigeria’s revenue projections may be facing a fresh threat as the trade war between the United States and China gets fiercer. The intensifying trade war could see oil price sink to as low as $30, Bank of America Merrill Lynch warned on Monday.

In its 2019 budget, Nigeria projected oil to sell at an average price of $60 and national production was projected to grow to 2.3 million barrels. The proposed Federal Government budget estimates N6.97 trillion revenue for the 2019 fiscal year. The oil sector is expected to contribute around N3.73 trillion, while N710 billion will come from the proceeds of government equity in Joint Ventures.

Read More : FG unlikely to meet revenue projections in 2019 budget

But the Bank of America Merrill Lynch, an American multinational investment bank, noted that a further deterioration in relations between the US and China could set off a chain of events that would push oil down more than 50 percent to as low as $30.

“While we retain our $60 a barrel Brent forecast for next year, we admit that a Chinese decision to reinitiate Iran crude purchases could send oil prices into a tailspin,” a Bank of America Merrill Lynch Global Research report said, warning that prices could sink by as much as $20-30 a barrel in that scenario.

The US and China, two world superpowers, account for about 34 percent of the global crude oil. The commodity also accounts for 2/3 of Nigeria’s revenue and nearly all of foreign exchange earnings.

China, the single largest buyer of Iranian crude oil before the US sanctions hit the Islamic Republic’s oil exports, continues to import oil from Iran despite the ‘zero exports’ maximum pressure campaign of the United States. China has said that it wouldn’t comply with the US sanctions on Iranian exports.

According to sources, China and other countries are receiving oil shipments from a larger number of Iranian tankers than was previously known, defying sanctions imposed by the United States to choke off Tehran’s main source of income.

International Brent crude oil stood at $60.53 per barrel by 3pm Nigeria time on Monday, indicating there is nothing in excess of Nigeria’s 2019 budget benchmark.

When oil prices found a floor around $40 in the first quarter of 2016, the Nigerian economy slid into a recession and the Central Bank of Nigeria (CBN) began restricting scarce forex for what it considers important items and began to artificially prop the naira to maintain exchange rate stability. The long-term effect of these controls is an economy with a weak growth.

“If oil price falls below $50 a barrel, Nigeria will not be able to balance its books. We have to contend with negative volume variance. For instance, first quarter production averaged 1.96 million barrels, and it is 300 million below the target 2.26 million barrel per day,” said Johnson Chukwu, managing director and CEO, Cowry Assets Management Ltd.

According to Chinese customs data, cited by Reuters, Iran sent a bit over 208,000 bpd of crude to China, which was down from over 250,000 bpd in May.

Early this month, the US threatened to hit China with sanctions over its continued imports of Iranian oil. Last week, US Secretary of State Mike Pompeo said that his country was imposing sanctions on Chinese entity Zhuhai Zhenrong and its CEO Youmin Lin because “they violated U.S. law by accepting crude oil”.

President Donald Trump accused China on Monday of manipulating its currency as the trade war between the world’s largest economies keeps escalating.

“China dropped the price of their currency to an almost a historic low,” Trump said in a tweet. “It’s called ‘currency manipulation.’ Are you listening Federal Reserve? This is a major violation which will greatly weaken China over time!”

Other international oil experts also agree with the statements of Bank of America Merrill Lynch that the utmost impact of the US-China trade war would be on the global oil industry.

According to Rystad Energy Senior Analyst Artyom Tchen, given the current considerations on the supply side, the oil market should have seen risk premium pushing up oil prices but that hasn’t happened over the last month.

“We believe that United States-China trade war and resulting weak economic growth sentiment is among those factors that balance supply risks and cap oil prices,” the Rystad Energy representative added.

The greatest impact of the US-China trade war on the global oil industry is its effect on oil prices, explains Steve Wood, a managing director at financial services company Moody’s.

“The market is concerned that a prolonged dispute will result in slower global economic growth leading to lower demand for oil,” Wood told Rigzone.

On the flip side, opportunities abound for Nigerian growers of Soybeans and other farm produce as the trade spat between the US and China forced Beijing to halt agricultural imports from the US.

On Monday, China devalued its currency and ordered its state-run agricultural firms to cut purchase of US farm produce after President Trump last week proposed adding 10 percent tariffs on another $300 billion in Chinese imports from Sept. 1, a situation analysts say opens way for Nigerian agricultural farmers to boost exports.

“If Nigeria had the capacity to produce the volume that met international standards and at competitive prices, it may have been able to partake in the opportunity that the US-China trade war presented,” analysts at FSDH Merchant Bank said.

China is the largest export market for US agricultural products with soybeans taking the number one spot accounting for about 52 percent market share.

In 2017, the US agricultural exports to China reached $23.8 billion, according to data obtained from the Minnesota Department of Agriculture. This figure represents about 17 percent of the US total agricultural exports.

The move to stop the purchase of farm produce from the US would compel Beijing to find another trade partner to meet the demand for the products and Nigeria stands a chance of benefitting.

Nigeria is the largest producer of soybeans in sub-Saharan Africa with a production of 750,000 metric tonnes per annum, according to data obtained from the Federal Ministry Agriculture.

“This will open up opportunities for our export to China because the major exports to China from the US are agricultural commodities,” Muda Yusuf, director general, Lagos Chamber of Commerce and Industry (LCCI), said in a telephone response to BusinessDay questions.

Other farm produce imported by China from the US which Nigeria can take advantage of include animal feed, hides, alfalfa, hay, diary, poultry, food, pork, beef and wheat.

DIPO OLADEHINDE & MICHAEL ANI