Nigeria’s darkening economic fortunes, due to policies that are impairing the growth of free markets, may be worsened as a result of the weakness of international trade, persistent global uncertainties and slowing demand for crude oil.
Gross domestic product (GDP) in China, the world’s biggest importer of crude oil, expanded by 6 percent in the third quarter, the weakest growth rate in roughly three decades.
A slower economic growth rate in China means demand for oil will also decrease, dragging oil prices down with it. A scenario that means Nigeria, Africa’s biggest exporter of crude oil, may experience a sharp drop in its foreign exchange earnings and will consequently have limited capacity to continue defending the naira.
Signs of slowing economic growth are also showing up in Germany, Europe’s biggest economy, and in the United States of America, the world’s largest economy. In Germany, the manufacturing sector seems to be stuck in negative territory.
The IHS Markit/BME Germany Manufacturing purchasing managers index (PMI) showed a slight uptick in October to 41.9, up from 41.7 in September, but below market expectations of 42. Anything below 50 is considered a contraction in activity. The number for September was the worst reading since the financial crisis.
“Hopes of a return to growth in Germany in the final quarter have been somewhat dashed,” Phil Smith, an economist at IHS Markit, which produced the PMI data, told Bloomberg.
In the US, business equipment declined for a second consecutive month in September. Caterpillar made news recently when it reported disappointing third-quarter figures and cut its full-year profit forecast. The equipment manufacturer is viewed as somewhat of a proxy for industrial activity. Caterpillar said that its earnings would take a hit as major companies hold off on equipment purchases due to concerns about the health of the global economy.
“Even if growth in these big economies were not contracting, Nigeria sits on a ticking time bomb and needs to aggressively diversify its economy by investing in gas production and monetisation, agriculture and manufacturing,” Ayodele Oni, energy partner at Bloomfield Legal Practice, told BusinessDay.
“The government has to be deliberate about supporting local manufacturers such as Innoson Motors just as South Korea has done with Hyundai and Kia, the private sector will in turn pay taxes,” Oni said.
The future of fossil fuel-powered internal combustion engines now hangs on the line too, which foreshadows further reduction in demand for petrol and diesel. More than nine countries and a dozen cities or states have announced what the media has called “bans” in the last few years.
Frank Jensen, Copenhagen mayor, wants the city to end all new diesel cars starting this year. In 2017, Paris, Madrid, Athens and Mexico City said they would remove diesel cars and vans by 2025. Norway will phase out conventional cars by 2025, followed by France and the United Kingdom in 2040 and 2050, respectively.
“In the next 10 years, electric cars will become more popular, even in Nigeria. They are easier to maintain and Nigeria may have challenges finding profitable uses for its crude oil. We need to invest in renewables or miss the train,” Oni said.
However, as internal combustion engines-driven demand for crude oil fades, global petrochemicals demand is expected to grow three to six times the global crude oil demand between 2018 and 2026.
The global compound annual growth rate from 2018 to 2026 for petrol, propylene and paraxylene is greater than 1 percent, 4 percent and 5 percent, respectively. This demand growth is being driven by the rise of the middle class in emerging nations.
But Nigeria is not in a position to take advantage of the coming petrochemicals boom except Dangote’s refinery comes on stream next year.
This is because after years of neglect, Nigeria’s refineries with a combined capacity of 446,000 barrels per day – which include the northern Kaduna refinery with 110,000-bpd installed capacity, two plants located in Port Harcourt with an installed capacity of 210,000 bpd, and the Warri refinery with an installed capacity of 125,000 bpd – have not operated beyond a quarter of their installed capacity, mainly due to attacks on pipelines carrying crude to the plants as well as technical problems.
STEPHEN ONYEKWELU
