The Nigerian Economy: Riding On Global Commodities Market Waves


Thursday, January 18, 2018 /11:50 AM /FDC

Commodities, also referred to as primary products, are raw materials extracted from the earth under-going little or no manufacturing or refining process. Commodities include fuels, agricultural products, minerals, ores, and metals, and they are traded on the commodities market. Of the emerging economies, countries in Africa have remained highly dependent on commodities.

More than two-thirds of African countries are over 80% reliant on commodity exports when compared to their total export value, while manufactured goods and services ac-count for the remaining exports. Even more remarkable, Nigeria is over 97% reliant on commodity exports, while services, capital, industrial and other goods account for the rest of exports).

Nigeria mainly trades in fuels, which constitute 96% of export revenue; and agriculture products and other minerals each represent 1% of export revenue16. Considering that the prices of commodities are not solely determined by the Nigerian economy, but by the interplay of demand and supply for commodities in the international market, it becomes imperative to be aware of economic variables that positively or negatively impact commodity prices in the inter-national market.

Furthermore, the economic prosperity of our major importers (e.g. India and United States) will have a far reaching effect on our ability to increase export revenue. A boost in the economic performance of Nigeria’s export trading partners will be accompanied by an increase in the demand for its goods and services. Conversely, a slowdown in the economies of Nigeria’s major trading partners will have a negative effect on the trade balance. This highlights the volatility of Nigeria’s commodity traders to the external environment.

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Oil remains volatile as always
Nigeria is highly dependent on crude oil, the most important commodity to the Nigerian economy (as an export revenue source). Nigeria produces Bonny light, a high grade of crude oil which is low in sulfur and has a lower environ-mental impact than most fossil fuels. It is benchmarked against Brent crude, one of the major benchmark prices for crude oil world-wide. Although crude oil contributes just around 10% to Nigeria’s GDP, it accounts for 86% of Nigeria’s export revenue, making it the main revenue source to financing government’s recurrent and capital expenditure18. The fragility in oil production and prices was the main trigger for Nigeria into recession in 2016, as the country recorded negative growth in two consecutive quarters. So it was no surprise that Nigeria’s exit from recession also coincided with the positive growth of the oil sector in Q2’17 and Q3’17.

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In the last four years, crude oil has witnessed some level of volatility partly due to the slump in demand by highly industrialized economies and to a larger extent, the abundant oil output relative to aggregate demand. Crude oil eventually hit a snag in the second half of 2014. It lost almost half its value to trade at an average of $52.44/barrel in 2015 from $99/barrel in 2014, and hit a decade low of $43.69/barrel in 2016.20 The fragility led to the strategic alliance of most oil producing countries, in a bid to control output and ultimately control price. This pact, which will lapse by the end of 2018 yielded some desirable results as crude oil prices climbed up to $69.80/barrel as at 11th of January 2018.

The main threat to maintaining a crude oil price above $60/barrel is a glut in the global supply and rising US crude. First, high crude oil prices act as an incentive to produce more shale oil – which will increase global output and negatively impact price. Second, the non-compliance of pact members or the exit of  key stakeholders, such as Saudi Arabia and Russia will negatively affect prices. Although the latter is unlikely, a possible misalignment in objectives among members would disrupt the balance and eventually lead to another glut in global supply and a crash in oil prices

Agricultural raw materials have seen growth but still have a long way to go
In spite of oil, agriculture remains the back-bone of the Nigerian economy, as it contributes about 21% to GDP and is the main provider of income, employing more than two-thirds of the entire labor force. Even during the economic downturn, the agricultural sector was one of the rare sectors to maintain positive growth. Accordingly, the Nigerian government has identified agriculture and processing as one of the sectors that will aid the export revenue diversification initiative of the government, propelling economic growth in Nigeria. 

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With abundant arable lands, agriculture in Nigeria has the potential to drive foreign exchange earnings. However, Nigeria has only achieved self-sufficiency in a few crop productions, like, cocoa, rubber and cassava – Nigeria remains the second largest producer of cassava in the world23. Ironically, it has been a major importer of staple foods especially wheat, rice, maize - which are consumed in high quantities but could be cultivated in the country (with the exception of wheat). This has adversely affected the economy’s current account balance. The tilt towards a more export focused agrarian economy has exposed Nigeria to the interplay of global demand and supply in agricultural commodities.

Cocoa production, which is used to produce chocolate, has been Nigeria’s leading food foreign exchange earner. The sector contributed 0.19% to total export value for Q3’17.24 Cocoa production benefited from favorable weather conditions during the year, eventually leading to a glut in supply. Cocoa yields also improved in Nigeria, but Nigeria lags behind its West African counterparts, Ivory Coast and Ghana, which ac-count for more than 50% of global supply. The glut in cocoa output saw cocoa prices decline from $3,390 in December 2015 to a low of $1,809 in December 2017.26 EIU’s 2018 outlook for cocoa establishes that global output is likely to remain in excess of demand, so cocoa prices will hover around cur-rent prices. However, there is also the opportunity to en-gage in cocoa powder and butter processing, which generates more income com-pared to raw cocoa exportation, given the competitive rivalry in raw cocoa exportation.

Sesame seed, popular for its oil, is another foreign ex-change earner that has gained 
traction due to interests from Europe and East Asia. In Q3’17, sesame seed exportation closely followed cocoa, contributing 0.16% to total export value. Sesame seeds are used to cook and also for health benefits. Sesame seed is widely used for baking, medicine, animal feeds and oils in key regions like India, China and Turkey. Considering its health benefits, the growing preference for organic foods will likely see the global sesame seed market soar. This would further bolster Nigeria’s trade in sesame seeds, and an opportunity for investors to widen its customer base, leveraging on its labor and arable lands. 

Moving forward with commodities in 2018
According to the EIU, the commodities market outlook for 2018 will be mixed. Average oil prices will rise by 7%, owing to the pact between OPEC and Russia. Russia is likely to maintain this agreement in the short term as the country recovers from 2 years of recession. Agricultural prices will remain weak in early 2018, owing to bumper harvest. Weather conditions are expected to be favorable during the year. However, the uptick in world population and average income levels will absorb some of this excess supply, mitigating the adverse effect of the glut 

Consequently, Nigerian investors in the commodities value chain need to diversify their portfolio, either vertically or horizontally. Vertical diversification would support a shift from the production and distribution of raw materials to refining and processing these raw materials, and manufacturing final products. Horizontal diversification would entail embarking on new product development outside of respective commodity portfolios. Horizontal diversification is particularly important for investors in fuel commodities, as the world moves to embrace alternative energy sources that are more ecologically sustainable, i.e. renewable energy. This will reduce the relevance of fossil fuels, and negatively impact prices.

To further bolster economic growth, Nigeria needs to strive in the development of other revenue sources like manufacturing, agro-processing and services, so as not to be caught in the evolution of renewable energy. Maintaining status quo will be unfavorable to Nigeria’s long term economic development, as our overreliance on commodities will at best lead to a meek economic growth. The federal government of Nigeria, through its ministries, department and agencies (MDAs), has moved to intensify its revenue earning potential by attracting investors, through foreign portfolio and direct investments in industrial and infrastructural development. Its ability to facilitate trade beyond commodities without being complacent will be a key decisive factor in accelerating sustainable economic growth in Nigeria.

Despite a tepid recovery in 2017, Nigeria has been poised to grow by only 2.1% in 2018, based on stable crude oil production and price, and a boost in non-oil earnings of the economy.28 However, with limited funds at its disposal, Nigeria needs to be efficient, in taking decisions on ‘what to produce’, ‘how to produce’, and ‘for whom to produce’, in order to pull off this feat.

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