Thursday, August 06, 2015 16:44 PM / ARM Research
In today’s cut-out of ARM Research core strategy document – Nigeria Strategy Report, we continue with their review of key economic indicators by taking a look at the balance of trade over H1 15 and their expectations thereafter.
Beleaguered oil exports drive negative trade balance
In line with our dour outlook for trade surplus, Nigeria recorded a trade deficit of $982 million over the first five months of 2015. On a quarterly basis, exports weakness (-45% YoY, -26% QoQ to $12.3 billion) offset cutback in imports (-14% YoY, -27% QoQ to $13.6 billion) resulting in trade deficit of $1.3 billion over Q1 15. However, despite 44% YoY moderation in exports to $8.5 billion and commencement of ECOWAS common external tariffs (CET) in April 2015, stronger import contraction (-33% YoY to $8.2 billion) underpinned positive trade balance of $326million over Q2 15.
Adducing the drivers, historically dominant role of oil in total exports remained in place as depressed Brent Crude prices over the period (-50% YoY) and slightly lower average oil production(-2% YoY to 2.18mbpd in Q1 15) largely accounted for export weakness. On the import side, breakdowns provided by the NBS reveal cutbacks in fuel and lubricants (-9% YoY) and transport equipment & parts (-35% YoY) as underpins for slowdown in import demand. On the latter, weakness in passenger motor cars (-40% YoY) following the raised tariff regime. However, the drop in the fuels and lubricants appears subdued especially in light of slash in PMS import allocation to 1.5million MT, difficulties in obtaining financing from banks on mounting uncertainty over the PSF scheme and lower refined product prices, suggesting our expectations of the impact of these drivers may be yet to materialise.
Figure 1: External trade data
Rising US shale production and changing global refinery architecture moderate appetite for Bonny light
Before the quantitative impact of oil price plunge on crude oil exports, rising shale oil production which progressively insulated US market from imports had driven changes in Nigeria’s export destination. As the shale phenomenon then became entrenched, with output reaching an all-time high in H1 15 despite low oil prices, and amid rising dominance of Asian and Middle-Eastern refineries in the global market (ex-US) and lack of investment in Europe’s refining industry, pervasive price discounting among market-share seeking OPEC members on crude exports to Asia is now driving crude oil inventory overhang in Nigeria).
Dissecting NNPC data over Q1 15, impact of rising shale production was evident as US share of oil exports extended declining trend since 2012 by shrinking 100bps QoQ to 3% of total exports. Elsewhere, weak economic growth in Q1 15 and increasing energy independence on rising domestic production in Brazil, which drove slower oil imports, resulted in 3pps QoQ contraction in South American share of Nigeria’s oil exports.
Figure 2: Breakdown of Nigeria’s oil exports by region
Whilst European share continued to rise (+2pps QoQ to 44%) with actual exports rising 8% from Q4 14 to 87.3mbpd, crude shipments to Asia contracted 9% QoQ to 44.4mbpd with export share declining 2pps to 23%. The decline in Asian share of exports and higher off-take of Middle-Eastern crude grades partly reflects lower freight costs due to geographical distance and changing refinery architecture towards processing of complex crude grades which contain more petrochemical extracts. Growing demand for these complex grades reflects advances in technology which permit higher extraction of inputs for manufacturing and industrial complexes in China and India, in contrast to previous preference for light oil such as Nigeria’s.
Compounding oil export woes for Nigeria is the halt in exports to Oceania since Q4 14 due to the mothballing of several refineries in Australia which has resulted near total dependence on imports for refined fuel supply. Over the last seven years, all of but four of Australia's refineries have either been idled or converted into fuel terminals, largely driven by stiff competition from Indian refineries. On a positive note, African share of Nigeria crude climbed 4pps QoQ to 22% driven by increasing exports to Cote d’Ivoire and South Africa. Overall greater preference for more complex crude oil grades and collapse in light sweet crude market in the US has resulted in Bonny light pricing to dated Brent swinging from a premium of $0.46/b to a discount of $0.06/b as at April 2015.
CET implementation holds upside to import demand
On the import side, following several postponements over the last decade, agreement by ECOWAS Heads of state in December 2014 and subsequent finance ministry approval at the end of Q1 15 saw the Nigeria Customs Service (NCS) commence CET implementation in April 2015. The CET harmonizes the tariff framework across Anglophone ECOWAS members with existing customs union in WAEMU countries into a five tier system with the first four outlined below.
Table 1: CET Regime
To counter local industry protection concerns, largely voiced by Nigeria, a fifth tier to be taxed at 35% was created for 177 “specific goods for economic development” which would be determined at country level. Under the new tariff regime, previous import prohibition lists will now apply to non-ECOWAS goods henceforth. The merged tariff rates eliminates incentives provided by tariff disparity for import duty shopping by importers among ECOWAS countries and subsequent smuggling to beat higher tariffs in countries like Nigeria. Already the move has resulted in FGN lifting the ban on furniture and textiles subject to a 35% tariff in April 2015. The tariff harmonization should incentivize coastal countries to work towards making their ports preferred import destinations to attract greater trade flows and by extension fiscal revenues. In addition, the lower tariff regime implied in the CET raises scope for uptick in ECOWAS share of Nigerian imports which has averaged 2% of total imports over the last three years.
Intensifying competition in export markets and tame oil price outlook keep trade balance outlook negative
In line with our subdued base case for oil prices in H2 15, resumption in exports of Iran’s two crude grades (light and heavy crude oils) adds fresh layer of concern to Nigeria’s export markets. Post the 2011 round of sanctions which shut-in 1-1.2mbpd of exports, the EU which mostly purchased Iranian light crude oil (25% of Iranian shipments) substantially increased imports from Nigeria and Saudi Arabia. Similarly, Asian countries (ex China which preferred heavier grades) replaced Iranian volumes with Nigerian crude grades. Whilst preconditions included in the P5+1 deal delay on-streaming of Iranian exports to 2016, markets could commence pricing in an estimated 20-30mb of Iranian crude inventory. Furthermore, recent discussions with European energy producers, Eni-Agip, Statoil and Total, who operated much of Iran’s oil wells prior to sanctions, point to erosion of Nigeria’s European export market. Elsewhere, we see continuing economic weakness in Brazil, US energy independence and aggressive discounting by Arabian oil producers driving an extension of H1 15 trends with sustained pressure on both Bonny-light prices and total oil export volumes.
Figure 3: Iranian oil exports: Market share
On the import front, clarity by the Buhari administration that fuel subsidies will continue to exist in the interim even as fuel import allocation has been increased 6% QoQ to 1.6million MT for Q3 15 indicate there could be a recovery in fuel imports. Nonetheless, recent CBN circular proscribing FX access to 41 items (including rice, textiles, furniture etc) and rising parallel market FX rate should temper import demand, especially amid funding constraints. Similarly, whilst lower tariff implicit in CET implementation provides incentives for importers, small size of ECOWAS imports narrow scope for this avenue to significantly stoke import demand. On balance, subsisting weakness in oil export account should continue to offset largely restrained import picture to drive negative trade balance over H2 15.
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