Thursday, May 12, 2016 9:42 AM / Uwadiae Osadiaye /FBNQuest Research
1. FG announces new petrol price band to reflect parallel market fx rate
2. Implication - Increased product supply and competition for major marketers
Yesterday, following a meeting between top government officials, leaders of the national assembly and labour unions to discuss the current petrol scarcity, the minister of state for petroleum, Ibe Kachikwu, announced a new price ceiling for petrol of N145 per litre. He noted that the cause of the current scarcity, which has persisted for several months, is the inability of petroleum product importers to source the required fx at the official rate given the decline in the nation’s foreign reserves.
The pressing issues include
i) the outlook for global oil prices remains subdued; as such, a quick build up of fx reserves is remote and
ii) the Petroleum Product Pricing Regulatory Agency’s (PPPRA) product pricing template assumes that all transactions for imports are carried out at the official fx rate.
This assumption was problematic. Given that around 50% of national petrol consumption was previously met by the private sector, the inability of this group (mainly independent marketers) to source fx at the official rate led to an unprofitable venture for many marketers. Hence the NNPC has had to carry the supply burden alone, sourcing its fx from the central bank with much difficulty. However, this strategy has not succeeded in meeting the national demand of around 45 million litres of petrol per day. We note that price modulation is still the preferred pricing mechanism for the government. Given that price ceilings are still set by the government we cannot conclude that yesterday’s announcement ushers in full blown deregulation. Price ceilings will be set in tandem with market realities. When crude oil prices rise, the PPPRA’s price ceiling will also be increased and vice versa.
In defence of the government, several attempts have been made by the NNPC to remedy the situation, such as its crude forward sales program and its attempt to encourage upstream exploration & production (E&P) companies to supply fx to major marketers. Given that the queues at petrol stations remain, yesterday’s announcement suggests that the FG may be seeking a more long term solution to fx shortages. The government stated that petroleum product importers are now free to import petrol, subject to existing quality specifications and other guidelines issued by regulatory agencies. Also, oil marketers will be allowed to import petrol on the basis of fx procured from “secondary sources” and the PPPRA template will reflect this in the pricing of the product. We interpret secondary sources as the parallel market.
We believe the likely implications are, firstly, quarterly import allocations by the PPPRA may cease to exist and marketers would be allowed to import products as each firm determines. Secondly, the PPPRA’s product pricing template’s fx assumption would now reflect the fx rate at the parallel market. The second point is the real game changer and should see the re-entrance of many industry participants, mainly the independent marketers. The policy change also suggests that the PPPRA would have to monitor two variables going forward, crude oil prices and fx rates at the parallel market, as opposed to only oil prices previously. We expect increased pressure on parallel market rates to be a major fallout of this decision.
Late yesterday, the PPPRA announced a new price band of N135-145 per litre for non-NNPC imports, with total cost-to-pump at around N138/l. The PPPRA did not disclose the fx rate which was adopted. Also, we are yet to determine if the fx rate assumption for NNPC imports would also now be at parallel market rates. We do not expect a strong push back from organised labour given that it was carried along and should understand the circumstances that led to this decision.
Broadly speaking, major marketers posted stellar y/y PBT growth in Q1 2016. We understand that the ability to source fx required for product importation, mostly from IOCs, supported growth and increased market share. Total Nigeria was a key beneficiary of the market anomaly during the period. However, we expect more competition in H2 2016 given that independent marketers are likely to re-enter the market now that importation is economically viable.
Nonetheless, if fx supply agreements with the IOCs remain, at the official rate, major marketers could have a pricing advantage. Given the supply gap we still expect pump sale prices within the PPPRA price band on average. This could lead to gross margins expanding nicely, especially for the marketers under our coverage, Total and Mobil.
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