As energy, raw materials crises push manufacturers to the cliff

Governments, households, and firms are grappling with an energy and cost-of-living crises that were exacerbated by the war in Ukraine. For Nigerian manufacturers, this was not the expectation at the beginning of the year, even though some of the challenges had lingered. With high inflation and rapidly tightening monetary policy however, local manufacturers are worried about sustainability with limited capacity to bear more shocks. FEMI ADEKOYA writes.

There have been arguments that persistently high prices could create lasting damage, erode competitiveness in high-energy manufacturing activities, causing losses in market share, and prompting companies to relocate to countries with lower energy costs.

Though some manufacturers have threatened to move their production bases out of Nigeria owing to several factors, the energy crisis however is not an isolated situation, as many global firms struggle to find a balance between price stability and rising energy costs.

For Nigeria however, the peculiarity of the challenges borders on the fact that energy from the grid remains unreliable, pushing many firms to alternative sources of energy.

For instance, the manufacturing sector’s expenditure on alternative energy sources soared to N67.8 billion in the first half of 2022 (H1’22), about 110 per cent, year-on-year (YoY), from N32.2 billion in the corresponding period of 2021 (H1’21).

The Manufacturers Association of Nigeria (MAN) disclosed this in its H1 2022 Economic Review made available at the weekend. The report indicated an increasing dependence by the nation’s manufacturers on self-generated power supply for their operations.

Commenting on the development, the Director General, MAN, Segun Ajayi-Kadir, said: “The poor power supply from the grid fueled self-energy generation among manufacturers as expenditure on alternative energy source soared to N67.77 billion in the first half of 2022 (year-on-year) up from N32.18 billion recorded in the first half of 2021, and N45.04 billion of the second half respectively.

“Although, average daily supply to the sector increased marginally to 12 hours in the first half of 2022 from 11 hours in the second half of 2021, the average number of outages per day increased six times from three times recorded in the preceding half, which more than off-set the increase in supply in the period.”

Ajayi-Kadir further noted that the harsh operating environment pushed manufacturing output growth down from 5.8 per cent recorded in the first quarter (Q1’22) to 3.0 per cent in the second quarter of the year (Q2’22).

To address the issues, MAN recommended that government should “carry out further investment in the electricity value chain and commit to adding 10,000MW to the current electricity distributed in the country; embrace and support significant development of energy mix”, noting that the country has huge potentials for solar and wind.

The Association also called for the resuscitation of the existing national refineries to produce fuels locally. “Review the gas price for domestic consumption to be in tandem with the export price, which is about $3.25 per cubic meter, improve the level of forex allocation to the productive sector including manufacturing,” MAN added.

Using advanced energy system modelling techniques, Wärtsilä’s analysts had earlier outlined the most cost-effective power system that can be built in Nigeria year after year to reach net zero by 2060.

According to Wärtsilä’s report, the optimal power system will consist of 1,200 GW of renewable energy capacity and require a total of 283 GW of energy storage and 34 GW of engine-based power plants for grid balancing purposes.

The research shows that investing in renewable energy and flexibility from gas engines and energy storage is the best way to reduce energy costs, increase energy access and improve grid reliability. With this strategy, the cost of electricity generation is predicted to drop by 74 per cent by 2060 compared to 2022 levels, and carbon emissions will drop to zero.

This in-depth energy modelling exercise also reveals the key role that Nigeria’s domestic gas will play to enable a smooth energy transition. Nigeria’s vast domestic gas reserves can be mobilised as an inexpensive bridging fuel, to power balancing engines in support of intermittent renewable energy generation, until gas engine power plants begin to be converted to run purely on green hydrogen starting in the early forties.

“If the power system expansion roadmap presented to the report is successfully implemented, by 2060 Nigeria’s power system will be fully decarbonised and able to meet the energy needs of our country’s rapidly growing population. The key components of our power system will be renewables, supported energy storage technologies, together with grid-balancing engines that have been converted to run on green hydrogen. As early as 2032, Nigeria can reach universal access to electricity, and the inefficient, expensive, and polluting diesel generators still widely used today will be history.”, said Wale Yusuff, Managing Director of Wärtsilä in Nigeria.

However, delivering on this ambitious plan will require enormous investments, estimated at $18.7 billion until 2030 and $425 billion until 2060. “Attracting that level of investment is possible, but not without significant policy reforms. Despite the many government efforts to implement an increasingly strong legal framework, project developers and sponsors must still navigate a very complex and uncertain system that adds excessive investment risk.”, warned Wale Yusuff.

With its huge gas reserves and high renewable energy potential, Nigeria has all the natural resources necessary to lead the country to a successful energy transition. If the country can improve its power transmission infrastructure, develop a sound policy framework, and deploy a data-driven power expansion plan based on renewable energy and flexibility; it will take a giant step towards its goal of securing universal access to affordable, reliable and fully decarbonised electricity.

On cost of funds to manufacturers, MAN noted that the average lending rate in the period, under review rose by 4.5 percentage points to 23.5 percent in H1 ’22 up from 19 per cent in H1’21.

“Average lending rate to the sector from the commercial banks increased to 23.5 percent (year-on-year) up from 19 percent of the corresponding half in 2021, but declined by 0.5 percentage point when compared with 24 percent interest charged to manufacturers in the second half of 2021.

“The growing lending rate in the economy is underscored by among others, the upwards review of the Monetary Policy Rate (MPR) from 11.5 per cent to 13 percent by the CBN in May 2022 even though the asymmetric corridor at +100/-700 around MRP; Credit Reserve Ratio (CRR) at 27.5 per cent and Liquidity Ratio at 30 percent remained unchanged; and the rising global interest rate due to the Russian-Ukrainian face-off,” MAN stated in the report.

The manufacturers also lamented that the “sector is generally faced with limited investment in domestic production of raw materials for utilisation in most of the sub-sectors, which is as result of limited funding and policy incentives in the country”.

Specifically, manufacturing sector local raw materials utilisation steepened to 52 percent (year-on-year) in the first half of 2022 down from 53 per cent of corresponding half in 2021; thus, indicating 1 percentage point decline over the period. However, it increased by two percentage points (half-on-half) when compared with 50 per cent recorded in the second half of 2021.

MAN noted that the Basic Industrial Chemical sub-sector faced severe inactivity in the first six months of 2022 due to lack of domestic production of basic chemicals, hence calling for the need to resuscitate the local refineries to encourage investment in petrochemical development in the country.

“The current performance of the sector suggests that it is not ‘Uhuru’ and emphasises the need for more proactive, broad and sector focused measures to address both the recent challenges thrown up by the Russian-Ukrainian war and other perennial challenges.

“MAN has, therefore, urged for an improved level of forex allocation to the productive sector including manufacturing, leveraging on the high and sustained crude oil prices in the international market,” MAN stated.