Fuel Imports: The Real Cabal

fuel trucks

A cursory survey of media reports on the downstream oil sector suggests that the prevailing popular belief is that a predatory cabal has a vice grip over the business of fuel importation.

 There is concern, therefore, that this, presumably, vicious class of businessmen would do everything to ensure that refineries will never work, and that the subsidy regime would subsist, while fuel supply will continue to be carefully manipulated to regularly induce artificial scarcity so that bountiful profits can be harvested from the attendant sufferings and economic dislocation deliberately caused by the oil cabal.

It would probably be more difficult to find a contrary view to the above popular perception, than it is to find the proverbial needle in a haystack. Besides, the widely reported ‘extreme’ annual subsidy values seem to also confirm that these fuel barons make a kill on the back of fellow Nigerians.
Furthermore, despite several allegations that marketers collect billions of Naira as refund of subsidies on fuel supplies which were never delivered, no convictions have, surprisingly, so far resulted from EFCC’s tenuos efforts.

Nonetheless, it will be useful to examine the process of fuel importation more closely to actually identify the real beneficiaries in this business. Indeed, the major oil marketers, Total, Mobil, Oando, Conoil, NNPC inclusive, and a few others have not been fingered for collecting subsidy with fake import papers. However, it may be more difficult to vouch for the innocence of the motley subset of hundreds of indigenous independent marketers, as this class also accommodates the ubiquitous briefcase importer, who is clearly, a more footloose buccaneer.

Sadly, much to the chagrin of the public, the snail speed procedure for prosecuting financial crimes, may, postpone judgment day for fuel subsidy racketeers, while a judicial process that is allegedly compromised may actually also set the guilty free. However, let us examine, hereafter, how profitable the fuel supply business is for bonafide importers, who have to borrow billions of dollars and Naira to finance their operations.

The available data from the National Bureau of Statistics indicates that fuel accounts for over 40% of Nigeria’s total foreign exchange expenditure on imports annually. Thus, the consolidated forex requirement for genuine importers will exceed $5bn annually. Instructively, commercial banks would buy the required dollars, predominantly, from the Central Bank at the official rate and then add between 1-2% premium on their purchases before selling forex to importers; the banks could easily earn up to $100m from such simple exchange transactions.

However, the premium on each dollar sold may well exceed N10 per dollar, whenever dollar is relatively scarce and the parallel market exchange rate is over N220 while official rate remains below N200/$ as is currently the case. It is also not immediately obvious to non business persons, that the same banks lend fuel importers the Trillions of Naira which they subsequently exchange for dollars; presently, marketers would pay between 17-20% interest for the Trillions of Naira borrowed for fuel imports.
Furthermore, importers would also require additional Naira loans to settle port, storage and other ancillary domestic charges. Thus, the already high consolidated cost of importation will still become further compounded with the other bank charges, such as COT, L/C establishment, loan administration, insurance and of course, the legal fees to perfect each contract.

Worse still, ultimately, the ‘now customary’ extended delays preceding government’s release of subsidy refunds to marketers, will also lead to unexpected open-ended additional costs; thus, each cycle of import may attract well over 10% consolidated interest charges, from which banks may earn over N100bn additional income. Ultimately, the relatively modest 3-4% gross margins which marketers projected on shorter turnaround cycles for their imports will become extensively breached because of delayed payments, while the ‘unexpected’ failure of the venture may become a major inducement for hyper stress for genuine fuel merchants.

Sadly, the woes of fuel importers could still be further compounded if the Naira exchange rate also depreciates against the dollar before subsidy claims are finally settled, especially if government foot drags or denies liability for delayed payments and the attendant exchange rate differentials.

 Indeed, the recent 20% devaluation of the Naira may have inadvertently added over N200bn($1bn) to the annual cost of fuel import; thus, any additional delay in the settlement of the existing claims for payment delays and exchange rate differentials would in turn, further increase the attendant interest burden for marketers.

Indeed, the longer it takes to settle the alleged current outstanding claims of almost N300bn, the heavier will be the ultimate debt burden to marketers particularly if the official dollar rate appreciates above N220 as per current speculation. Expectedly, the reluctance of marketers to commit to fresh orders for fuel supply will inevitably induce domestic scarcity which will also trigger a spiral in the black market price of fuel.

Thus, with the constant abiding threat of negative profit, it is difficult to understand how any sane businessman would wish that such an oppressive business model should continue. Nevertheless, without the steady cash flow from fuel marketing, the existing heavy debt obligations would ground the activities of marketers and increase the burden of maintaining their existing substantial investments in storage and supply infrastructure nationwide, while unserviced overheads and recurrent expenses would deepen their agony and ultimately cripple their businesses.

What shines through from the above narrative is the extreme good fortune of the banks, as heads or tails they win; clearly, therefore unless, this business model changes, the major oil companies, and genuine independent marketers may eventually opt for self preservation and, divest from the downstream fuel business. Comparatively, however, the superior profitability of banks is obvious from the relatively bountiful 10-15% net surpluses generated annually, while, conversely, fuel marketers, will be lucky to post net returns of 2-3%.

These divergent relative profit indices are incidentally also clearly reflected in the price earning ratios of the respective equities in both sectors.
Although abolition of price control would minimize interest charges on delayed payments, but in reality, banks profitability will still be sustained especially if shorter turnaround order cycles also lead to increase in loans sought by fuel marketers.

Evidently, the foregoing discussion does not validate the widely held view that marketers form the core cabal that allegedly opposes the abolition of subsidy. Indeed, it is more likely that genuine marketers, would prefer an unencumbered ambience, with prices which are determined by market forces, so that budgeted profit margins will be secure from the destabilising vagaries of a fuel subsidy regime, and marketers will escape the fatal damage that payment delay and Naira devaluation could inflict on their business.
Save the Naira, Save Nigerians

Source: Vanguard