Rising diesel cost chokes businesses

Rising diesel costs are squeezing businesses across the country, threatening to stall economic growth and pushing some companies to the brink, BusinessDay’s findings have revealed.

Diesel, the lifeblood of industries reliant on transportation and heavy machinery, has seen a dramatic price increase in recent months, putting a stranglehold on profit margins and forcing difficult decisions.

“We’re basically working for peanuts now,” Juwon Adesanya, owner of a local trucking company said on social media platform X. “Every delivery we make is less profitable, and I can’t raise prices overnight without risking losing customers.”

Read also: Truckers woes worsen as diesel price doubles

Adesanya’s struggle is not peculiar. From delivery services and construction firms to agricultural giants and manufacturers, businesses that rely on diesel are feeling the pinch

The cost of diesel has eaten away at our margins. We’ve had to cut back on deliveries and even lay off some drivers just to keep the doors open,” said Wasiu Sekoni, who runs a printing press in Shomolu, Lagos.

BusinessDay’s findings showed the price of diesel in Nigeria has gone from N312 per litre in January 2022 to as high as N1,700 in March 2024, indicating a more than 400 percent increase.

The unreliable power supply from the national grid has forced companies across the country to rely heavily on diesel-powered generators to keep their operations running.

Businesses are forced to rely heavily on alternative sources of power, such as generators, which are significantly more expensive than grid-supplied electricity. This not only eats into their profits but can also hinder production and disrupt operations.

“We’re trying to be creative and find ways to cut costs elsewhere,” said Emeka Okafor, chief operating officer of Sepraco Group. “But there’s only so much we can do. If diesel prices keep rising, we’ll have to raise our product prices, which will hurt consumers in the end.”

The latest Confidence Index report from the Manufacturers Association of Nigeria (MAN) identified the high cost of energy as the foremost challenge facing manufacturing in the country.

According to MAN, this challenge is compounded by high credit costs and lack of loanable funds, multiple taxes, charges, levies, consistent tax policies for local producers and importers, raw material unavailability and delays in receiving imported raw materials, high raw material costs, forex scarcity, high exchange rates, and poor forex allocation.

A recent analysis by BusinessDay revealed that several listed companies experienced a substantial increase in energy expenditure last year.

The combined energy costs for the firms reached N275.41 billion in 2023, a sharp rise from N216.77 billion in 2022

The cement industry appears to be particularly affected, with BUA Cement leading the pack. Their energy costs skyrocketed by 86.5 percent to N123.26 billion in 2023 from N91.18 billion the previous year.

Dangote Cement also saw a significant increase of 49.8 percent, with their energy expenditure reaching N399.20 billion from N266.48 billion. Lafarge Africa wasn’t spared either, experiencing a 21.62 percent rise in energy costs to N75.66 billion from N62.20 billion.

“The situation is causing a domino effect,” Janet Okojie, a professor of energy economics said. “Higher diesel prices lead to higher transportation and production costs, which then translate to higher prices for consumers. It’s a vicious cycle that requires a multi-pronged approach to address.”

Analysts said this significant rise in energy costs underscores the challenges faced by businesses in Nigeria, particularly in maintaining operational efficiency amidst increasing expenditures.

Bala Zakka, an energy analyst, said manufacturers can’t afford to incur additional costs, considering the state of the Nigerian economy

Before now, small businesses were already groaning in pain due to lack of electricity. With the increase in tariff, their operating cost will go up and what that means is an increase in the cost of goods and services,” he told BusinessDay.

Nigeria is currently suffering from lower power supply because many gas suppliers have reduced their output, while others stopped supplying the commodity to power-generating companies due to the indebtedness of the generation companies to gas-producing firms.

Muda Yusuf, director of the Centre for the Promotion of Private Enterprise, said the implications of the increase in the pump price of diesel would result in increased production costs for industries.

“Most small-scale producers are dependent on diesel generators as alternative sources of energy and this means that the production costs for them will go up. When you combine this with the forex crisis and all the other problems manufacturers are battling with, you can only imagine what will happen in the next few months,” Yusuf said

A German think tank, ifo Institute, said “a sufficient and constant supply of electricity is indispensable for the economic development of industrialised countries.”

But Africa’s biggest economy, with over 200 million people, receives only 4,000 megawatts daily.

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