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Nigeria’s heavy import dependence exposes it China’s energy crisis

China’s power shortages hit growth in the world’s second-biggest economy, threatening more pain for global supply chains and Nigerians would feel the heat this festive season. Last week, Nigeria’s headline inflation rate slowed once again as it recorded a decline from 17.01 percent in August to 16.63 percent in September representing the 6th consecutive monthly decline and the lowest inflation rate in the last 8 months. This trend, however, is likely to reach its point of inflection on the back of the upcoming festive season and China’s current economic crisis (shortage of coal and Evergrande real estate crash). Unlike the popular Las Vegas anthem which says that “what happens in Vegas, stays in Vegas”; for China, the narrative is different. Whatever happens in China, does not stay in China, it spreads to various economies and Nigeria happens to be caught up in this mix. The impact of the current Chinese debacle is most definitely going to be felt in the Nigerian economy during the coming festive season as prices of commodities ranging from food and gift items to electronics and automobiles would experience soaring prices at all levels. Over 23 percent of Nigeria’s imports come from China and Nigeria’s heavy reliance on Chinese imports creates the perfect channel for imported inflation. Read also: Nigeria’s inflation slows for 6th straight month in September BusinessDay analysis revealed that statistics of China’s major exports to Nigeria include electrical machinery (27.4%), computers (17%), plastics (3.7%), vehicles (2.9%), toys and games (2.8%). Thus, if China crashes, these products would become scarce and a lot more expensive. Demand pressures for these commodities during the festive period coupled with the possible deregulation of the downstream oil sector which is expected to accompany the implementation of the Petroleum Industry Bill would threaten the trajectory of prices by way of a higher cost of premium motor spirit (PMS) as the international oil market still remains relatively bullish. China is halfway back to the stone age as Xi Jinping, the President of the Federal Republic of China has been struggling to keep the lights on. His hybrid economy is literally going dark. Factories are not powered, homes are dark due to electricity unavailability; even traffic lights and street lamps are being turned off. This energy crunch started in pockets, a handful of factories began shutting down in August, now it’s a national crisis that is gradually transforming into a global one. All these could be owed to China’s overdependence on coal. As countries around the world race to secure energy supplies as demand picks up and the festive season draws near, prolonged periods of high commodity prices, oil prices, natural gas prices, and coal prices should be expected. The global energy crunch has been gaining momentum over last week with pricing fundamentals increasingly pointing towards a much more prolonged period of high gas and coal prices as electricity generation became a price concern across the Atlantic Basin and Asia. Nigerian Petroleum Minister, Timipre Sylva stated that “European gas futures have already moved beyond a crude oil equivalent of $200 per barrel, boosting gas-to-oil possibilities wherever they remain available. Coal, too, has received a massive boost as conducive gas-to-coal switching economics compel producers to produce more amid global supply tightness.” In 2003, China’s share in global output was 8.5 percent; however, in 2019 its share in global output stood at 20 percent (more than twice its output in 2003). The same story with global exports, in 2003, China’s share was 6.2 percent, today it stands at 14.7% (again more than twice its share in 2003). The Chinese economy is more integrated with the world today. That is good news for China, not so much for Nigerians. Any melt-down in China always has a ripple effect on the rest of the world. A recent example was Xi Jinping’s announcement to end financing any new coal projects offshore. The announcement was made at the 76th United Nations General Assembly (UNGA 76) last month. China’s BRI is currently the country’s biggest project in Africa, and energy projects account for about 44 percent of the BRI, a significant part of which is coal-driven. Nigeria is not just a major BRI participant, but also has significant coal projects across Kogi, Enugu and Benue States with intent to further explore its coal deposits in other areas and has announced the construction of six new coal plants by 2037. Most of Nigeria’s coal power plants have been undertaken with financing from China since most Western entities would not fund coal. This means that, if China should end coal financing, coal projects, as well as existing plants in the country, may soon become moribund. “Global collateral to China’s opaque rise”, is what this anticipated Chinese economic meltdown could mean for us. In other words, for the world, it could be regarded as ‘THE GREAT FALL OF CHINA’.

Nigeria’s heavy import dependence opens it up to China’s energy crisis

China’s power shortages hit growth in the world’s second-biggest economy, threatening more pain for global supply chains and Nigerians would feel the heat this festive season. Last week, Nigeria’s headline inflation rate slowed once again as it recorded a decline from 17.01 percent in August to 16.63 percent in September representing the 6th consecutive monthly decline and the lowest inflation rate in the last 8 months. This trend, however, is likely to reach its point of inflection on the back of the upcoming festive season and China’s current economic crisis (shortage of coal and Evergrande real estate crash). Unlike the popular Las Vegas anthem which says that “what happens in Vegas, stays in Vegas”; for China, the narrative is different. Whatever happens in China, does not stay in China, it spreads to various economies and Nigeria happens to be caught up in this mix. The impact of the current Chinese debacle is most definitely going to be felt in the Nigerian economy during the coming festive season as prices of commodities ranging from food and gift items to electronics and automobiles would experience soaring prices at all levels. Over 23 percent of Nigeria’s imports come from China and Nigeria’s heavy reliance on Chinese imports creates the perfect channel for imported inflation. Read also: Nigeria’s inflation slows for 6th straight month in September BusinessDay analysis revealed that statistics of China’s major exports to Nigeria include electrical machinery (27.4%), computers (17%), plastics (3.7%), vehicles (2.9%), toys and games (2.8%). Thus, if China crashes, these products would become scarce and a lot more expensive. Demand pressures for these commodities during the festive period coupled with the possible deregulation of the downstream oil sector which is expected to accompany the implementation of the Petroleum Industry Bill would threaten the trajectory of prices by way of a higher cost of premium motor spirit (PMS) as the international oil market still remains relatively bullish. China is halfway back to the stone age as Xi Jinping, the President of the Federal Republic of China has been struggling to keep the lights on. His hybrid economy is literally going dark. Factories are not powered, homes are dark due to electricity unavailability; even traffic lights and street lamps are being turned off. This energy crunch started in pockets, a handful of factories began shutting down in August, now it’s a national crisis that is gradually transforming into a global one. All these could be owed to China’s overdependence on coal. As countries around the world race to secure energy supplies as demand picks up and the festive season draws near, prolonged periods of high commodity prices, oil prices, natural gas prices, and coal prices should be expected. The global energy crunch has been gaining momentum over last week with pricing fundamentals increasingly pointing towards a much more prolonged period of high gas and coal prices as electricity generation became a price concern across the Atlantic Basin and Asia. Nigerian Petroleum Minister, Timipre Sylva stated that “European gas futures have already moved beyond a crude oil equivalent of $200 per barrel, boosting gas-to-oil possibilities wherever they remain available. Coal, too, has received a massive boost as conducive gas-to-coal switching economics compel producers to produce more amid global supply tightness.” In 2003, China’s share in global output was 8.5 percent; however, in 2019 its share in global output stood at 20 percent (more than twice its output in 2003). The same story with global exports, in 2003, China’s share was 6.2 percent, today it stands at 14.7% (again more than twice its share in 2003). The Chinese economy is more integrated with the world today. That is good news for China, not so much for Nigerians. Any melt-down in China always has a ripple effect on the rest of the world. A recent example was Xi Jinping’s announcement to end financing any new coal projects offshore. The announcement was made at the 76th United Nations General Assembly (UNGA 76) last month. China’s BRI is currently the country’s biggest project in Africa, and energy projects account for about 44 percent of the BRI, a significant part of which is coal-driven. Nigeria is not just a major BRI participant, but also has significant coal projects across Kogi, Enugu and Benue States with intent to further explore its coal deposits in other areas and has announced the construction of six new coal plants by 2037. Most of Nigeria’s coal power plants have been undertaken with financing from China since most Western entities would not fund coal. This means that, if China should end coal financing, coal projects, as well as existing plants in the country, may soon become moribund. “Global collateral to China’s opaque rise”, is what this anticipated Chinese economic meltdown could mean for us. In other words, for the world, it could be regarded as ‘THE GREAT FALL OF CHINA’.

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The revenge of the old economy

The writer is global head of commodities research at Goldman SachsIt is tempting to blame today’s shortages in the “old economy” — everything from energy to other basic materials, and even agriculture — on a series of temporary disruptions driven largely by the Covid-19 pandemic.But outside of a few labour issues, these bottlenecks have little to do with Covid. Instead, the roots of today’s commodity crunch can be traced back to the aftermath of the financial crisis and the following decade of falling returns and chronic under-investment in the old economy. As infrastructure aged and investment waned, so did the old economy’s ability to supply and deliver the commodities underpinning many finished goods. After years of neglect, today’s rising gas prices, copper supply shortfalls and China’s struggles with power generation are the “old economy’s revenge”. In the economic stagnation following 2008, policymakers focused recovery efforts via central bank quantitative easing programmes to support markets. Lower-income households faced sluggish real wage growth, economic insecurity, tighter credit limits and increasingly unaffordable assets. Higher-income households, on the other hand, benefited from the financial asset inflation caused by QE.This disparity in outcomes hit the old economy hard. In the old economy, price appreciation results when the volume of demand outstrips the volume of supply. Higher-income households may control the dollars, but lower-income households control the volume of commodity demand given their greater number and propensity to consume physical goods over services. As the volume of demand for commodities waned, so did the returns for old economy sectors. Lower returns led to less long-cycle old economy capital expenditure — which traditionally requires a five to 10-year horizon of sufficient demand — in favour of short-cycle “new economy” in investment in areas such as technology. By 2013, this weakness backed up into China. As the world’s manufacturing engine slowed and commodities began their historic slide, the old economy’s capital flight intensified.Indeed, the old economy was overbuilt, debt-laden and over-polluted. While the old economy only represents about 35 per cent of global gross domestic product, it generated at least 2 times the corporate losses, had about 90 per cent of the non-financial debt and created 80 per cent of the emissions. It is no wonder why investors preferred Big Tech to oil and copper. After the oil price collapsed in 2015, markets were fed up with wealth destruction, nearly halting deal flows across the old economy. China stopped aggressively stimulating lossmaking enterprises such as coal mines. And as climate change became top of mind, investors put greater weight on environmental, social and governance issues, further restricting capital. The resulting decline in investment prevented capacity growth in commodities. This has been particularly the case in hydrocarbons where divestiture by investors for ESG reasons compounded an already growing under-investment problem.The severity of these supply constraints has been underlined as countries have moved into recovery mode from the pandemic, exposing just how stretched the old economy has become. The pandemic also had a further effect, placing social needs more at the centre of policymakers’ agendas. Such inclusive growth has only accentuated the demand for physical commodities.Shocks to one part of the system are now creating ripple effects elsewhere. Reduced coal output in China hit aluminium smelting capacity, creating shortages in aluminium. Reduced gas availability forced gas-to-oil substitution, generating shortages in oil. The rolling impact of smaller, frequent shocks on a stretched system generates the emergent phenomenon in which transitory shocks lead to persistent physical price inflation — the start of which we are seeing today.This is where the revenge of the old economy will leave its mark. Periods of commodity price pressure will reoccur as broad-based demand meets inadequate infrastructure. If policymakers’ goals of broad-based prosperity and a massive buildout in green infrastructure are to be met, commodity prices will need to significantly overshoot to the upside to provide the incentive for investment. This is needed to compensate for the growing risks involved in long-cycle capex projects and the inherent complexities surrounding the green energy transition. As we argued a year ago, a new commodity supercycle is upon us.

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