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BETWEEN THE NIGERIAN AND BRAZILIAN LPG (COOKING GAS) MARKET- AN INVESTMENT PERSPECTIVE

Brazil, an economic powerhouse in South America is armed with a 208million population, 42million Households, Annual GDP of $1.8billion and per capita GDP of $8,926 as at 2018. Nigeria, also is another economic powerhouse in Africa with a population of 200million people, 30million households, Annual GDP of $397million and per capita GDP of $2,081.

Nigeria and Brazil also share other cultural similarities that make this post all the more exciting:

  1. Nigeria and Brazil share a deep love for the game of soccer.
  2. Nigeria and Brazil have similar figures in terms of population.
  3. Nigeria and Brazil are the largest democracies in their respective continents
  4.  Geographical terrains in both nations are similar. Just as we have vast areas of savannah in northern Nigeria, Brazil has same. As with Nigeria's tropical regions like the Niger Delta, Brazil also has the Amazon basin.
  5. The Yoruba tribe of Nigeria has a substantial presence in Brazil.

On all facets of development, though Brazil is doing 5 times better than Nigeria to say the least, this however presents an opportunity for Nigeria to learn from the models that made Brazil a success since we share so many striking similarities as a nation. In other words we can easily adopt a lot from the Brazilians and grow our economy accordingly.

For the purpose of this piece, we would focus on the progress and dynamics of the LPG industry in Brazil with an emphasis on how the Nigerian Market will evolve in that trajectory.

Leggo!

MARKET SIZE

BRAZIL
The Brazilian market is a mature market. Brazil has 42 million Households. 95% use LPG. The consumption of LPG in Brazil currently stands at 7.3millionMTPA (metric tonnes per annum). There are 21 distributors and 65,000 sellers, trading 100 million cylinders and serving 42 million homes. This network covers the entire Brazilian territory and ensures the supply to 39,900,000 households. In 2008, Brazil consumed 6.7million MTPA and consumption grew 8.21% in 10 years to 7.3million MTPA in 2018.

NIGERIA

The Nigerian LPG market is a fast-growing market. Nigerians consumed 600,000MTPA of LPG in 2018, through approximately 15,000 retailers, trading 1,500,000 units of LPG cylinders and serving 1,500,000 households which makes up just 5% of the total households in Nigeria. Nigeria is a fragmented market with different players at the moment. Nigeria currently has a population of 30million households and the energy mix is as follows:

  1. Firewood- 56%-16,800,00HHs
  2. Kerosene- 27%- 8,100,000HHs
  3. Charcoal- 6%- 1,800,000HHs
  4. LPG- 5%- 1,500,000HHs
  5. Electric Cookers- 4%- 1,200,000HHs
  6. Other Solid Fuels (Sawdust, cow dung etc)- 2%- 600,000HHs

Nigeria’s consumption in 2008 was 80,000MTPA in 2008 and grew 650% to 600,000MTPA in 2018.

 

SUPPLY CHAIN STRUCTURE

BRAZIL
Brazil consumes more LPG than she produces, that is why she also imports the product to support local production.

About a third of the LPG consumed in Brazil is imported while the rest is produced locally.  Importation of LPG is handled by Petrobras only and is supplied to distributors approved by the Agência Nacional do Petróleo, Gás Natural e Biocombustíveis, which is the National Agency of Oil, Natural Gas and Biofuel.

The LPG gotten from the local refineries and import terminals are stored in large storage spheres and transported through pipelines and trucks to primary and secondary storage facilities across the country which is then distributed with smaller trucks to satellite storage facilities in the retail market. From thence, it is dispensed into cylinders and distributed to households through a well-organized network of independent retailers and several company owned retail outlets.

NIGERIA

In Nigeria LPG is currently delivered to the local market principally through 3 sources:

  1. NLNG and other Processing Plants in Nigeria: The Nigerian LNG (NLNG) is the largest gas processing facility in Nigeria. The facility processes wet gas gathered from selected oil fields into Natural Gas Liquids and Natural Gas (Liquefied for export). LPG supplies from NLNG are delivered ex-ship and priced basis Mont Belvieu non-TET LPG indices. The company has a mandate to provide 250,000MTPA to the local market, it is currently being reviewed upwards to 500,000MTPA because of increased local demand. Other major gas processing centres in the country are Mobil’s Oso facility in Bonny and Chevron’s Escravos facility both of which produce LPG chiefly for the export market.
  2.  Local Refineries: The refineries in Warri and Port Harcourt produce LPG as a light end product of the crude refining process. LPG gotten from the refineries makes up less than 5% of the total LPG consumed in Nigeria. LPG produced at the refineries are solely for domestic consumption. Sales and allocation of the product are handled by the downstream subsidiary of the National Oil Company (Nigerian Petroleum Marketing Company - NPMC).
  3. LPG Imports: 47 per cent of the LPG supply in the country in the first quarter of 2019 was imported while 53 per cent was produced locally.  The United States accounted for 46 per cent of Nigeria’s LPG imports in the period, while India, Trinidad and Tobago, Algeria, Argentina, and Equatorial Guinea supplied the remaining one per cent.

LPG is supplied to the bulk storage terminal through vessels, then distributed through trucks to retail distribution plants ranging from small plants of 2.5mt to 100mt across the nation from there it will be distributed to small retailers who retail to end users.

 

RETAIL PRICE STRUCTURE

BRAZIL

State-owned Petrobras has the sole responsibility of importing LPG (cooking gas) in Brazil and is primarily responsible for the pricing structure of the retail price of LPG in Brazil as the company sells to all approved distributors at the same price.

The price of gas is determined by Petrobrás, which increased the price of LPG sold in bulk by 15% sometime in 2014. The final retail price is determined by the distributors, margins for the distributors is dependent on their ability to distribute LPG to their network of customers in the most cost-efficient way.

The average retail price for a 13kg Cylinder (the standard size of LPG cylinders) in Brazil is BRL69.06, NGN6,468.24, $17.93

The Price structure is as follows;

Petrobras Bulk Price: BRL 25.55, NGN 2393.04, $6.63 (37%)

Tributes: BRL11.44, NGN1071.48, $2.97 (16.6%)

Gross Margin of Distribution + costs: BRL15.28, NGN 1431.14, $3.97 (22.1%)

Margin resale + costs: BRL16.79, 1572.57, $4.36 (24.3%)

NIGERIA

The Nigerian LPG (Cooking Gas) retail price structure is not regulated in any way; prices are determined by market forces of demand, supply and the Mont belvieu international pricing system. As the price of LPG moves in the European and Western markets it also moves in the local market in Nigeria. When the demand for LPG goes up during winter in Europe, prices increase in Nigeria and when the demand drops in Europe during summer, prices drop locally in Nigeria.

The challenges with this system are that the retail price of LPG changes often as the Mont Belvieu prices change.

The average retail price for a 12.5kg Cylinder in Nigeria in the first 6 months of 2019 is NGN4,000 BRL69.06, $ 11.09

The Price structure is as follows;

LPG Importers Bulk Price: NGN 2500 BRL 42.71, $6.63 (62.5%)

Logistics Cost (it is relative to distance to the bulk storage terminals, it could be lower or higher): NGN145, BRL1.55, $0.40 (3.6%)

Margin resale + costs: NGN1,355, BRL14.47, $3.76 (34%)

Clearly, we see that the margins in the Nigerian market is 10% higher than the margins in the Brazilian Market. The margins can increase if further backward integration is done to maximize the potentials of the entire value chain.

 

POLICY STRUCTURE AND REGULATORY ENVIRONMENT

BRAZIL
Up until 2001 LPG was subsidized in Brazil, after the removal of the subsidy program demand dropped but demand has risen back to pre-subsidy times. The subsidy regime greatly encouraged low income households to make the big switch.

The Government is actively involved in the LPG space in Brazil as the state owned Petrobas is the only company responsible for bulk imports and sales to in-country state approved distributors at same prices.

There are only 21 Major Distributors licensed by the ANP, each distributor is responsible for growing a nationwide network of retailers, bulk customers and her retail customers.

The National Agency for Petroleum, Natural Gas and Biofuels - controls the number of gas cylinders of each of these distributors. It is accredited by the Ministry of Mines and Energy.

NIGERIA

Fortunately for Nigeria, the free market system has kept the price of LPG low which is making low income areas to easily make the switch because the of LPG is relatively lower than the price of kerosene.

The LPG (cooking gas) Industry in Nigeria is regulated by the department of Petroleum Resources (DPR) under the Ministry of Petroleum. The agency is responsible for issuing permits and ensuring that all Gas Facility operators adhere to the safety and regulatory laws but not with pricing or any commercial related indices.

The market in Nigeria is fully deregulated, which makes it very competitive.

CONCLUSION

The LPG Industry in Brazil is over 70 years old, while that of Nigeria was reborn in 2005 and took off properly around 2008, so she is barely10-14 years old, a little boy compared to the grown Brazilian.  As mentioned earlier, just as the Nigerian economy can look up to Brazil as a big brother to learn from, the LPG industry can do the same as well. Key take aways are:

  1. The Brazilian market has 100million cylinders in circulation while Nigeria has 1.5million units in circulation with only 10% of those cylinders cleared as safe, you will not be making a mistake if you say Nigeria has just 150,000 to 200,000 units of LPG cylinders that are safe in circulation.
  2. Nigeria should take a cue from the strategy Brazil used to achieve 95% penetration of LPG in 42million households to grow our consumption from 5% to at least 80% in the next 20 years.
  3. Consumption in Nigeria is 600,000MTPA serving just 5% of her total households while Brazil is 7,300,000MTPA serving 95% of her total households. If Nigeria adds another 30% to the to the LPG consumption grid it means consumption will increase by 3,600,000MTPA.
  4. The LPG industry in Brazil created 350,000 direct and indirect jobs. For a country like Nigeria with perennial youth unemployment challenges, the LPG Industry can be an antidote to solving this problem.
  5. Standard retail gas cylinders in Brazil are 13kg cylinders. Cylinders used in Nigeria are more dynamic to cater for different segments of the market. 3Kg, 5kg, 6kg, 12.5kg and 50kg cylinders are more popular here and will aid quicker penetration of LPG especially among low income households.

To achieve this growth, investor-led spending on trucks, bulk storage terminals, cylinder manufacturing plants worth NGN100,000,000,000 ($277million) over the next 5 years, is required to be able to achieve this growth.

 

The current level of national consumption in Nigeria is a small fraction of what domestic consumption can be. We at Kiakiagas.com foresee a future where local demand will surpass our in-country production capacity  or at least be at equilibrium. The consumption of just 1.5 - 2 MTPA has a NGN380 Billion ($105billion) market valuation.

 

The Nigerian LPG Market is the next success story of the Global LPG industry, if you need a partner with a global perspective and local expertise in the Nigerian space, you can write us email at gaspreneur@kiakiagas.com or call/Whatsapp: +2348085269328

 

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