Petroleum oils drive N$10bn import bill
Weak rand likely to keep imports inflated
A depreciation in the local currency makes imports expensive and exports cheap, while an appreciation makes imports cheap and exports expensive.
Namibia’s N$10 billion import bill in January 2023 was mainly driven by petroleum oils, with a share of 32.4% of the nation’s total import value. Petroleum oils were mostly sourced from Saudi Arabia, Malaysia and Singapore, according to the Namibia Statistics Agency (NSA).
Simonis Storm noted that while global food, oil, car, fertiliser and shipping costs are on a flat to downward trend, the weaker rand exchange rate is likely to keep the import bill inflated. In 2022, petroleum oil imports were the biggest contributor to the import bill. Year to date, Brent crude averages US$ 84 per barrel, compared to US$ 99 per barrel in 2022.
The rand has averaged 17.44/US$ year to date compared to 16.37/US$ in 2022 and will keep imports inflated above exports, Simonis Storm said. The value of exports stood at N$7 billion in January 2023, leading to a trade deficit of N$3 billion.
A depreciation in the local currency makes imports expensive and exports cheap, while an appreciation makes imports cheap and exports expensive.
Shortages lead to increases
The ministry of mines and energy expects oil prices to increase due to undersupply and a rebound in demand. A shortage in the market causes prices to increase.
"The International Energy Agency (IEA) and the Organisation of Petroleum Exporting Countries (OPEC) have both raised their 2023 demand outlooks due to the expectation of a Chinese recovery," the ministry added. China is one of the world’s biggest economies.
On the supply side, Fin24 reported that "from 5 February, the European Union, the G-7 and its allies will attempt to impose a cap on the price of Russia’s fuel exports – the latest punishment for its invasion of Ukraine. The European Union will have to replace about 600 000 barrels a day of diesel imports, and Russia will need to find new buyers for those supplies, store the fuel on ships, or cut production at its refineries."
The ministry meanwhile added: "The Russian Federation, which has been hit with an embargo by the European Union against its oil industry, has announced a cut in production of about 500 000 barrels per day for the month of March."
US treasury secretary Janet Yellen has urged emerging market countries to use the price cap to negotiate steeper discounts with Russia.
A price cap on Russian crude oil to limit Russia’s revenues could save the 17 largest net oil-importing African countries US$6 billion annually, Yellen was quoted by Fin24.
Meanwhile, Fin24 recently quoted United Nations (UN) leader Antonio Guterres slamming the world's rich countries and energy giants for throttling poor nations with "predatory" interest rates and crippling fuel prices.
Guterres told a summit of the most deprived states on the planet that wealthy nations should provide US$500 billion a year to help others "trapped in vicious cycles" that block their efforts to boost economies and improve health and education.
The summit of the 46 least developed countries (LDC) is normally held every 10 years but has twice been delayed since 2021 because of the coronavirus pandemic.
Ripple effects
During January 2023, Namibia sourced most of its imports from neighbouring South Africa.
Fin24 recently reported that the price of both 95 and 93 unleaded petrol in South Africa was hiked by R1.27 a litre, while diesel went up by 30 cents.
Illuminating paraffin prices increased by 13 cents a litre, while the maximum retail price for LP gas was hiked by R5.22 a kilogram.
In Gauteng, the price of a litre of 95 unleaded petrol will increase to R22.95, while it will increase to R22.30 at the coast. This is still lower than December's price of R23.45 in Gauteng. A year ago, 95 petrol retailed for R21.60 in Gauteng.
Since fuel is an input cost in transport, the cost of goods transported from South Africa to other countries is likely to increase as well.
During January 2023, motor vehicles for the transport of goods and persons, which were part of the top-five goods imported into Namibia, were sourced from South Africa.
Locally, the price of petrol increased to N$1.50 per litre on 1 March, while the price of diesel remained unchanged.
The price of petrol at Walvis Bay, which is the port of entry, is N$19.75 per litre and N$20.65 per litre for diesel. This is the second petrol price increase for 2023.
Simonis Storm noted that "in their latest announcement, the ministry of mines and energy incurred under-recoveries both on petrol (N$1.87 per litre) and diesel (N$0.30 per litre). As usual, the national energy fund (NEF) was used to partially subsidise under-recoveries and so petrol prices only increased by N$1.50 – instead of N$1.87 – to N$19.78 per litre and diesel prices remained unchanged at N$20.65 per litre for the month of March 2023.
"To put the benefit of our national energy fund in perspective, our petrol prices would have been at N$21.58 – and not N$19.78 – in March 2023 if the government did not use the profits from over-recoveries to subsidise under-recoveries. This is not standard practice in South Africa, where the full under- or over-recoveries are allocated to consumer prices, and hence one of the reasons why Namibian fuel prices are often cheaper than South Africa’s. The other reason is higher levies in South Africa," Simonis Storm explained.
According to the NSA, inflation in Namibia averaged 6.1% in 2022 and came in at 7% in January 2023, mainly driven by food, non-alcoholic beverages, and transport. The Bank of Namibia (BoN) expects inflation to average 5.3% in 2023.
Outlook
Commenting on the outlook, Simonis Storm said while shipping costs have decreased considerably in recent months, they still remain expensive, and this could maintain upward pressure on local fuel prices when combined with a weaker rand exchange rate as shipping costs are paid in US dollars.
In addition, due to rising demand and uncertainties around supply, higher global Brent crude prices are being forecasted towards the end of the year. These forecasts imply that Namibia could potentially see further fuel price hikes in the coming months. In order for Namibia to cut local fuel prices, the country would need a USD/ZAR closer to 17.
"Given that this is unlikely, it can be that petrol and diesel prices move closer to N$23 per litre by mid-2023 as our conservative or base scenario forecast. In the extreme scenario, we see local fuel prices at N$25 per litre."
There are a number of opposing forces at play, which makes the future path of local fuel prices uncertain. The ministry of mines and energy, with the approval of the ministry of finance, can reduce certain levies charged on fuel prices and so provide fuel price relief to consumers.
"We note that the National Petroleum Corporation of Namibia (NamCor) levy, which was reduced from N$0.08 per litre to N$0.04 per litre in April 2022, is still in place, but some industry players say this levy can be eliminated indefinitely," Simonis Storm said.
Also, some industry experts call for a permanent reduction in the Motor Vehicle Accident (MVA) fund levy – currently N$0.50 per litre – due to an easing of accidents and improved financial conditions at the fund.
The MVA fund has recorded revenues far above its total claims in recent financial years, leading to a positive cash flow position. The value of their assets is almost double the value of their liabilities, and direct claims have declined by 10.2% on an annualised basis since 2017.
The national energy fund could, of course, also prevent local fuel prices from reaching N$25 per litre by subsidising portions of future under-recoveries.
However, the NEF paid out a substantial amount of close to N$1 billion in the first half of 2022 alone for major under-recoveries incurred.
"Since the balance of the NEF is not known, we are not sure how many more – or to which extent – under-recoveries consumers can be shielded from in the future," Simonis Storm pointed out.
"One risk to our base scenario forecast is the Organisation of the Petroleum Exporting Countries Plus (OPEC ) deciding to cut production further, artificially constraining global supply."
It is also uncertain whether petrol, diesel, jet fuel or other fuel products will see production cuts if OPEC decides to limit production, Simonis Storm said.
[email protected]
Simonis Storm noted that while global food, oil, car, fertiliser and shipping costs are on a flat to downward trend, the weaker rand exchange rate is likely to keep the import bill inflated. In 2022, petroleum oil imports were the biggest contributor to the import bill. Year to date, Brent crude averages US$ 84 per barrel, compared to US$ 99 per barrel in 2022.
The rand has averaged 17.44/US$ year to date compared to 16.37/US$ in 2022 and will keep imports inflated above exports, Simonis Storm said. The value of exports stood at N$7 billion in January 2023, leading to a trade deficit of N$3 billion.
A depreciation in the local currency makes imports expensive and exports cheap, while an appreciation makes imports cheap and exports expensive.
Shortages lead to increases
The ministry of mines and energy expects oil prices to increase due to undersupply and a rebound in demand. A shortage in the market causes prices to increase.
"The International Energy Agency (IEA) and the Organisation of Petroleum Exporting Countries (OPEC) have both raised their 2023 demand outlooks due to the expectation of a Chinese recovery," the ministry added. China is one of the world’s biggest economies.
On the supply side, Fin24 reported that "from 5 February, the European Union, the G-7 and its allies will attempt to impose a cap on the price of Russia’s fuel exports – the latest punishment for its invasion of Ukraine. The European Union will have to replace about 600 000 barrels a day of diesel imports, and Russia will need to find new buyers for those supplies, store the fuel on ships, or cut production at its refineries."
The ministry meanwhile added: "The Russian Federation, which has been hit with an embargo by the European Union against its oil industry, has announced a cut in production of about 500 000 barrels per day for the month of March."
US treasury secretary Janet Yellen has urged emerging market countries to use the price cap to negotiate steeper discounts with Russia.
A price cap on Russian crude oil to limit Russia’s revenues could save the 17 largest net oil-importing African countries US$6 billion annually, Yellen was quoted by Fin24.
Meanwhile, Fin24 recently quoted United Nations (UN) leader Antonio Guterres slamming the world's rich countries and energy giants for throttling poor nations with "predatory" interest rates and crippling fuel prices.
Guterres told a summit of the most deprived states on the planet that wealthy nations should provide US$500 billion a year to help others "trapped in vicious cycles" that block their efforts to boost economies and improve health and education.
The summit of the 46 least developed countries (LDC) is normally held every 10 years but has twice been delayed since 2021 because of the coronavirus pandemic.
Ripple effects
During January 2023, Namibia sourced most of its imports from neighbouring South Africa.
Fin24 recently reported that the price of both 95 and 93 unleaded petrol in South Africa was hiked by R1.27 a litre, while diesel went up by 30 cents.
Illuminating paraffin prices increased by 13 cents a litre, while the maximum retail price for LP gas was hiked by R5.22 a kilogram.
In Gauteng, the price of a litre of 95 unleaded petrol will increase to R22.95, while it will increase to R22.30 at the coast. This is still lower than December's price of R23.45 in Gauteng. A year ago, 95 petrol retailed for R21.60 in Gauteng.
Since fuel is an input cost in transport, the cost of goods transported from South Africa to other countries is likely to increase as well.
During January 2023, motor vehicles for the transport of goods and persons, which were part of the top-five goods imported into Namibia, were sourced from South Africa.
Locally, the price of petrol increased to N$1.50 per litre on 1 March, while the price of diesel remained unchanged.
The price of petrol at Walvis Bay, which is the port of entry, is N$19.75 per litre and N$20.65 per litre for diesel. This is the second petrol price increase for 2023.
Simonis Storm noted that "in their latest announcement, the ministry of mines and energy incurred under-recoveries both on petrol (N$1.87 per litre) and diesel (N$0.30 per litre). As usual, the national energy fund (NEF) was used to partially subsidise under-recoveries and so petrol prices only increased by N$1.50 – instead of N$1.87 – to N$19.78 per litre and diesel prices remained unchanged at N$20.65 per litre for the month of March 2023.
"To put the benefit of our national energy fund in perspective, our petrol prices would have been at N$21.58 – and not N$19.78 – in March 2023 if the government did not use the profits from over-recoveries to subsidise under-recoveries. This is not standard practice in South Africa, where the full under- or over-recoveries are allocated to consumer prices, and hence one of the reasons why Namibian fuel prices are often cheaper than South Africa’s. The other reason is higher levies in South Africa," Simonis Storm explained.
According to the NSA, inflation in Namibia averaged 6.1% in 2022 and came in at 7% in January 2023, mainly driven by food, non-alcoholic beverages, and transport. The Bank of Namibia (BoN) expects inflation to average 5.3% in 2023.
Outlook
Commenting on the outlook, Simonis Storm said while shipping costs have decreased considerably in recent months, they still remain expensive, and this could maintain upward pressure on local fuel prices when combined with a weaker rand exchange rate as shipping costs are paid in US dollars.
In addition, due to rising demand and uncertainties around supply, higher global Brent crude prices are being forecasted towards the end of the year. These forecasts imply that Namibia could potentially see further fuel price hikes in the coming months. In order for Namibia to cut local fuel prices, the country would need a USD/ZAR closer to 17.
"Given that this is unlikely, it can be that petrol and diesel prices move closer to N$23 per litre by mid-2023 as our conservative or base scenario forecast. In the extreme scenario, we see local fuel prices at N$25 per litre."
There are a number of opposing forces at play, which makes the future path of local fuel prices uncertain. The ministry of mines and energy, with the approval of the ministry of finance, can reduce certain levies charged on fuel prices and so provide fuel price relief to consumers.
"We note that the National Petroleum Corporation of Namibia (NamCor) levy, which was reduced from N$0.08 per litre to N$0.04 per litre in April 2022, is still in place, but some industry players say this levy can be eliminated indefinitely," Simonis Storm said.
Also, some industry experts call for a permanent reduction in the Motor Vehicle Accident (MVA) fund levy – currently N$0.50 per litre – due to an easing of accidents and improved financial conditions at the fund.
The MVA fund has recorded revenues far above its total claims in recent financial years, leading to a positive cash flow position. The value of their assets is almost double the value of their liabilities, and direct claims have declined by 10.2% on an annualised basis since 2017.
The national energy fund could, of course, also prevent local fuel prices from reaching N$25 per litre by subsidising portions of future under-recoveries.
However, the NEF paid out a substantial amount of close to N$1 billion in the first half of 2022 alone for major under-recoveries incurred.
"Since the balance of the NEF is not known, we are not sure how many more – or to which extent – under-recoveries consumers can be shielded from in the future," Simonis Storm pointed out.
"One risk to our base scenario forecast is the Organisation of the Petroleum Exporting Countries Plus (OPEC ) deciding to cut production further, artificially constraining global supply."
It is also uncertain whether petrol, diesel, jet fuel or other fuel products will see production cuts if OPEC decides to limit production, Simonis Storm said.
[email protected]
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