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Sunday, January 17, 2021

Why Tesla’s Rise may Complicate Things for Africa’s Richest Man

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Tesla Inc., shares ended at a record $1,079.81 on Tuesday, sending the Silicon Valley car maker’s market cap above $200 billion for the first time.

That valuation puts Tesla at just a stone’s throw from Japan’s Toyota Motor Corp. as the world’s most-valued car maker.

Tesla is slated to report second-quarter deliveries, in the coming days, with analysts expecting sales of 72,000 vehicles, of which 61,000 would be Model 3s.

Tesla shares have gained 159 percent this year. The rise of Tesla stock is the markets way of signaling the tectonic shifts already taking place in the global energy space and the upcoming winners and losers.

The International Energy Agency in a report released in 2018 forecast that global gasoline consumption had peaked as more efficient cars and the advent of electric vehicles from new players such as Tesla halt demand growth over the next 25 years.

Outbreak of the coronavirus has further dampened demand for gasoline and other fuels.

The rise of Tesla and its implication for global oil demand could complicate plans for Africa’s richest man Aliko Dangote, who is spending about $15 billion to construct a 650,000 barrel-per-day oil refinery and petrochemical plant in Lagos, Nigeria’s commercial capital.

The facility with capacity to produce 55.2 million liters of gasoline daily was originally scheduled to be completed in 2018 but has now been pushed back to 2022.

European refiners had traditionally sent gasoline and diesel to Nigeria, due to the inability of the NNPC to refine petroleum products locally.

Dangote’s plan is to replace some (if not all) of that foreign supply with fuels produced locally at his new Refinery and also export any excess to the rest of Africa.

Dangote also plans to export its diesel to Europe and gasoline to Latin America, Western and Central African markets.

The electrification of Europe’s road transport however poses a big threat to gasoline, diesel demand as well as to European refiners.

The UK for instance has announced plans to ban all new sales of gasoline, diesel and hybrid vehicles by 2035.

This is five years earlier than a previous 2040 date, while EVs have a current UK market share of 2 percent, it is seen rising steeply as a result of this proposed ban.

A fallout of this could be much lower margins for European refiners who in turn could seek to flood the African and other markets with cheap gasoline.

“We believe the introduction of autonomous vehicles, coupled with Mobility as a service, will combine with additional societal and technology trends to drive a more precipitous disruption than typically expected – one which is likely to pull electric vehicles into the market and shift the composition of the fleet much quicker than currently anticipated,” consulting firm KPMG said in a 2018 report on the sector.

Dangote which is financing the Refinery project with about 70 percent debt and 30 percent of his own equity was hoping on the continued growth in demand for refined petroleum products in Nigeria and the rest of Africa.

The problem though is that refiners already operate under very thin margins today and the fall in demand could erode margins in the future.

Another issue that could complicate Dangote’s Refinery operations is the fixed retail prices and opaque foreign exchange market in what would presumably be its largest market Nigeria.

The cost of gasoline per litre in Nigeria currently stands at $0.33, compared with $0.76 in South Africa, $0.86 in Kenya, $0.99 in Ivory Coast, and $1.08 in neighboring Cameroon, according to the website, globalpetrolprices.com.

In order to realize the highest margins refiners, seek to pay the lowest price for crude oil, maximize the yield of the higher value products (e.g., gasoline), control operating costs and receive the highest price for refined products on a sustained basis.

The petrol subsidy regime in Nigeria currently means it is a little bit unclear if Dangote refinery can sell its products at a market rate.

“If the government operates the subsidy regime, we can sell it to the government at the subsidized price,” Devakumar Edwin, a group executive director at Dangote Industries Ltd. said in an interview. “If there is no subsidy regime, we’ll sell it directly to the distributors. So practically it is not going to affect our operations.”

This may be easier said than done especially with the current situation where Nigeria’s National oil company NNPC is racking up losses from its inability to pass on the full market price of imported petrol that it sells to retailers and other marketers.

Also the opaque FX system in Nigeria will surely challenge Dangote’s Refinery which will be buying inputs such as crude oil in dollars, but selling the output like Gasoline, Diesel, and Aviation fuel in Naira.

“We are going to buy the crude just at the export price and will sell our products at the import price,” Edwin said in an interview last year.

Dangote Industries Ltd. said in 2018 the Refinery complex plans to produce about 50 million liters (13.2 million gallons) a day of gasoline and 15 million liters of diesel.

Gasoline has been the world’s choice to power automobiles.

From the 1950s onward, when Henry Ford’s dream that every middle-class American could own a car became reality.

IEA Executive Director Fatih Birol expects the biggest victim from the move to electric cars to be refiners, noting that the changes in fuel-demand growth over the next 25 years will have “major implications” for the industry.

Telsa’s stock run-up may be the markets signaling that the first steps into that future is beginning to take place.

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