Nigerian manufacturers who are already reeling from foreign exchange scarcity and inflationary pressures face imminent cost pressures as the sanctions slapped on Russia for invading Ukraine has sent the price of wheat sky-rocking.
The Russian invasion of Ukraine is disrupting the export of critical commodities and rupturing supply chains and perhaps more worrisome is that the interruption of Russia exports will also hit a wide range of industries from fertilizer makers to food, automotive to aircraft manufacturers.
The two countries accounted for about 29 percent of the global supply of the commodity in 2021 and a shortage of the grain will result in substantial increases in wheat prices.
Nigeria relies mainly on imported wheat to meet domestic demand, importing 640,000 tons in 2021 based on data from USDA.
It must be noted that Nigeria has accelerated the import of the commodities in recent times due to disruption to local production in the Northern part that hindered farmers from going to the fields.
In the first quarter of 2021 alone, Russia’s wheat exports to Nigeria were valued at N37.2 billion based on news reports.
Bread, pasta, crackers, many cakes, and many other foods are made using flour.
“Manufacturers, especially the millers will bear the brunt in the form of higher raw material costs and that is bad news for a sector struggling with a myriad of challenges,’’ said Johnson Chukwu, managing director/CEO of Cowry Asset Management Limited.
“China is already hiking the price of commodities and the pressure will be on other world producers such as the United States and Canada to fill the vacuum caused by the war,” said Chukwu.
The largest manufacturers in Nigeria collectively incurred N2.95 trillion in production costs in December 2021, which is 37.81 percent higher than 2020’s N2.14 trillion the previous year, according to data gathered by MoneyCentral.
They spend on average N0.68 to produce each unit of products, which is why they are always passing on rising input costs to consumers by hiking the price of products.
Flour Mills of Nigeria, HoneyWell Flour Mills, and Northern Nigeria Flour Mills on average spent N0.91 on input cost for every N1 they generated in sales, leaving them with a slim profit margin.
Dangote Cement, the largest producer of the building material in Nigeria, BUA Cement, and Lafarge Africa, collectively incurred N838.76 billion in input costs as at December 2021 from N673.65 billion the previous year.
Analysts at CSL Stockbrokers say a rise in the global price of wheat will feed into an increase in the prices of bread, pasta, noodles, and all wheat-based products, further causing an increase in food prices and food inflation in leaving the poor most vulnerable.
Manufacturers are struggling with foreign exchange constraints, supply chain disruption, and weak disposable income.
The dearth of foreign exchange compels companies to source foreign currency at the black market at cut throat prices higher than the official rate, and delay in clearing goods at the ports that results in high price of wheat and other commodities undermine the sector.
The International Monetary Funds (IMF) and the World Bank had urged the central bank to adopt a uniform exchange system that will bolster foreign investor confidence and attract foreign direct investment.
The need to boost the manufacturing sector is pertinent to achieving the country’s output projection, and if structural constraints remain unaddressed, growth in the sector will remain lackluster, according to analysts at CSL Stock Brokers Limited.
Despite the myriad of challenges, the manufacturer sector contributes to the economy. However, there is room for improvement as the sector is not creating enough jobs needed to spur economic growth.
An analysis of the fourth quarter (Q4) 2021 GDP report by the National Bureau of Statistics (NBS) showed the manufacturing sector real GDP closed the year positive, rising by 3.35 percent year on year (y/y) in 2021 from a contraction of 2.75 percent year on year (y/y) in 2020.