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Monday, October 3, 2022

Manufacturer’s Battle Rising Input Costs as Operating Expenses hit N2.19trn

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Nigerian manufacturers are battling with mounting cost of production as they are spending more to produce each unit of products.

For instance, the 22 largest listed firms on the Nigeria Exchange Group (NGX) that comprise of cement industry, paint sectors, pharmaceutical industry, and the consumer goods sectors incurred N2.19 trillion in total cost of production in the six months period to June 2022, which represents 30.48 percent higher than 2021’s N1.68 trillion, according to data gathered by MoneyCentral.

The industry growth in total costs is higher than the 18.60 percent June inflation figure as firms on average spend N0.82 on average to produce each N1 unit of product, according to MoneyCentral calculations.

The Russia-Ukraine induced strain in the global supply chain has continued to cause an increase in the cost of raw materials for manufacturers, particularly as both countries rank among the top ten producers of wheat.

Of course, the war in East Europe that led to a spike in crude oil price is not a boon for Nigeria because it ballooned the price of diesel used by companies and small businesses to power plants at the factories and offices since electricity from the grid is unreliable.

Analysts have rang the alarm bell that the foreign exchange crisis that forces manufacturers to resort to the parallel market to source foreign exchange at outrageous rates and the recent continuous hike in the monetary policy rate by the central bank to tame inflation could put a brake on profit growth.

As a result of consumers downgrading to essential items, companies are losing hire priced sales, which means future margins will be pressured.

“Although, the apex bank had planned to devote the country’s available foreign exchange to strategic imports or service obligations, many manufacturers’ claim they only get c.10% of  their dollar demands,” said analysts at CSL Stock Brokers Limited.

“For as long as inflationary and FX pressures persist, the performance of the manufacturing sector will remain lackluster. A prolonged constraint in the inability of manufacturers to conduct businesses seamlessly leads to a crisis in the sector and loss of loans extended to the manufacturers by the banks,” said analysts at CSL StockBrokers.

In its second consecutive meeting, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria increased the benchmark interest rate (monetary policy rate) from 11.50% to, and 13% to 14%.

Nigeria’s Inflation hits 18.60% for the month of June, the highest in 16 months, according to data from the National Bureau of Statistics (NBS).

Analysts at Chapel Hill Denham in a recent note to clients said rising energy prices due to the Russia and Ukraine war that spurred energy prices have indirectly driven the sugar prices higher due to increased demand for sugar-based ethanol, hence ballooning cost of production for producers of the sweeteners.

“We still see further scope for higher sugar prices further out into the year. In our view, this would continue to result in higher input cost for Dangote Sugar, thereby driving the cost of production higher,” said the analysts.

Dangote Cement, BUA Cement, and Lafarge Africa, collectively incurred N741.17 billion in total production cost, which is 28.68 percent higher than 2021’s N575.95 billion.

Dangote Cement, the most capitalized firm in Africa’s largest economy, spent N129.95 billion on fuel and power consumed in 2022, and that is 31.29 percent higher than 2021’s N98.97 billion.

Similarly, BUA Cement spent N43.58 billion on fuel in 2022, which is 64.66 percent higher than 2021’s N26.46 billion.

The largest quoted consumer goods firms such as Nestle, BUA foods and others, collectively incurred N1.40 trillion in total production expenses, which is 31.12 percent higher than 2021’s N1.07 trillion.

Fidson Healthcare, GlaxoSmithKline, May and Baker, and Neimeth Pharmaceutical, the largest drug makers in Nigeria, collectively incurred N38.08 billion in the first six months of the year, which is 41.13 percent higher than 2021’s N26.98 billion.

Because drug makers depend on import of Active Pharmaceutical Ingredient (API) from countries such as India and China for drug production, the spiralling inflationary environment and exposure to FX volatility impacted production costs for these firm

While the listed firms have continued to weather the storm of a hostile operating environment as they are benefitting from price increases due to the allure of their products to consumers, a lot of manufacturers who can no longer cope with the tough and unpredictable macroeconomic environment have closed shop.

Some of the manufacturing companies that have exited the industry in the last five years include: Surest Foam Limited, Mufex, Framan Industries, MZM Continental, Nipol Industries, Moak Industries, and Stone Industries

“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 sub-optimal,” said analysts at CSL Stock Brokers.

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