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The cost of doing business which has been rising over the past few years has bloated NGX listed manufacturers’ total costs as firms are most likely to jerk up prices because of exploding inflation.
Of course, manufacturers have been faced with complex challenges such as rising input costs due to spiraling energy prices and deteriorating consumer spending which forces them to jerk up their prices so as to protect profit margins and stay afloat.
The most liquid and capitalised firms on the NGXASI that have released full-year results collectively incurred N4.98 trillion as costs at December 2022, which is 31.35 percent higher than 2021’s N3.79 trillion, according to data gathered by MoneyCentral.
Across sectors, they spent an average of 88.63 percent on input cost to produce every N1 of each unit of products, leaving them with slimmer profit margins and reducing money that ought to have been distributed to shareholders in the form of dividend and used for the purposes of funding future expansion plans.
Decrepit infrastructure like bad roads leading in and out of the ports and across the country, hefty levies or taxes, and the war in Ukraine that has bloated the price of wheat, corns and other grains which are primary raw materials components in the production of products make it more expensive for manufacturers along the supply chain to obtain what they need, adding another layer of concerns to imported inflation.
As a result of geopolitical tensions which saw commodities prices spiking since the start of the first quarter of last year, the costs of fuels sources such as diesel oil have skyrocketed together with inflationary increases on raw materials leads to an upward movement in the cost of production of manufacturers who rely on these inputs for their processes.
Raw material costs have been rising due to currency devaluation as the central bank seeks to avert an economic disaster.
The doubling of diesel prices have left firms gasping for breath as many have closed shops.
According to recent data by the Manufacturing Association of Nigeria (MAN), the price of diesel in Nigeria had gone from $0.75 (N312) per litre in January to $1.92 (N800) in March; indicating a 100% increase.
Further analysis by sector shows consumer goods firms’ cost of production soared 32.81 percent to N3.24 trillion, from N2.44 trillion the previous year.
“For the rest of the year, the consumer goods sector outlook remains broadly positive, owing to the several growth initiatives implemented by players in the industry,” said analysts at Meristem Securities Limited.
“However, we do not foresee a considerable moderation in production cost as the current headwinds impacting raw material prices persist. Although, we expect the continued domestic demand and implementation of growth initiatives to support revenue, the ability to keep costs in check is also expected to prop up earnings,” said analysts at Meristem Securities.
Dangote Cement, BUA Cement, and Lafarge Africa, the largest producers of the building material in Nigeria, saw total cost of production grow by 31.04 percent to N1.56 trillion as at December 2022.
“We observed that listed cement players were confronted by rising costs, especially energy which accounts for 36.0 percent of their overhead cost in 2021, based on our estimation,” said analysts at Afrinvest Securities Research.
“The impact of currency devaluation (-8.0% to ₦410.40/US$1.00) and an uptick in energy prices globally threatened to erode the margins of cement players,” said analysts at Afrinvest Research.
A conundrum that managers face is how easy it will be passing on input costs to consumers whose wallets have been squeezed by rising inflation.
Nigeria’s headline inflation rate rose to 21.91 percent in February 2023 compared to 21.82 percent of January 2023, indicating an increase of 0.09 percent points.