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Wednesday, March 29, 2023

Manufacturers Hit with Higher Production Costs on Naira Devaluation

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The largest Nigerian manufacturers are struggling to stay in business as a devaluation of the Naira spawned by the collapse in oil prices means they can’t deliver higher returns to shareholders.

The combined cost of goods sold of the largest companies listed on the Nigerian Stock Exchange (NSE) grew at 16.87 percent, and it outpaced cumulative revenue growth of 12.28 percent, which resulted in erosion of operating margin or EBIT Margin.

Notably, they incurred a collective total cost (cost of goods sold plus administrative/distribution expenses) of N1.89 trillion as at September 2020, a figure that is 78.74 percent of total revenue of N2.24 trillion, based on data compiled by MoneyCentral.

Analysts attribute the increase in costs to the impact of devaluation of the currency on the cost of imported inputs given that firms can’t source most raw materials needed to meet production locally.

As a result of the crash in oil price on the back of coronavirus induced headwinds, the central bank weakened the currency to N386/$ in early 2020, compared to an average of N363/$ in 2019.

There are concerns that companies may be unable to pass on rising costs to beleaguered consumers in the form of higher price, as over 50 percent of a population of 200 million live on less than $1.98 a day.

The Manufacturer Association of Nigeria (MAN) have complained that high energy costs affect their bottom line as they spend money on diesel oil to run generator plants at factories since electricity from the grid is unreliable.

The body said they expended 38 percent of their production cost on energy in 2019, while inventory of unsold manufactured goods stood at an all-time high of N402.42 billion, about 7.2 percent rise compared to N375.42 billion in 2018.

A breakdown of cost structure shows combined cost of sales of the largest listed manufacturers increased by 16.70 percent to N1.50 trillion as at September 2020 from N1.28 trillion the previous year.

They collectively incurred N397.09 billion in administrative and distribution expenses, according to data gathered by MoneyCentral.

Manufacturers are having difficulty in getting foreign currency to import raw materials and spares that aren’t available in Nigeria. Over 40 percent of dollar needs are unmet, constraining producers from operating at full capacity.

And a difficult operating environment exacerbated by the coronavirus virus pandemic and hike in tariffs means consumers will have little money left in their pockets.

Nigeria’s economy contracted 6.1 percent in the second quarter as the combined impact of the prolonged lockdown to curb the spread of the coronavirus and the plunge in the price of oil, the country’s main export, took its toll.

Consumer goods firms saw combined cost of sales spike by 20.65 percent to N931.53 billion as at September 2020, while Nestle Nigeria, said foreign exchange pressure drove the increase in cost as it imports 30 percent of input raw materials.

Also Flour Mills Nigeria, the largest miller by market capitalization attributed spiraling cost to the impact of Naira devaluation as it imports raw sugar.

The three dominant cement makers: Dangote Cement, Lafarge Africa, and BUA Cement saw cumulative cost of sales increase by 12.17 percent to N526.11 billion as at September 2020.

BUA said exogenous currency shocks weigh on energy cost as it imports 70 percent of the coal which it uses to power plants at the factories.

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