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Manufacturers Spend Way into Future as Cost of Production hits N2.89 trillion

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Manufacturers in Africa’s largest economy face many challenges on different fronts, and little wonder captains of the industry have gained a few grey hairs in the past six years.

Companies are squeezed by rising costs brought on by spiraling inflation, volatile foreign currency, and infrastructure bottlenecks such as bad roads at the ports and epileptic power supply.

Regrettably, the coronavirus pandemic that disrupted the demand and supply side of the market, tipped the country into its second recession in less than six years compounded the woes of manufacturers.

At the very least, an entity should break even, that is cost of production equals the revenue for the product, but in Nigeria policy somersault has hindered marginal costs from equaling marginal revenue.

A rigorous analysis by MoneyCentral shows the largest listed manufacturers collectively incurred N2.89 trillion in total costs in December 2020, and that represents 10.80 percent increase from 2019’s N2.60 trillion.

Interestingly, the N2.89 trillion figure is 80.15 percent of combined revenue of N3.58 trillion, and when exceptional items such as finance costs, foreign exchange loss and loss on significant investment are factored in, profit margins will be slim; and that means shareholders will not get bumper dividend payment.

The average industry cost of sales ratio stands at 71.51 percent, which means companies spend on average N0.71 on input cost to produce each unit of revenue, according to MoneyCentral calculations.

A breakdown of costs shows they collectively incurred N1.10 trillion on raw material costs in December 2020, which represents a 11.47 percent increase from 2019’s N994.48 billion.

Because most raw materials are sourced abroad, the devaluation of the currency by the central bank to protect the external reserve from the precipitous drop in crude oil price balloons the cost of production.

Of course, manufacturers are struggling to stay in business because of foreign exchange shortage that hinders them from importing raw materials and equipment to accelerate production in the factories, and they added that another hiccup facing the industry is the high cost of funds.

“The implication of these challenges highlighted is that it impedes the growth and development of the manufacturing sector, thereby affecting the attainment of the sector’s full potential of massive job and wealth creation,” said Mansur Ahmed, president of Manufacturer Association of Nigeria (MAN).

Nigeria’s unemployment rate rose to 33.30 in the three months to December 2020, the second highest on the global list. That’s up from 27.10 percent in the second quarter of 2020, according to a recent data from the National Bureau of Statistics (NBS).

Nigeria’s inflation rate for the month of March 2020, rose to 18.17 percent from 17.33 percent recorded in February 2021. This represents 0.82 percent points higher than the February figures.

The country’s misery index is at 51.47, which makes it rank among the six most miserable countries in the world.

Oruche Ambrose, director in MAN said that low purchasing power of consumers had resulted in decreased demand for locally manufactured products, leading to unsold inventories in many companies.

“The consumer purchasing power is being eroded by rising inflation and the effective demand is not there, which is why there are piles of unsold goods in the warehouses,” said Ambrose.

He added that the ability of companies to pass on spiraling costs to the already beleaguered final consumers depend on the elasticity of the products.

According to MAN’s calculations, Inventory of unsold manufactured goods in the sector totaled N577.61 billion in 2020 as against N402.42 billion recorded in 2019.

The average turnover over ratio for companies is 4.21 times, which indicates that they sell their entire goods within an 86.62-day period, according to MoneyCentral calculations.

Analysts say the government has not been nimble enough to formulate policies to help remove the bottlenecks undermining the manufacturing sector, galvanize economic growth and attract the desired foreign direct investment.

For instance, the border closure (now opened) imposed by the government to curb smuggling was a strategic mistake as companies were not able to ship their goods across the borders, while scarcity of food stoked inflation.

Had the policy makers adopted a unified flexible foreign exchange system as championed by the International Monetary Fund (IMF) and the World Bank, foreign currency would have been available to companies to underpin their operations.

Dangote Cement Plc, the largest listed company, is spending copious amounts of money on alternative sources of energy, but strong growth in sales resulted in an increase in profit margins.

The largest producer of the building material in Africa’s largest economy incurred N146.34 billion on fuel and power in 2020, and that represents 19.2 percent increase from 2019’s N122.85 billion.

Interestingly, the N146.34 billion figure is 33.41 percent of the total production cost of sales, according to MoneyCentral calculations.

Between 2019 to 2020, manufacturers spent about N143.29 billion on alternative power supply, according to recent data from the Manufacturers Association of Nigeria (MAN).

Flour Mills of Nigeria (FMN) Plc’s total cost of N508.11 billion is 91 percent of total sales of N555.34 billion, and its material cost spiked by 31.67 percent to N425.81 billion in 2020 from N323.81 billion in 2019.

Nigerian Breweries Plc total cost of N308.26 billion is 91.24 percent of total revenue of N337.16 billion.

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