Manufacturers Walk a Tight Rope as Operating Costs Hit N6.28trn

Though manufacturers have been offsetting inflation with price increases, rising costs of everything from raw materials to energy signal tighter times for companies who are the hardest hit from macroeconomic headwinds.

Energy costs and raw material prices have surged due to the devaluation of the currency and the sharp depreciation of the Naira that catapulted inflation rates to an unprecedented level, which led to the reduction in profit margins and earnings growth.

MoneyCentral analysis shows that the most liquid and capitalised manufacturers collectively incurred N6.28 trillion in input costs in the first nine months of 2024, which is 90.72 percent to N3.29 trillion.

Consumer goods firms’ cost of sales that increased by 89.01 percent to N4.24 trillion make up 67.50 percent of manufacturers’ costs, as huge foreign exchange revaluation losses brought on by a weak Naira, which tipped many of them over the edge.

The average industry cost of sales rose to 73.90 percent in September 2024 from N67.07 percent the previous year, according to MoneyCentral calculations. That means firms are spending N0.74 on input costs to produce every N1 of a product.

It is worthy to say that local wheat production has remained abysmally low as a result of climate change, insecurity in cultivated areas, and lack of improved seeds, while the war of between Russia and Ukraine, the two largest producers of then grain, ensures that price remain elevated, which heaps pressure on the cost of production of sector players like Flour Mills of Nigeria and Honeywell Flour Mills.

Since over 90 percent of raw sugar are imported annually, players in the Sugar Refining Industry are reeling from cost pressures and weak margins.

Flour Mills incurred N1.41 trillion in material costs that represents 92.15 percent of total cost of sales and which is 79.25 percent higher than 2023’s N786.75 billion.

Nigerian Breweries incurred N407.19 billion in material costs that represents 59.72 percent of total cost of sales, distribution and administrative expenses, which is 129.25 percent from 2023’ 177.42 billion.

Dangote Sugar Refinery expended N401.15 billion on raw materials that is 86.54 percent of total cost of sales, which is 100.15 percent higher than 2023’s N200.66 billion.

BUA Foods Plc incurred N686.18 billion in material costs that represents 93.10 percent of total costs of sales, which is 121.24 percent higher than 2023’s N736.97 billion.

There are concerns that manufacturers will find it difficult passing on rising inputs to the final consumers in the form of higher prices as their wallets have been squeezed by rising inflation and higher utility bills in a country where over 50 percent of a population of 200 million live on less than $1.98 a day.

The inflationary pressure is still there as reflected in consumer prices, said Abiola Rasaq, a Lagos based analyst.

“However, most of them are not able to pass on the spiraling costs because of margin compression,” said Rasaq.

Nigerian inflation quickened more than expected in October, putting another interest-rate hike in play.

Nigerian inflation rose 33.9 percent year-on-year compared with 32.7 percent in September, the National Bureau of Statistics said in a statement. That exceeded the median estimate of seven economists in a Bloomberg survey of 33.4 percent.

In a related development, the three dominant cement producers who are movers of the industrial goods industry saw their combined cost of production or input costs spike by N1.88 trillion as at September 2024, according to data gathered by MoneyCentral.

Fuel and power make up the chunk of cost of production as they grapple with a high-cost environment, weaker Naira exchange rate, and inflationary pressures.

Dangote Cement’s N536.15 billion fuel and power expenses that increased by 109.43 percent makes up 43.25 percent of total cost of production.

BUA Cement’s incurred N196.65 billion on energy, which is 138.82 percent higher than 2023’s N82.34 billion.

“Alongside other factors, the war in Europe is stoking energy prices and raising costs for cement producers,” said analysts at Afrinvest Securities Limited.

“The outlook is mixed as the energy crisis could foster short-term use of cheap coal while commitment to climate action and the need for energy security could accelerate investment in alternative fuel for long-term benefit,” said analysts at Afrinvest Securities.

Unsold goods are piling in the warehouses of manufacturers, validating a challenging environment.

Inventory of unsold products in the manufacturing sector rose to N1.24 trillion in the first half of 2024 from N272 billion in the same period of last year, according to data from the Manufacturers Association of Nigeria (MAN).

“The high levels of unsold inventories reflect the challenges faced by consumers and the need for interventions to stimulate demand and improve the sector’s performance,” said manufacturers’ association.

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