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Manufacturing Sector Fragile with Low Margins as FX Scarcity, Devaluation Bites

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The largest listed manufacturers in Africa’s largest economy are on the ropes as incessant devaluation of the currency, shrinking disposable incomes, and foreign exchange (FX) scarcity leaves them fragile with low profit margins.

An abysmally low profit margin means companies are not generating money from their core business; also, they are unable to turn each Naira invested in sales into higher profit.

Some operators in the industry have been recording recurring losses over the past three quarters and even before the outbreak of the deadly coronavirus pandemic, which exposes them technically to insolvency as the liability side of the balance-sheet could exceeds the asset aside.

With continued reduction in sales, rising cost of production and ballooning interest expense, the industry could be in a tailwind if economic recovery doesn’t gather momentum.

The combined average operating margin of listed manufacturers fell to 8.04 percent in September 2020 from 9.84 percent the previous year, according to data gathered by MoneyCentral.

Also, their combined net profit margin declined to 4.44 percent in the period under review as against 5.83 percent the previous year, MoneyCentral data shows.

The manufacturing sector contributed 8.90 percent to the Gross Domestic Product (GDP) in the third quarter of 2020, according to the latest data from the National Bureau of Statistics (NBS).

That compares to 9.76 percent the first quarter of 2020, and 9.9 percent in the first quarter of 2018, according to the Abuja based Bureau.

Analysts and investors have attributed the industry’s precarious situation to the inability of manufacturers to source dollars to import raw material/equipment to accelerate production, difficult operating environment, a weak consumer purchasing power, and currency devaluation.

They added that the most insidious predicament of entities is the foreign exchange scarcity. Vast majority of Nigerian manufacturers rely on several raw materials and machines from China and Europe.

The outbreak of the coronavirus pandemic has disrupted manufacturing activities. During the period of the lockdown, companies were unable to distribute their goods while consumers, whose wallets were squeezed, could not go out to buy goods.

While the Central Bank of Nigeria (CBN) had assured companies that the country’s available foreign exchange will be devoted to strategic imports or to service obligations that are a priority, it appears many manufacturers’ dollar demands are not met or only partially met.

The Manufacturers Association of Nigeria (MAN) has warned that many of its members could close shop by January 2021, unless the Federal Government takes urgent steps to address challenges in the sector.

The association noted that they have been able to access the CBN’s N1 trillion intervention fund but still could not buy machines for their production due to the foreign exchange scarcity.

They also noted that most of the sub-sectors are operating at less than 10 percent capacity utilisation because of the impact of covid-19 and sustained infrastructural challenges.

MoneyCentral calculations show the consumer goods sub sector felt the pang of the economic downturn the most as the combined average operating profit margin dipped to 6.15 percent in September 2020 from 6.52 percent the previous year.

Unilever Nigeria and International Breweries recorded N2.85 billion and N15.15 billion losses respectively.

Industrial Goods firms saw combined average operating profit margin fall to 14.70 percent in September 2020 from 19.50 percent the previous year, according to MoneyCentral Calculations.

“A prolonged constraint in the ability of manufacturers to conduct businesses seamlessly leads to a crisis in the sector and loss of loans extended to manufacturers by the banks,” said analysts at CSL Stock Brokers Limited.

“The scarcity of foreign exchange from the official window compels manufacturers to source funds from the black market, which trades at a significant premium to the I&E window, in order to sustain their business operations,” said the analysts.

Another risk in the horizon is the slow economic recovery and the attendant high unemployment rates as over 50 percent of a population of 200 million live on less than $1.98 per day.

Nigeria’s gross domestic product (GDP) shrank 3.6 percent in the three months through September from a year earlier, compared with a 6.1 percent slump in Q2, the statistics body said, as a lockdown to contain the Covid-19 outbreak, lower oil prices and rampant dollar shortage weighed on output.

The International Monetary Fund (IMF) has forecast that the Nigerian economy would witness a deeper contraction of 5.4 percent and not the 3.4 percent it projected in April 2020. But the global lender expects Nigeria’s economy to rebound by 2.6 percent in 2021.

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