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Wednesday, September 28, 2022

Nigerian Manufacturers Input Costs Spike Higher Amid FX Supply constraints

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…as listed firms incur N2.44 trillion as total production costs

Manufacturing input costs rose at an accelerated rate in September, increasing at one of the sharpest rates seen over the past decade as supply shortages were exacerbated by rising inflation and energy prices.

Data gathered by MoneyCentral showed that the largest listed manufacturers incurred N2.44 trillion in total cost of production, which is 31.09 percent higher than 2020’s N1.86 trillion, according to Data gathered by MoneyCentral.

On average, manufacturers spent 81 percent on input cost to produce each unit of product as they have been passing on higher costs to consumers who are hard squeezed by inflationary pressures and utility bills in the form of higher prices of products.

With the market seeing further devaluation of the currency by the central bank to stabilise the economy, rising cost of production could expose the sector to crisis in 2022.

This is because the majority of companies import raw materials to meet production as foreign exchange crisis, supply chain bottlenecks, and deteriorating infrastructure leaves them struggling to cope.

Of course, the spiraling cost of production leaves companies with very low profit margins and undermines dividends, while investors will dump shares because there are no prospects of robust profit.

A breakdown of the numbers by sectors shows the largest Fast-Moving Consumer Goods firms incurred N1.50 billion, which is 36.92 percent higher than 2020’s N1.10 trillion.

Dangote Cement, BUA Cement, and Lafarge Africa collectively incurred N872.28 billion in September 2021 from N712.07 billion the previous year.

Cement manufacturers have been investing in alternative energy such as coal and gas with a view to reducing cost and maximising profit.

The drug makers saw total cost of production increase by 23.93 percent to N43.39 billion in September 2021 from N35 billion the previous year.

Of course, analysts and industry stakeholders have been urging the central bank and the government to implement policies that will help remove the bottlenecks undermining the growth of the industry.

For instance, the power industry has been underperforming since the industry was privatised in 2013, and the implication is that companies have been spending copious amounts of diesel oil to power plants at the factories.

The real GDP growth of the sector has been abysmal in the past 5 years not until 2021, when it posted positive growth of 4.29% in Q3 2021, according to data from National Bureau of Statistics (NBS).

“Due to the inability to source forex, many have been unable to buy machines for their production, making them operate at less than their optimal capacity utilization,” said analysts at CSL Stockbrokers 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, to sustain business operations,” said the analysts.

Analysts at CSL said that as long as inflationary pressures and currency depreciation persist amid foreign currency constraints, the performance of the manufacturing sector will remain strained.

The manufacturing and non-manufacturing Purchasing Managers Indices for November 2021 remained below the 50 index points at 47.3 and 47.5 index points.

PMI readings above 50.0 signal an improvement in business conditions, while readings below 50.0 show a deterioration.

The headline inflation (year-on-year) decelerated for the seventh consecutive month to 15.99 per cent in October 2021 from 16.63 per cent in the previous month.

There are concerns that these bottlenecks will most likely hinder manufacturers from benefiting from the reopening of the economy and vaccinations that spurred gradual economic recovery.

The domestic real GDP grew by 4.03 per cent year-on-year in the third quarter of 2021 compared with 5.01 and compared with 5.01 and -3.62 per cent in Q2 2021 and Q3 2020, respectively.

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

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