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Thursday, May 26, 2022

Manufacturers Obligation to Suppliers Surge on Dollar Crunch

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Manufacturers’ obligation to suppliers of inventories used to meet production are piling on the back of dollar scarcity as the energy crisis and the Ukraine war has cast a pall over future earnings growth.

Companies have been struggling to secure enough dollars to import raw materials and equipment, a conundrum the Buhari government and the central bank have not been able to solve to the detriment of the economy.

The largest manufacturers on the NGX-ASI collectively owe suppliers of raw materials and other inputs N1.68 trillion  in December 2021, and that is 28.51 percent higher than 2020’s N1.30 trillion, according to data gathered by MoneyCentral.

A trade payable is an accounting term that represents the money a company owes a specific supplier for inventory related goods. It is standard practice for companies to purchase inventory or inventory related materials from external suppliers or vendors.

There is no course for alarm because firms are not susceptible to a working capital crisis as an excess of current assets over current liabilities indicate they can meet short term obligations.

Consumer goods firms such as Nestle Nigeria have huge warehouses where customers buy from the parent company allowing flexibility for it to be owed by subsidiaries.

Those payables are linked to parent companies and imported raw materials,” said Tajudeen Ibrahim, head of research at Chapel Hill Denham Limited.

“Inability to source foreign exchange is responsible for the backlog. However, the moment foreign exchange liquidity improves payable will reduce,” said Ibrahim.

Short term loans or liabilities falling within a year determine the gearing positions of firms and form a chunk of total debts of Nestle, Nigeria Breweries and Guinness.

A 10 year analysis of the financial statement of Nestle shows obligations to suppliers were N19 billion in 2012 when foreign exchange market was liquid, but it skyrocketed to N148.38 billion in December 2021.

On a year on year basis, the consumer goods giant’s payables spiked by 60.60 percent to N148.38 billion in 2021 from N116.51 billion the previous year.

Interestingly Nestle short term obligations dipped by 24.14 percent in 2017, a period that was concomitant with the introduction of a foreign exchange policy by the central bank that brought liquidity to the foreign exchange market.

Nigerian Breweries, the largest brewer by market capitalization in Africa’s most populous nation, saw its payable surge to N226.41 billion in December 2020 from N61.69 billion in 2012.

International Breweries’ account payables were up 41.29 percent to N143.56 billion in December 2021 from N101.60 billion the previous year.

Flour Mills of Nigeria, the largest miller by market capitalization on the NGXASI, saw total payables increase to N176.44 billion in the period under review from N120.15 billion the previous year.

Dangote Cement, the largest producer of the building material with plants across the continent, saw total payables up 6.24 percent to N371.22 billion in December 2021 from N349.51 billion the previous year.

Lafarge Africa’s short-term obligation spiked by 34.24 percent to N103.17 billion in December 2021 from N76.85 billion the previous year.

Nigeria depends on crude oil exports for most of its revenue and more than 90% of its foreign exchange earnings. Despite a recent rally in oil prices, Nigeria’s forex situation remains bleak as businesses find it difficult to access forex.

The Manufacturers Association of Nigeria (MAN) says the central bank needs to prioritize improved access to foreign exchange for operators in the real sector to allow them to acquire the necessary tools in reactivating the economy.

To mitigate the negative impact of foreign exchange crisis on their earnings or operating performance, some companies have been thinking outside of the box and sourcing raw materials locally.

Last year, Nigerian Breweries (NB) Plc disclosed that it had reached about 56 per cent in local sourcing of raw materials and injected up to $114 million (N55 billion) in capital investments and expansion projects to create more wealth for the economy.

Flour Mills has over the years invested in sourcing its raw materials, such as cassava, maize, rice, sugar and palm oil, locally and cut its import bill.

Nestle sources maize, cassava, palm olein, sorghum, soya and salt locally. The company also sources over 90 percent of its packaging materials locally.

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