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Soaring Raw Material Costs Causing Pains for Nigerian Manufacturers

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Nigerian manufacturers are feeling the pains of rising raw material costs brought on by geopolitical tensions, foreign exchange illiquidity and currency devaluations that are squeezing profit margins.

Interestingly, data gathered by MoneyCentral shows the impact on manufacturers of the sustained high costs for key raw materials, such as barley, wheat, crude oil, natural gas and forestry products.

In fact, the most liquid and capitalised manufacturers collectively incurred N2.85 trillion input costs in December 2022, which is 36.36 percent higher than 2021’s N2.09 trillion, according to data gathered by MoneyCentral.

“Supply chain continues to be challenged by volatile price of commodities, FX sourcing, and logistics bottleneck. Players have been hit by high agricultural commodity prices and difficulty in sourcing FX to ensure efficient supply of raw materials,” said analysts at Afrinvest Securities Limited.

“The impact of the price increase has been majorly felt by import-dependent countries like Nigeria, following trade restrictions by major grain shippers,” said the analysts.

It is worth noting that the Russia and Ukraine war that started in February 2022 exacerbated the already anemic situation of manufacturers’ as the price of wheat and other grains skyrocketed as the two countries are among the major exporters and producers of the commodity.

Global wheat prices increased by over 60 percent over the period from February 24 to June 1, 2022 compared to the average in January 2022. The growth was explained by the Russia-Ukraine war.

Flour millers also face a tough operating environment as local wheat production remains abysmal due to climate change, insecurities in cultivation area, unavailability of improved seeds, and lack of modern agronomic practices.

Consumer goods firms collectively incurred N2.50 trillion in raw material costs, which is 41.11 percent higher than 2021’s N1.77 trillion.

Flour Mills of Nigeria Plc, the largest miller by market capitalisation and most cost pressured, whose raw material costs rose 46.63 percent make up 38.23 percent of total material costs of the industry.

Nestle Nigeria Plc’s incurred N223.68 billion in material costs, which is 36.60 percent higher than 2021’s N163.73 billion.

The three dominant cement makers in Africa’s second largest oil producers: Dangote Cement, BUA Cement, and Lafarge Africa, collectively incurred N270.49 billion as at December 2022, which is 5.47 percent higher than 2021’s from 2021’s N256.45 billion.

Of course, cement makers’ costs are growing at a single digit because they have embraced backward integration that paved the way for them to source cheap materials locally.

Companies have capitulated to imported inflation caused by the central bank’s incessant currency devaluation to protect the external reserve and stabilize the economy.

Along with these escalating costs, manufacturers are also grappling with energy costs and decrepit infrastructure as these challenges are weighing on margins, leaving manufacturers with no choice but to pass on some of the additional costs to consumers.

Manufacturing accounts for a substantial proportion of economic activities in Nigeria’s GDP. In the fourth quarter (Q4) of 2022, it constituted 13.60 percent of economic activity. But the sector recorded a slowdown growth to 8.90 percent in Q4-2022 from 25.50 percent year on year (Y/Y) Q4-2021.

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