Consumer goods firms face new headwind as sugar price surges

The price of raw sugar that has jumped 24 percent this year, trading at levels last seen in October 2013 (19.42 cents to a pound) is emerging as a new headwind for Nigerian consumer goods manufacturers who use the sweetener as input for their products.

Analysts tie rising sugar prices to heavy rains, which are disrupting harvesting, and shipping in Brazil – the largest global sugar producer and drought conditions in Thailand and India, the second-biggest grower.

BusinessDay findings identified an unlikely victim of this trend- consumer goods firms with sugar as a core component of their input material.

“Spikes in the global price of sugar will feed directly into the input cost of local sugar refiners, forcing margins to compress if it cannot be passed-through to final consumers,” said Abiodun Keripe, head of Research and Strategy at Elixir investment partners Ltd, in an email response to questions.

“For the consumer good firms with sugar as a core input material, they will have to carefully look at their suppliers. At some point when costs can no longer be held tight, it has to be passed on to the consumer and this is where product substitution comes to play. The consumer will probably have to consume less of the products or rotate into cheaper substitutes where possible,” said Keripe.

In the first three months through March 2016, Dangote Sugar Refinery (DSR), the largest producer of the sweetener by market value, saw cost of sales increase by 52.09 percent to N25.84 billion from N17.0 billion in March 2015.

Nigeria Breweries, the county’s largest brewer, had cost of sales soar 11.85 percent to N40.27 billion in the period under review as against N36.0 billion the previous year.

For the quarter ended December 2015, 7 Up Bottling Company’s cost of sales was up 10.13 percent to N14.47 percent compared with N13.14 billion in 2014.

The cumulative cost of sales ratio of the three firms increased to 61.60 percent in the period under review from 57.96 percent the previous year. This means they are spending more to produce each unit of products.

Analysts and traders are also expecting more price gains for sugar. Futures could reach 19.9 cents by the end of the year, according to the average of 15 estimates in a Bloomberg News survey.

Industry experts say the jump in sugar prices will further compound the woes of raw sugar importers, as they will demand more foreign exchange from the apex bank.

“The major concerns for the broad economy are two. The first is a further pressure on FX as sugar refiners demand for more US$ to import raw sugar as prices increase,” said Tajudeen Ibrahim, team head, Chapel Denham Hill Ltd, in an emailed statement.

“The second is higher food inflation as the relevant companies pass input cost increases to consumers in Nigeria,” Ibrahim added.

The dip in oil price and drying up of foreign investment inflow has put immense pressure on Nigeria’s foreign exchange reserves, forcing the Central Bank of Nigeria (CBN) to impose capital controls.

The policy has further worsened dollar shortages fuelling concerns that sugar importers may be unable to access forex.

Inflation quickened to a six month high to 13.7 percent in April, the Abuja-based National Bureau of Statistics (NBS) noted in its most recent report.

“For an economy with rising inflation, a jump in global price of sugar will translate into another round of imported inflation,” said Keripe.

Nigeria’s economy, which grew annually at an average of 7 percent in the decade to 2014, contracted by 0.36 percent in the first quarter of 2016.

The unemployment rate surged to 12.1 percent in the first quarter from 10.4 percent in the previous three months, further eroding consumer disposable income.

Moody Investor Service, a rating agency, in a recent report, said the country’s beverage industry would experience slow growth on the back of a slowing economy.

“In Nigeria (B1 stable) we expect alcoholic beverage volumes, and to lesser extent soft drink volumes, to remain under pressure and for consumers to trade down to cheaper brands,” said analysts at Moody Investor’s service.

According to the National Sugar Development Council (NSDC), demand for sugar in Nigeria was estimated to have grown from 442,867 metric tons (mmt) in 1995 to about 1,301,494 mmt in 2005, showing an average annual growth rate of 7 per cent, while local production accounted for less than 2 percent. Today, demand has risen to about 1.5mmt while local production has stagnated.

“For companies like Dangote Sugar, backward integration into sugar plantation is the solution,” Keripe submitted.

BALA AUGIE & LOLADE AKINMURELE