Nigeria’s manufacturing Purchasing Managers’ Index (PMI), a gauge for manufacturing sentiments, declined by 0.7points in October on FX volatility and social unrest in the eastern and northern parts of the country, according to data compiled by FBN Quest and NOI.
The index which declined from 50.3 to 49.6 points was mirrored across three of the five sub-indices, according to the data.
“Small businesses are more impacted by the FX squeeze because their FX demands frequently fall beyond the scope of eligible items on the official window, and often lack the capacity to push through the administrative processes necessary to handle their FX needs,” the report stated.
FX availability and accessibility have remained challenging for manufacturers. Currently, it costs N411 to get one dollar from the Central Bank of Nigeria (CBN), while it costs around N580 in the parallel market.
In addition, manufacturers complain that they get two to 10 percent of their dollar needs from the market even after waiting for 30-90 days.
According to analysts at FBN Quest, the impact of elevated raw material costs and higher cost of production was evident in the third quarter suboptimal financial performance of some publicly listed manufacturing companies particularly the Fast Moving Consumer Goods (FMCG).
“We see some pressure points relating to the high cost of sales and opex on some names, such as Nigerian Breweries and Dangote Sugar Refinery whose gross margins decreased by 1042bps and 485bps, respectively, in Q3 ’21,” analysts said.
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Manufacturers’ production and distribution costs increased by 21 percent in the second quarter of 2021, the hike in production cost also caused a 29 percent decline in the volume of production, according to the MAN CEOs Confidence Index (MCCI) for the second quarter of 2021 compiled by MAN.
Okhai Ehimigbai, an export executive at Aarti Steel said goods manufactured in Nigeria have one of the highest production costs in the world and this is majorly because every manufacturer is their government whereby they provide infrastructure, power among others themselves.
“Production cost has increased and these rising costs have to be transferred to the end-user of the products so this inflates the cost thereby hindering the competitiveness of players in the sector,” he said.
Analysis of Nestle Nigeria, Dangote sugar, Cadbury, Unilever, and NASCON’s financial statement for the period ended June 2021 revealed that the cumulative cost of sales of these companies was N197 billion which was a 32 percent increase from the N149 billion realized in the same period of 2020.
This significantly affected their profit for the period as it grew by a marginal eight percent moving from N22.6 billion in 2020 to N24.5 billion in the first half of 2021.
Jide Babatope, a Lagos-based economic analyst said the direct and operating costs of these firms increased significantly eating deep into their revenue, which caused the slow growth in their profit margin.
“The FMCGs were confronted with high operating costs during this period following the persistent inflationary pressure and FX illiquidity. Companies with huge profit decline must have experienced a double whammy of fragile revenue growth and escalated cost level,” he explained.
Experts believe that if issues around FX availability and accessibility are not addressed promptly, many of these companies will fold up which will consequently collapse the sector and affect job creation.
The PMI index had hit 51 points in May but dropped continuously till it hit 48 points in July. It showed signs of strained recovery as it ended the third quarter with 49.6 and 50.3 points in August and September respectively.
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