A 100 percent increase in electricity tariff by regulator will tip manufacturers over the cliff, balloon cost of production, and compound the woes of companies who are reeling from the wrought caused by the coronavirus pandemic.
Companies are spending more on input cost to produce each unit of product -as material and overhead cost continue to spike, which is quite difficult for a lot of them to breakeven or retain enough cash in the business to fund future expansion plans.
Industry players have warned that an increase in the tariff will make goods produced locally less competitive in terms of price compared to foreign products that are produced at a much lower cost.
Out of the N1.29 trillion generated in revenue by the largest manufacturers quoted on the Nigerian Stock Market, N907.18 billion was spent on input cost, otherwise known as cost of sales, leaving very little to cover other operating expenses.
Additionally, total production, administrative and distribution expenses amounted to N1.08 trillion as at March 2020, which is huge when compared to revenue of N1.29 trillion.
“The cost of power in our total cost of production is 40 percent, and when tariff increases then the price of product will go up and consumer will bear the brunt as such higher cost that will be passed over to them,” says Ambrose Oruche, acting director-general, Manufacturing Association of Nigeria (MAN).
A spike in production cost due to spiralling utility will make our product uncompetitive because most foreign made goods are produced at lower cost, putting local producers in a disadvantaged position.
Manufacturers spent N24.28 billion less on alternative energy sources in 2018, according to the MAN.
Oruche warns that the regulator is being wicked and inconsiderably insensitive by contemplating a hike when companies have not been in real business over the past few months due to the lockdown imposed by government to curb the spread the of the coronavirus pandemic.
However, the National Assembly and stakeholders have halted the planned electricity tariff hike that was supposed to take effect July 1 and rescheduled it for the first quarter of 2021.
“They have to pass the cost in form of higher pricing to the consumers. They are already reeling from high distribution cost,” notes Gbolahan Ologundro, industry analyst at CSL Stockbrokers Limited.
The cumulative average total cost as a percent of sales for the largest manufacturers increased to 93.44 percent in March 2020 from 87.11 percent the previous year. What this means is that a manufacturer spent N93.44 to generate every N100 in revenue.
Aside difficulty in sourcing raw materials, experts have also linked the exorbitant cost of movement of good at the port to the factory to huge cost of sales among companies.
They add that the high cost impact negatively on the prices of goods and services, leading to inflation.
The lockdown policy imposed by government across the country following the outbreak of the virus was felt by businesses at the lower end of the curve, as it disrupted the demand and supply chain.
Demand contraction rather than closure of suppliers or disruption to logistics are the main threat to companies.
While the hike in key consumer utilities is a welcome development to keep both sectors in tune with market realities and drive efficiency, these hikes will put further strain on already pressured consumer income.
The COVID-19 has forced many companies to slashed salaries and cut workforce so as to stay afloat.
Nigeria’s unemployment rate is at 23.10 percent as at 2018, but analysts say it may rise to 40 percent.
The International Monetary Fund (IMF) has announced that the Nigerian economy would witness a deeper contraction of 5.4% and not the 3.4% it projected in April 2020.
“An increase in price of tariff will hurt consumer wallets and result in lower demand for foods,” states Johnson Chukwu, managing director/CEO of Cowry Asset Management Limited.
Analysts at CSL Stock Brokers Limited are of the view that the continued strain on consumer purchasing power will impact revenue of companies with very elastic product portfolios.
