Global crisis threat to manufacturing output – Experts
Manufacturers’ production cost will experience a further increase due to scarcity of raw materials and a continuous surge in energy cost as the crisis between Russia and Ukraine lingers, experts have said.
This is expected to affect their output as they are forced to reduce their production level considering that the availability of raw materials and energy are two of the most crucial components of the production process.
Businesses affected the most are those operating under the Fast Moving Consumer Goods (FMCGs) subsector as they rely heavily on wheat, chemicals, and other commodities.
The Black Sea region which includes Russia and Ukraine plays a major role in the global food system and accounts for a quarter production of global wheat.
However, shipments of these commodities are constrained as Ukrainian ports remain blocked by Russia while the European Union placed a ban on Russian vessels, leading to the scarcity of these inputs and a surge in their prices, leaving manufacturers to pay more for these items.
In addition to this following the invasion, the West responded with sanctions that, though not targeted at its energy industry, had a crippling effect, consequently, diesel prices, which are deregulated in Nigeria surged from about N288 per litre in January to over N700 by the end of March and is yet to stabilise.
According to MAN, Nigeria’s inability to supply and distribute sufficient electricity has left manufacturers at the mercy of alternative energy sources such as the use of generators that consume diesel and petrol which takes 40 percent of the total production cost, hence manufacturers are forced to pay more to keep up production.
Experts say this has intensified the gaps from the COVID-19 disruptions which manufacturers are yet to fully recover from and as the crisis shows no signs of abating, concerns are raised for manufacturers.
According to the Manufacturers Association of Nigeria (MAN), 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; this is expected to worsen going forward.
“The ongoing invasion of Ukraine will continue to have negative spiral effects on every sector of the economy; for the manufacturing sector this will cause an enormous decrease in capacity utilisation as factories begin to experience stock-out situations,” MAN said.
Experts also say that some manufacturers may effect a price increase in the cost of their products and also reduce the quantity provided to mitigate the impact of these rising cost
Usman Imanah, managing director/CEO of Friska Farms Limited said the rising cost is already taking a toll on production activities which occur daily, noting that poor electricity supply has made his factory dependent on an alternative energy source which is a diesel generator to function.
“We used to buy diesel for N340 per litre suddenly, it increased to N651 and has not stabilised, now allocation to energy cost will automatically increase and this will hurt our production activity,” he said.
He added that other than the energy cost, logistics services have also been affected, as they pay more to get materials and machines.
“As much as we don’t want to, we will have to increase the prices of our goods because that is the only option we have as we do not want to compromise the quality of our products,” he said.
For raw material supply, experts say this global supply cut should boost the local sourcing unfortunately; the rise in security threats has dampened its prospects.
“With rising productions cost, these firms will choose between increasing their prices and losing patronage due to declining purchasing power of consumers or maintaining prices and running at a loss,” Jide Babatope, Lagos-based analyst said.
Michael Olawale-Cole, president, Lagos Chamber of Commerce & Industry (LCCI) said the persisting Russia-Ukraine war has triggered a positive oil price shock with spillover effects on operating costs, raw materials, and inflation in countries that are not directly engaged with the war including Nigeria.
“If the above conditions persist, production volumes will be impacted by the raw materials supply chain disruptions and the rising cost of diesel, Job losses are also very likely due to constrained production and these will likely depress growth potentials in Q2 2022,” he said.