PMI back below water as FX shortages, rising production costs bite

Nigeria’s manufacturing Purchasing Managers’ Index (PMI), a gauge for manufacturing sentiments has declined to 49.6 points in October dropping from the 50.3 it achieved in September according to data by FBN Quest and NOI.

The drop was primarily driven by the shortage of foreign exchange as well as the unfriendly exchange rate which caused an increase in the price of raw materials and consequently a rise in production cost

“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 they often lack the capacity to push through the administrative processes necessary to handle their fx needs,” the report stated.

In addition to this, the impact of elevated raw material costs and higher production costs 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 operating expenses 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, Export executive at Aarti Steel said goods manufactured in Nigeria has one of the highest production cost in the world and this is because every manufacturer is their own government whereby they provide infrastructure, power, etc. 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.

Experts are of the opinion 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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