Rising costs threaten manufacturers’ profits, output in half-year

Manufacturing firms in Nigeria will suffer lower production output and reduced profitability in the first half of 2022 as cost pressures intensify in the second quarter of the year, experts have said.

Since February when the Russia-Ukraine crisis started, manufacturers have had to deal with a surge in the price of diesel by almost 92 percent, as well as the intensified cut in the supply of raw materials among other issues with adverse effect on their production and operational activities.

Seeing that this has continued into the second quarter of the year without showing signs of abating soon, these experts told BusinessDay that manufacturers may have to reduce their output to cut cost which will affect their profitability.

Micheal Olawale Cole, president of the Lagos Chamber of Commerce and Industry (LCCI) said during a recent briefing that the Russia-Ukraine war had 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, Nigeria inclusive as prices of goods and services surged with the potential implication of shrinking production of goods and services, especially for manufacturing and agriculture.

“Going into the second quarter of 2022, the manufacturing sector will likely suffer some shocks from the rising cost of diesel, logistics, foreign exchange illiquidity, domestic inflationary pressure, weakening purchasing power, poor public infrastructure, and port-related challenges as these may continue to present as headwinds to the sector’s performance,” he said.

He added that with the war in Ukraine aggravating disruptions to supply chains of raw materials like wheat, barley, soybeans, sunflower, and corn, the rising cost of production may not abate soon.

Jide Babatope, Lagos-based economic analyst said that manufacturing companies especially those under the Fast Moving Consumer Goods (FMCG) industry will bear the brunt more as they are faced with the dilemma of either absorbing the cost of sales pressures without hiking their prices which may affect their profit or hiking prices to contain cost prices will affect demand for products.

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“The current economic terrain does not augur well for most FMCGs in terms of rising operating costs due to supply cut, energy cost and FX pressure, although big FMCGs players can afford to raise prices of their products while still maintaining market share because of their brand reputation and a sizeable chunk of their customer base are value brands, but the small and medium scale players are more disadvantaged,” he said.

Analysts at FBN Quest in a report titled ‘FMCGs: Looming pressure on earnings from Russia-Ukraine conflict’ said the conflict has pushed commodity prices higher as supply chains adjust which translates into additional cost pressures for Nigerian consumer goods manufacturers whose production relies heavily on imported inputs.

“As a result, we see two new cost pressure sources for FMCG companies in 2022: raw material costs and abnormally high energy costs; we would expect management teams to give an update on their strategy to offset these input costs when they report Q1 earnings,” the report stated.

Some manufacturers have already reduced their production output as a response to the challenge with the hope that everything will stabilize by the end of the second quarter, while some others are eyeing the upward review of the prices of their products.

Kwajaffa Hamma, Director –General of the Nigerian Textile Manufacturers Association (NTMA), said energy cost has always been a challenge that has affected manufacturers; however it has become more intense now.

“In my factory due to low product demand and our inability to compete with imported products, we only utilized 20 percent of our capacity but now we will further reduce it and reduce our production quota because we rely heavily on diesel” he said.

Hamma noted that effecting a price increase in his products is not possible as they are already suffering losses and dealing with low product demand.

Rob Kleinjan, Finance Director at NB said during the company’s pre- Annual General Meeting (AGM) media briefing in Lagos that the company’s Nigeria operations does not have a direct link to any importation from Ukraine or Russia, however its input cost and marketing expenses have continued to increase significantly, hence posing a challenge.

He specifically highlighted the rising cost of fuel and diesel which has an impact in the production and distribution process, adding that the company will have to review the price of its products upward during the year.

“Our cost of sales increased by 26.6 percent to N276 billion from N218 billion in 2020 driven by raw materials and energy cost, the company already absorbs these additional costs; the N10 per litre excise duty which the government wants to implement is an indirect consumer tax so going forward it will be passed on to the consumers,” he said.