Nigerian manufacturers say rising cost impedes benefits of AfCFTA
Nigerian manufacturers see the rising cost of production and distribution in the country as a hindrance for them to maximise the potential of the Africa Continental Free Trade Area (AfCFTA) agreement as it limits the competitiveness of the goods they produce.
“The Nigerian manufacturer, who must contend with rising costs of operations, would be playing catch-up to other African countries under AfCFTA, which is premised on the assumption of a level playing field,” Frank Onyebu, chairman, Manufacturers Association of Nigeria (MAN), Apapa branch, said while reacting to latest data showing production costs of manufacturers rising by 21 percent in the second quarter of 2021.
The Nigerian manufacturing sector has battled low competitiveness for a very long time, which is primarily caused by high production due mainly to repeated problems of infrastructural deficiency, Onyebu said.
According to Onyebu, Nigeria could become a dumping ground for finished products unless the government takes appropriate action to resolve the issue of the poor competitiveness in the sector.
Similarly, Okhai Ehimigbai, an executive at Aarti Steel, said goods manufactured in Nigeria had one of the highest production costs in the world and this was majorly because every manufacturer was 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 of the product thereby hindering competitiveness,” Ehimigbai said.
“Although it does not hinder manufacturers in Nigeria from participating, it will however be difficult to benefit because the competition will be severe,” he said.
Manufacturers’ production and distribution costs increased by 21 percent in the second quarter of 2021, according to the MAN CEOs Confidence Index (MCCI) for the second quarter of 2021, compiled by MAN.
The data also showed that the hike in production cost caused a 29 percent decline in the volume of production.
The trade agreement, AfCFTA, is projected to provide a market of 1.2 billion people and a gross domestic product (GDP) of $2.5 trillion across all 55-member states of the African Union. However, participating countries need to be competitive enough to tap these opportunities.
The 2019 Global Competitiveness report published by the World Economic Forum ranked Nigeria 116th position out of 141 countries with a score of 48.3 points. It also did not fall among the top 10 competitive sub-Saharan African countries analysed.
Business and economic experts say the competitiveness of participating countries will be driven by reasonable production cost, business enabling environment, easy accessibility to the markets, innovation, and value addition.
“Only countries with an open, pleasant, and enabling business environment will benefit from the agreement, and this highlights the need for Nigeria to tactically position itself for significant trade benefits,” Muda Yusuf, former director-general of the Lagos Chambers of Commerce and Industry (LCCI), said.
The government needs to provide adequate support in order for manufacturers to penetrate new African markets and fully enjoy the benefits of the trade agreement, if not, inherent challenges will dampen the chances of the sector’s growth and expansion, he said.
Although not a new occurrence, since 2020, production cost has been rising due to inherent challenges and effects of the COVID-19 pandemic. This was evident in the financial results of major Fast Moving Consumer Goods firms (FMCGs) listed on the Nigerian Stock Exchange.
Analysis of Nestle Nigeria, Dangote Sugar, Cadbury, Unilever, and NASCON’s financial statement for the period ended June 2021 reveals that the cumulative cost of sales of these companies was N197 billion, which was a 32 percent increase from the N149 billion realised in the same period of 2020.
This significantly affected their profit for the period as it grew by a marginal 8 percent, moving from N22.6 billion in 2020 to N24.5 billion in the first half of 2021.
“Textile makers are unable to buy raw materials for production because it has become increasingly expensive. This has forced a cut in output produced in order to retain quality as the sector still struggles with smuggling,” Hamma Kwajaffa, director-general, Nigerian Textile Employers Association (NTEA), told BusinessDay.
The situation is further aggravated by the scarcity and increased price of raw materials due to the extended lockdown of principal partner countries like southern China, which has clogged ports critical to global trade, Kwajaffa said.
“In addition to this, production activities also slowed down in the textile industry due to the inability of producers to get foreign exchange (FX) for the procurement of raw materials and machines,” he said.
There are fears that this may intensify in future as China plans to retain its pandemic border restrictions for at least one more year due to the emergence of new variants and a schedule of major events and exhibitions.
Other than the scarcity of raw materials and shortage of FX, high electricity cost without correlating provision of power also affected manufacturers’ production costs.
Data from MAN showed that in the second half of 2020, manufacturers spent N57.75 billion on alternative energy while it spent N81.91 billion on alternative energy sources during this period.
Segun Ajayi-Kadir, director-general, MAN, said at a workshop recently that energy was a critical component of the production process, however, adequate power and energy have remained challenges for local manufacturers causing the huge dependence on alternative energy.
The cost of generating alternative energy for operations takes 30 percent of the total production cost while energy from the national grid has not been business-friendly, either due to the increment in tariffs by distribution companies with no corresponding improvement in service delivery, he said.
The MCCI report also mentioned that shipping cost in the second quarter of the year increased by 20 percent, which constrained export and import activities, with 62 percent of the survey respondents affirming that the macroeconomic environment had an increasing effect on the cost of shipping in the sector.
Manufacturers reported high and multiple ports charges as a primary driver of increased shipment cost, which was also worsened by the free fall of the naira against the dollar, this has made high logistics cost and rigorous shipping process sixth major problem of industry players.
Presently, it cost about N700,000 to lift a 40-foot container from Tin-Can Port to warehouses in Lagos, which used to cost between N200,000 and N300,000 in 2020. Transporters also charge about N350,000 to load a 20-foot container from the same port.
In addition to this, the clearing time at the ports was also extended from two days to two weeks, making manufacturers incur more costs and also significantly affects clearing operations.
Anthony Ajulo, co-founder, Colton Group, said now at the ports they have a flat rate used to clear containers unlike before when the size of the container and its contents determined the clearing cost, which caused a price surge.
“Now a container is cleared for N1 million, when other costs like shipping are considered you find yourself spending N2.5 to N3 million to get your products from the port. Agents also have to rub palms at the ports to easily access the containers; if not demurrage cost will accumulate,” he said.
The LCCI in its economic report revealed that 5,000 trucks seek access to Apapa and Tin Can ports in Lagos daily; however, the two ports could only accommodate 1,500 trucks who encounter hurdles to even gain access.