Manufacturers incur heavy losses as forex crisis, inflation bite harder

In apparent reflection of the depreciation in the value of the Naira coupled with the sustained inflationary pressure, the cost of raw material input for consumer goods companies rose by 18.5 percent in the first half of 2023 (H1’23), a development which undermined the companies’ profitability.
Nigerians have been battling with persistent increase in the prices of goods and services, aggravated by insecurity, naira depreciation and global supply chain disruption due to the rising barriers from the escalation of the Ukraine/ Russia war.
Data from the National Bureau of Statistics (NBS) showed that the inflation rate in Nigeria closed H1’23 at 22.79 percent.
The figure has since risen to 25.8 percent as at last month and is projected to rise further this month, possibly sustained to year end.
Also, the Naira value against the USDollar which stood at N448.04/US$ at the beginning of the year (2023) crashed to N823.13/US$ as at end H1’23 following the Central Bank of Nigeria (CBN) foreign exchange reforms in mid-June.
The severity of this trend is reflected in the increased cost of producing consumer goods, which are mostly essential commodities used regularly by households. These include foods and beverages, toiletries, over-the-counter medicines, cleaning and laundry products, plastic goods, and personal care products, amongst others.
Financial Vanguard findings from the financial statements of eight major Fast Moving Consumer Goods, FMCGs, companies listed on the Nigerian Exchange Limited (NGX), including Nestle Nigeria Plc, Cadbury Nigeria Plc, NASCON Allied Industries Plc, Dangote Sugar Refinery Plc, BUA Foods, International Breweries Plc, Champion Breweries Plc, Nigerian Breweries and two industrial goods companies – Meyer Plc and Berger Paints Plc showed that the amount spent by the companies on raw material procurement rose to N634.22 billion in H1’23 up from N535.09 billion in H1’22, indicating an 18.5 percent increase.
Consequently, the ratio of raw materials cost to the total cost of sales for the companies rose to 79.64 percent in H1’23, up from 78.1 percent in H1’22
Details of the financial reports showed that the companies’ spent 50.2 percent of their N1.263 trillion revenue in H1’23 on raw materials procurement. This is, however, two percentage points decline from 52.2 percent of their revenue (N1.026trn) spent on raw materials purchase in the corresponding period in 2022.
The increase in raw material cost led to a jump in the cost of sales of the 10 companies by 16.2 percent to N794.404 billion in H1’23 from N685.39 billion posted in the corresponding year.
Consequently, the companies recorded N104.54 billion as Loss Before Tax (LBT) as against N151.23 profit posted in the corresponding period of 2022, an indication that attempts at product resizing and price increment undertaken by the companies failed to achieve the desired result.
Further details showed that besides the two industrial goods companies (Meyer Plc and Berger Paints Plc), which recorded over 100 percent increase in their profitability, five out of the eight FMCGs companies reviewed recorded loss before tax.
Breakdown of companies’ financials
International Breweries Plc, which was most hit, posted N41.43 billion loss before tax in H1’23, a 2,372 percent decline compared to N1.82 billion Profit Before Tax (PBT) in H1’22 amidst a 22.6 percent increase in the cost of raw material and 16.9 percent increase in its total cost of sales.
Meanwhile, the proportion of raw material cost to the company’s total cost of sales rose to 80.04 percent in H1’23 against 76.3 percent in H1’22.
Cadbury Nigeria Plc with a 534.6 percent decline in profitability, recorded N14.54 billion pre-tax loss following a13.6 percent and 15.2 percent increase in raw material cost and cost of sales respectively. However, its raw materials cost to the total cost of sales fell to 42 percent compared to 43.6 percent in the corresponding period in 2022.
Despite a paltry 4.9 percent and 6.3 percent increases in its raw material cost and cost of sales respectively, Nigerian Breweries Plc posted N67.84 billion pre-tax losses from N25.7 billion pre-tax profit in H1’22, while raw material input gulped 71.2 percent of its total cost of sales.
Nestle Nigeria Plc with 10.5 percent and 8.6 percent increases in raw material cost and cost of sales respectively, recorded N61.12 billion in pre-tax loss as against N43.74 billion PBT in H1’22, indicating a 258 percent decline, while Dangote Sugar Refinery, another company that took a hit from the rising cost of raw materials, posted N31.37 billion in loss before tax from N29.73 billion profit before tax in H1’22.
The proportion of Dangote Sugar’s raw material cost to its total cost of sales stood at 80.8 percent H1’23, a 1.9 percentage point decline from 82.7 percent in the corresponding period in 2022.
Analysts blame devaluation, subsidy removal, others
Commenting on the development, Akinloye Ayorinde, Economic and Investment Strategist at United Capital Plc, attributed the increase in cost of raw materials to global supply chain disruption and devaluation of the naira.
According to him, the disruption of the global supply chain has impacted prices of commodities imported for use by consumer goods companies. In addition, most of them have had to rely on sourcing dollars from the parallel market, causing higher costs in Naira, he said.
He said: “Many consumer goods businesses have had to raise prices in 2023 to cope with surging costs. Despite the price increases, many consumer goods businesses have still had to record weaker margins due to inability to fully pass on cost increases to consumers.
“On the other hand, due to weak income growth, rising prices have forced consumers to prioritise purchases and cut back spending on discretionary consumption items.”
David Adonri, Vice Chairman, Highcap Securities, said: “Two major factors contributed to the escalation in cost of inputs in Q2 2023. These were the sudden hike in price of fuel after subsidy was removed and depreciation of Naira after exchange rate unification.
“Almost all raw materials, machinery, equipment and their spare parts used for production in Nigeria are imported.”
Continuing, he said: “The increased cost of production by manufacturers will cause prices of goods and services to be inflated. It will erode the purchasing power of consumers and impoverish more people. Manufacturing companies that cannot pass the extra cost to consumers may become unprofitable and fail to pay dividends to shareholders.
“The financial stress they are thrown into may prevent them from repaying their debt to creditors. This may have a domino effect on banks’ balance sheets.”
“Boost working capital to absorb shock”
Adonri of Highcap Securities, said: “Manufacturers need to boost their working capital to immediately absorb the shock. They also have to increase their cost recoveries and controls so as to remain competitive and cost effective.
Moving forward, they must hedge against currency risks and re-strategize to make their production less import dependent.
“He, however, stated that the heightened cost of operations in the economy is a short term dislocation, saying that sooner or later, the economy will readjust to the new price levels.
On his own part, Ayorinde of United Capital said: “In periods of broad based economic turmoil, it is typically difficult for companies to navigate the terrain. However, attempting to source raw materials locally and where possible, investing in backward integration programs, could be strategies that would help consumer goods businesses cope with economic shocks that impact their costs.

Show More

Related Articles

Leave a Reply

Back to top button