Manufacturers incur heavy losses as forex crisis, inflation bite harder


Manufacturers incur heavy losses as forex crisis, inflation bite harderIn 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.

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