Harsh Operating Environment Worsens Manufacturers’ Ordeal

 

Nigerian manufacturers are fast becoming an endangered species. Many are still grappling with and are yet to fully recover from the big hit they took as a result of the COVID-19 pandemic. The current hike in the price of diesel has piled more pressure on local manufacturers. The current hike in the commodity adds to challenges such as scarce FX, currency devaluation, unfavourable port practices, epileptic power supply, poor road infrastructure and an unyielding inflationary trend to further tighten the noose on the manufacturers.

 

Diesel which fuels, the power generating sets in most production facilities, and the trucks used for the supply and distribution of goods, has seen a price increase of around 18%. The pump price of a litre of diesel jumped from N700 to N850 recently. And this is expected to rise to N1500 in the next few weeks if the current trend persists.

 

For the record, the pump price for diesel was N288.1/ litre, N317.45/ litre, N314.25/ litre, N243.92/ litre, N269.89/ litre in Lagos, the South East, South West, North West, and North East regions, respectively, as at January 2022. The increases have raised the operating cost to an unbearable level considering that self-generated electricity, especially through diesel-powered sources, account for 30 per cent of local manufacturers production.

 

President of the Lagos Chamber of Commerce and Industry (LCCI), Dr Michael Olawale-Cole, at the LCCI Quarterly press conference held in April on the state of the Nigerian economy warned that the manufacturing sector will likely experience more shocks from the rising cost of diesel, logistics, foreign exchange illiquidity, domestic inflationary pressure, poor public infrastructure, heightened insecurity in major food-producing states, port-related challenges coupled with the Russian-Ukraine war which has triggered supply chain issues in the energy and agriculture markets.

 

The high cost of diesel has soared into the scarcity of petrol in several parts of the country. Citing the causes of the hike in diesel price, Bennet Kories, the National President, Natural Oil and Gas Suppliers Association (NOGASA), told journalists in Abuja, “You and I know that we import everything now in Nigeria. Diesel is an imported product and it is fully deregulated. So, the importers are not getting dollars at the official CBN rate to import diesel. Everybody is going to the black market to get dollars to import their products and so you expect the price of diesel to be high.”

 

Also speaking on the woes of manufacturers, Dr Muda Yusuf, Chief Executive Officer of Centre for the Promotion of Private Enterprise (CPPE), said, “Manufacturers are experiencing significant spikes in the cost of raw materials, cost of fund, high import duty, prohibitive cost of transportation and high cost of logistics. A huge proportion of these costs cannot be passed on to the consumers because of weak purchasing power and high consumer resistance. Given the strategic importance of manufacturing to the Nigerian economy, what the sector needs at this time is more stimulus and not more taxes.”

 

Meanwhile, food manufacturers which are saddled with the responsibility of supplying healthy, affordable packaged foods to the growing population have been one of the hardest hits. In the face of a threatening global food insecurity level, this does not augur well for the country.

 

Amid declining sales as a result of squeezed consumer wallets, food manufacturers have had to resort to expensive fuel due to poor electricity supply from the national grid to sustain the operation of their plants.

 

Citing feedback from local manufacturers, Mr. Segun Ajayi-Kadir, Director-General, MAN, in an interview with the News Agency of Nigeria (NAN) said the cost of running diesel in the various manufacturing plants is becoming unsustainable, and dragging capacity utilisation.

 

Alhaji Mutair Sobiye, Chairman, Table Water and Beverages Producers Association of Nigeria (TWABPAN), Egba zone, captured the gruesome experience of manufacturers more succinctly. He explained that manufacturers are being forced to shut down their plants as production costs spiral out of control. He too mentioned the cost of diesel and various production inputs as some of the reasons behind the major collapse in the sector.

 

Similarly, flour millers, have had to combat the increased price of global wheat & freight costs, FX scarcity, in addition to high duty levies due to the combined effect of the cassava levy & subjective duty valuation now in practice, among other challenges, are experiencing skyrocketing production costs.

 

More so, the high cost of diesel will further squeeze the sector’s operating margin. This scenario put at risk the concerted public-private efforts targeted at boosting the supply of quality and affordable staple foods to an expanding population.

 

Another top-level executive of a food product packaging company in Agbara, Ogun State, who pleaded to remain anonymous, said an increase in fuel price always increases the cost of operating plant machines as well as moving goods in and out of the company. 

 

“The hike in diesel price combines with the rise in the global prices of food commodities to put food manufacturers in an even tighter position. As a result of Russia’s invasion of Ukraine, global food prices have risen in 2022, he said.

 

Similarly, while commenting on the recent increase in the prices of bottled water and sachet (pure) water as a guest on Channels TV’s Business Incorporated, Favour Ogunniranye, Senior Analyst, Financial Derivatives Company, said that manufacturers, in a bid to maximize profit as the cost of raw material rises, are faced with the option of either increasing production volume or prices.  

 

Ogunniranye said: “In 2022, we have seen that manufacturers are facing further cost pressures, considering that diesel prices aren’t what they used to be, so we can even expect a further hike in prices. Because at the end of the day, the goal for a lot of businesses is profit maximisation, and that can only be achieved through either costs management or an increase in volume sold or the selling price of the product. So, the major factor is the cost”

 

Broadly, according to the details highlighted in the Food and Agriculture Organisation of the United Nations (FAO) Food Price Index report which tracks the international prices of the most commonly traded food commodities, released in April 2022, vegetable oils, cereals and meat top the list of foods which prices have witnessed exponential increases.

 

The FAO Food Price Index averaged 159.3 points in March 2022, up 17.9 points from February, making a giant leap to a new highest level since its inception in 1990. “The latest increase reflects new all-time highs for vegetable oils, cereals and meat sub-indices, while those of sugar and dairy products also rose significantly,” FAO said.

 

The upward trend in the prices of food commodities is creating an unfortunate situation whereby food manufacturers, having cushioned prices for as long as possible and no longer able to bear the cost, are forced to pass on the extra cost of production to the consumers who are battling with dwindling disposable income and purchasing power. Likewise, as manufacturers’ operating expenses continue to rise, their revenue diminishes.

 

Therefore, as food manufacturers’ profitability level is declining, the employment-generating and retaining capacity of food manufacturers and their other economic value propositions are also expected to decline. A further increment in the price of diesel will compound the woes of food manufacturers.

 

Meanwhile, Food manufacturers have been raising the alarm over the negative impacts of the Nigeria Customs Service’s use of an arbitrary valuation methodology to determine the duty charge on their imported raw materials at the ports. Customs now bases its duty charge on the spot price of an imported commodity instead of the price indicated on the receipt presented by the importer.

 

Abiodun Olorundenro, manager, AquaShoot, expressed his disapproval of the practice at the port. “I don't think it is right for the Customs to base their duty valuation on Consumer Price Index (CPI). What this means is that the imported commodity will cost more and the manufacturer will pass the extra cost to the consumers,” Olorundenro said. “This is one of the reasons why food prices are surging, and we would see a further surge if the government fails to address the issue.”

 

Food manufacturers are paying more for importing raw materials that are not readily available in the country. This is a major challenge for many food manufacturers. Again, a good example would be the millers and bakers, who have been agitating the removal of the 15% cassava levy as part of a cumulative 30% levy imposed on them by the government.

 

So far, local food prices are already reflecting the choking effects of the multiple operating challenges. A loaf of premium bread, which previously sold for between N400 and N450, now sells for N700. Food price is expected to rise further as the latest CPI released by the National Bureau of Statistics (NBS) on Wednesday, June 15, showed inflation rose by 0.89% points between April and May to reach an 11-month record of 17.71%.

 

The composite food index rose to 19.50 percent in May 2022 and this rise in the food index was caused by increases in prices of Bread and Cereals, Potatoes, Yam, and other tubers, Fish, Meat, and Oils. Very similar to some of the food products flagged in the FAO Food Price Index.

 

Meanwhile, the penultimate year syndrome, a term that is used to describe the various economic upheavals that often characterize a year preceding a national election, is expected to impact activities in the country going forward, and the inflationary trend is likely to worsen.

 

If the trend continues and food prices increases, the consumers may start trading off quality, safe foods for cheaper but unsafe alternatives with a negative impact on public health. The Federal Government will have to intervene fast to help food manufacturers as well as prevent the public from making a trade-off that poses a risk to their health.

 

Consequently, one of the key interventions that food manufacturers believe could seriously move the dial in terms of bringing down the cost of food products in the country is the adoption of near-zero duty on raw materials and inputs meant for food  manufacturing.