Manufacturers of consumer goods are counting their losses to high cost of raw materials due to inflation and exchange rate volatility, which resulted to N266 billion loss in 2023, from profit of 320.5 billion in 2022, a development which would likely keep the prices of goods high in the months ahead despite positive trends in exchange rate in recent weeks.

The manufacturers have recorded about 25.5 per cent rise in cost of raw materials in 2023 and Financial Vanguard findings indicate that current stocks of raw materials in their warehouses were procured at even higher cost through first quarter of 2024.

While most of them tracked have recorded erosion of profit, declaring massive losses in their full year financial statement, the companies have strategized to recover the losses through inflation targeting price mark ups in 2024.

Nigeria’s headline inflation surged to 33.2 percent at end of First Quarter 2024, from 21.8 percent at the beginning of last year while exchange rate surged to average N1500/$1 in the Q1’24 from N650/ $1 in the corresponding period of last year.

the manufacturers said these two developments resulted in an unprecedented rise in the cost of raw material inputs and cost of producing consumer goods, thereby resulting in massive rise in prices of goods and services which Nigerians have continued to bear.

Financial statements of some leading Fast Moving Consumer Goods Companies, FMCG, showed that the amount spent by the companies on raw materials’ procurement rose to N2.77 trillion in 2023 up from N2.21 trillion in 2022, indicating a 25.5 percent increase.

The manufacturers said as a result of the increase in the cost of raw materials, the cost of sales jumped 24.8 percent to N3.53 trillion in 2023, from N2.83 trillion in 2022.

Moreover, the companies spent more than half of their revenue on raw materials in 2023. Specifically, the companies’ spent 57.8 percent of their total revenue of N4.795trillion in 2023 on raw materials procurement.

The huge increase in the cost of sales in addition to effect of revaluation of their dollar loans resulted in a N266.51 billion combined loss before tax, indicating a massive reversal of fortune for companies that had declared N320.5 billion profit before tax the previous year.

The companies affected by this adverse fortune includes Unilever Nigeria Plc, Nestle Nigeria Plc, Cadbury Nigeria Plc, Dangote Sugar Refinery Plc, NASCON Allied Industries Plc, BUA Foods Plc, Flour Mills of Nigeria Plc, Honeywell Flour Mills Plc, Nigerian Breweries Plc, and Champion Breweries Plc.

Others are Guinness Nigeria Plc, International Breweries Plc, May & Baker Nigeria Plc, and Neimeth Pharmaceutical Plc.

What the companies are saying

While attributing the jump in the cost of raw materials to the twin problem of exchange rate volatility and inflation, the Managing Director/Chief Executive of Nigerian Breweries (NB) Plc, Hans Essaadi, said that the 15 percent drop in the company’s operating profit and N106 billion net loss during the year, were due, mainly, to high input cost.

NB posted a 16 percent Year-on-Year (YoY) increase in its raw material costs to N286.06 billion, while the ratio of its raw material cost to the cost of sales stood at 73.9 percent.

Speaking at the Pre-AGM media briefing in Lagos last week, Essadi noted a corresponding increase in the prices of raw materials as inflationary pressures heightened and the Naira depreciated. He stated: “Our operating profit fell by 15% due to higher input cost and one-off re-organisation cost despite strong and aggressive cost savings and other efficiency measures.

“Coupled with the impact of the devaluation of the naira which resulted in a foreign exchange loss of N153 billion, the company recorded a net loss of N106 billion during the year.

“So, the drivers of our cost were inflation and devaluation. For example, when we have raw materials like malt and barley, they go directly up with devaluation. And because they are imported, there’s a sort of price raising.”

He, therefore, said that consumers should expect price increments as a direct result of Naira devaluation and inflation.

“And at the moment, on the basis of this inflation, we will continue to see prices go up.

“Food inflation is hitting almost 40% at this point and so for the short term, we will also continue to see consumer pricing going up”.

He, however, said that the company’s input costs “are going up more than the prices that we selling today because we are very conscious of affordability.”

Also, BUA Foods Plc, in its 2023 earnings release noted that the increase in its cost of sales was 64%, amounting to N468.98 billion in 2023 which was driven by increase in raw materials cost and energy cost.

The company stated: “The high input cost environment and further devaluation of the Naira against the US Dollar weighed heavily on prices for raw materials. This resulted in higher cost of production.”

Speaking in the same vein, Managing Director, Chemical and Allied Products (CAP) Plc, Bolarin Okunowo, attributed the high cost of raw material inputs to removal of petrol subsidy by President Bola Tinubu during his inauguration in May 2023.

He however, stated: “Our performance in the full year 2023 is a testament to our resilience as a business. Despite facing numerous policy and macroeconomic challenges throughout the year- notably the cash crunch from the naira re-design, the removal of petrol subsidies leading to a rapid escalation in the prices of raw materials, general goods and services, and foreign exchange challenges-we steadfastly maintained our reputation for excellence by providing high-quality products and services that delight our customers.”

Companies’ remedial actions

Owing to the persistent increase in the cost of raw materials and the need to save cost, most of the companies noted that one of their priority areas for 2023 was localisation of their inputs.

For instance, Nigerian Breweries Plc explained that it has continued to invest resources in the local development, improvement and commercialisation of its agricultural raw materials, saying: “Our collaboration with relevant local and international research institutes has been expanded to further assess and improve the performance and adaptability of selected registered local sorghum varieties and to develop new sorghum varieties with improved quality for the industry and increased yield for the farmers.”

To increase the positive impact of local sourcing of its agricultural raw materials, the company said it has continuously expanded its sorghum cultivation and sourcing areas to new communities.

In an explanatory note to its 2023 earnings release, Unilever Nigeria Plc, said: “Certain events in the last half a decade such as the COVID-19 pandemic and the Russia and Ukraine conflicts have necessitated businesses to localise their supply chain.

“Localisation is beneficial to companies as it helps corporates to reduce costs, achieve faster delivery times, shield against supply chain risks, reduce their dependence on overseas suppliers, and build a self-sufficient local ecosystem.

“As part of our localisation initiative, we have increased our locally sourced agricultural materials to over 50% between 2019 and 2023.

“We are focusing first on our main crops, such as palm oil, cassava, turmeric, garlic, and onion.”

On its part, Dangote Sugar Refinery (DSR) said it’s channeling resources towards ongoing backward integration programme (BIP) in Dangote Taraba Sugar Limited, Dangote Adamawa Sugar Limited and Nasarawa Sugar Company Limited.

The company said: “In line with the core objective of the National Sugar Master Plan which is for Nigeria to attain self-sufficiency in sugar production, Dangote Sugar is working on enhancing its existing refinery operations in Numan, Adamawa State, as well as developing its greenfield sites at the Nasarawa Sugar Company Project, amongst other sites.

“The company intends to achieve 1.5MT annually from locally grown sugarcane.” The story is the same for Nestle Nigeria Plc, which said that on a continuing basis, it explores the use of local raw materials such as soya bean, maize, cocoa, palm oil, sorghum, cassava and corn starch in its production processes in a number of its products.

Increased cost, cause of losses — Adonri

Meanwhile, a financial analyst and Vice Chairman at Highcap Securities, Mr. David Adonri, said that besides the factors listed by the companies, insecurity also hampered local sourcing of raw materials.

He stated: “Nigeria’s economy has been grappling with cost push inflation for several years occasioned by insecurity which is crippling domestic sourcing of raw materials and depreciation of the Naira causing imported raw materials to be costly.

“As the lion share of manufacturing cost, the increased cost has plunged many companies into extraordinary losses from which they require many years to recover,” he said.

“All elements in the economy, from loss of tax by government to loss of purchasing power of consumers, are experiencing the negative impact of cost push inflation. “Investors in the capital market are also groaning under this situation as the value of their investment in several manufacturing companies have dwindled considerably,” Adonri added. (Vanguard)

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