MANUFACTURERS EXPERIENCE SIGNIFICANT LOSSES AS INFLATION AND THE FX SITUATION GET WORSE.

The cost of raw materials input for consumer products companies increased by 18.5 percent in the first half of 2023 (H1'23), a situation that affected the profitability of the companies. This increase is likely a result of the depreciation in the value of the Naira combined with the persistent inflationary pressure.

Nigerians have been struggling with an ongoing rise in the cost of goods and services, which has been made worse by insecurity, the devaluation of the naira, and the disruption of the global supply chain brought on by the escalating conflict between Russia and Ukraine.

The National Bureau of Statistics (NBS) data indicated that Nigeria's inflation rate ended H1'23 at 22.79 percent.

Since then, the percentage has increased to 25.8% as of last month, and it is anticipated that it will continue to increase this month.

Additionally, as a result of the Central Bank of Nigeria's (CBN) mid-June foreign currency reforms, the Naira's value versus the US dollar, which was N448.04/US$ at the start of the year (2023), plummeted to N823.13/US$ by the conclusion of the first quarter.

The severity of this trend is seen in the rising cost of manufacturing consumer items, the majority of which are basic necessities consumed often by households. These include, among other things, foods and drinks, toiletries, over-the-counter medications, cleaning and laundry supplies, plastic items, and personal care products.

Eight major Fast Moving Consumer Goods, or FMCG, 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, revealed that the amount spent by the companies on raw material procurement was higher.

As a result, the enterprises' ratio of the cost of raw materials to their total cost of sales increased to 79.64 percent in H1'23 from 78.1 percent in H1'22.

According to the financial reports' specifics, the enterprises' procurement of raw materials accounted for 50.2% of their N1.263 trillion revenue in H1 of 23. However, this represents a two-percentage point decrease from the 52.2 percent of their sales (N1.026 trillion) spent on purchasing raw materials during the same time in 2022.

The cost of sales for the 10 companies increased by 16.2% to N794.404 billion in H1'23 from N685.39 billion reported in the comparable year as a result of the rise in raw material costs.

As a result, the companies' attempts at product downsizing and price increases failed to provide the anticipated outcome, and they recorded N104.54 billion in Loss Before Tax (LBT) as opposed to N151.23 profit posted in the similar period of 2022.

Additional information revealed that five of the eight FMCG companies examined reported loss before tax, with the exception of the two industrial products companies (Meyer Plc and Berger Paints Plc), which experienced over 100% increases in their profitability.

ANALYSES OF BUSINESS FINANCES

The hardest hit company, International Breweries Plc, reported a loss before tax of N41.43 billion in the first quarter of 23 compared to a profit before tax (PBT) of N1.82 billion in the first quarter of 22. This was despite a 22.6 percent increase in raw material costs and a 16.9 percent increase in its overall cost of sales.

In the meantime, the ratio of the company's total cost of sales to the cost of raw materials increased to 80.04 percent in H1'23 from 76.3 percent in H1'22.

With a loss of N14.54 billion before taxes and a profit reduction of 534.6 percent, Cadbury Nigeria Plc also experienced increases in raw material costs of 13.6% and sales costs of 15.2 percent. However, compared to the same time in 2022, its raw materials cost as a percentage of total cost of sales decreased to 42% from 43.6 percent.

Nigerian Breweries Plc suffered N67.84 billion pre-tax losses from N25.7 billion pre-tax profit in H1'22, while raw material input gobbled up 71.2 percent of its overall cost of sales, despite only modest increases in its cost of raw materials and cost of sales of 4.9 percent and 6.3 percent, respectively.

Nestle Nigeria Plc reported a pre-tax loss of N61.12 billion as compared to a profit before tax of N43.74 billion in H1'22, a 258 percent decline. Dangote Sugar Refinery, another business that was negatively impacted by the rising cost of raw materials, reported a loss before tax of N31.37 billion as compared to a profit before tax of N29.73 billion in H1'22.

ANALYSTS ASSIGN BLAME TO THE LOSS OF SUBSIDIES, DEVALUATION, AND OTHER FACTORS.

Akinloye Ayorinde, Economic and Investment Strategist at United Capital Plc, commented on the situation and linked the depreciation of the naira and disruption of the global supply chain to the rise in the price of raw materials.

He claims that the disruption of the global supply chain has had an effect on the cost of imports of raw materials used by consumer products industries. Additionally, he added, the majority of them were forced to purchase dollars on the black market, which drove up Naira exchange rates.

Vice Chairman of Highcap Securities David Adonri stated: Two significant causes contributed to the rise in input costs in Q2 2023. These included the abrupt increase in fuel prices following the removal of subsidies and the depreciation of the Naira following the unification of currency rates.

Nearly all of the raw materials, machinery, equipment, and their replacement parts used in nigeria are imported.

For his part, Ayorinde of United Capital said: Companies often find it challenging to negotiate the terrain during times of widespread economic turbulence. However, trying to source raw materials locally and, when feasible, engaging in backward integration initiatives, could be tactics that help businesses that make consumer goods deal with economic shocks that have an influence on their costs.