September 28, 2022
  • September 28, 2022

Rising Inflation, Energy Costs and Shrinking Manufacturers’ Margins | The Guardian Nigeria News

By on August 24, 2022 0

Manufacturers have faced tougher issues in recent years as they try to keep up with growing demand, changing consumer trends and operating expenses. Businesses and consumers are currently struggling to keep up with high prices for everyday items and raw materials as inflation continues to rise. The situation is dire for everyone and there seems to be no end in sight. FEMI ADEKOYA writes about how energy costs and inflation remain a challenge for local production.

Globally, concerns about inflation have led many countries to consider an aggressive approach to slowing the economy. Consumers are also starting to think twice before spending on goods and certain services.

While a forced recession seems to have worked for some economies, the situation is not the same in many African countries, especially in Nigeria, where a regime of higher interest rates spells the end of a productive sector. barely keeping afloat.

With the crisis between Russia and Ukraine, the rising cost of energy around the world has resulted in a significant upward trend observed in most economies, with the prices of goods and services reaching unprecedented levels.

The International Monetary Fund has also projected that the current inflationary pressure will continue until 2023, raising further concerns about a resulting global economic recession. In the same vein, the IMF raised the inflation projection for advanced economies to 5.7% and to 8.7% for emerging and developing economies.

The managing director of the IMF encouraged the central banks of each country to fight against the rise in the rate of inflation. According to her, “Even now the prices are going up. We need to mitigate it,” she said. “Each country’s central banks must take decisive action to suppress inflation until it becomes clear that the inflation rate is moving within a specific range.”

For many manufacturers, the current situation, which has been aggravated by the lack of foreign exchange for critical raw materials, may signal the start of a period of increased pass-through costs resulting in higher product prices and service. While rational, producers are also treading cautiously given that many households are barely struggling to get by and higher prices could mean substitution with cheaper imports and other alternatives.

The industrial sector must be able to act quickly to counter inflation and maintain profitability as the cost of materials continues to rise. What steps should manufacturers take to reduce the financial impact on the industry as a whole, and precisely how much inflation influences manufacturing, are questions that need to be answered.

Input cost pressures are unlikely to ease anytime soon. According to a January 2022 PwC Pulse survey, 68% of manufacturers agree that inflation is expected to remain high at the end of 2022. To offset rising input costs, from raw materials to parts and components to energy , nearly three-quarters (73%) of industry leaders expect to have to raise the prices of their goods and services through 2022, presumably to protect both gross and profit margins.

With manufacturers impacted on multiple fronts, they are looking far beyond the traditional cost-containment playbook to preserve margins. Pricing that aligns perfectly with cost of goods or just-in-time inventory management approaches seem like quaint, distant memories. Most industry leaders now realize that they will need to find ways to inject agility and resilience into their organizations. And quick. According to a PwC survey, 60% of them agree that increasing agility to operate better in a turbulent business environment will be important for their growth this year.

Already, local manufacturers across the country have urged the federal government to develop long-lasting national anticipatory policy measures against outside influences, to lessen the impact of global activities on the economy.

According to the Manufacturers Association of Nigeria (MAN), the current local challenges have been compounded by the lingering aftershocks of the COVID-19 pandemic and the ongoing Russian-Ukrainian war.

They noted that in addition to the need for ardent management of world peace, the series of world events and the lessons learned demand that national governments begin to take drastic measures to proactively manage these phenomena in the future. .

Local operators in the latest Manufacturer CEO Confidence Index (MCCI) for the second quarter of 2022, noted that although the operating environment in the quarter under review was quite better than the previous quarter due to adjustments convincing made by the government, manufacturers and households in response to the general increase in prices, shortage of foreign exchange, increase in the cost of energy, scarcity of raw materials and many others, caused by the war in Europe.

With an overall MCCI score which rose to 54.6 points in the quarter from 53.9 points in the first quarter of the year, MAN said the improvement in the index score was attributed to comments on the expected improvement in business situation, employment condition and level of production. in the third quarter of the year.

The Lagos Chamber of Commerce and Industry (LCCI) has also called for targeted funding of critical sectors such as agriculture, food processing, aviation fuels, transport and availability of foreign exchange for inputs manufacturers.

The chamber noted that it was evident that government intervention so far has had no impact on ever-increasing inflationary pressures.

Chief Executive Dr Chinyere Almona, who spoke on July 2022 inflation, said Nigerians were paying more for goods and services than they did exactly a year earlier in July 2021, at a relatively high rate of 19.64%.

Almona said that without concrete and rapid measures to intervene, the rising tide of the inflation rate could continue until the end of the year.

“A major concern is the scourge of inflation which is constraining production, causing job losses and courting an impending recession. The inflation rate could ease in the near term due to restrained consumer demand, harvests coming to an end in the third quarter and a resumption of wheat exports from Ukraine to Africa. However, there are fears of lower growth due to limited production in recent months.

Citing state inflation rates, she said the three lowest rates were recorded in Borno, Jigawa and Kaduna, while the highest rates were found in Akwa Ibom, Ebonyi and Kogi states. .

She therefore suggested that the government should come up with a targeted intervention for the movement of foodstuffs from production areas to areas of high demand to cushion inflationary pressures.

“Specifically, for manufacturers, input prices have skyrocketed. Items such as diesel, which most businesses depend on to power their factories, have continued to rise in price, leading to an unsustainable cost of production that is also translating into higher consumer prices.

“Nigeria’s energy crisis is compounded by poor electricity supply and a bumpy road to renewable energy deployment.”

Almona stressed the need for a combination of fiscal and monetary policies to tackle the key drivers of the scourge of inflation in Nigeria.

Furthermore, the Managing Director of the Center for Promotion of Private Enterprise (CPPE) and former Managing Director of the Lagos Chamber of Commerce and Industry (LCCI), Dr. Muda Yusuf, lamented that increased inflationary pressure remains worrying, with drivers dwindling.

He said: “In many cases, increases in production costs cannot be passed on to consumers. The implication is that producers also take a hit. This is more pronounced when the demand for the product is elastic. These are products that consumers can easily do without.

“The CBN’s accelerated budget deficit financing is a major driver of inflation. Fiscal deficit financing has been elevated to worrying levels with huge implications for the money supply and the effect on inflation. CBN deficit financing is powerful money and highly inflationary. It is an inflation tax.

“The main drivers of inflation include the high and rising cost of energy; worsening currency depreciation, increased transportation costs, high import duties on manufacturing inputs, foreign exchange market illiquidity, supply chain bottlenecks, security issues and low productivity resulting from structural challenges and low application of technology. The financing of the budget deficit by the central bank is also a major driver of inflation”.

“To combat inflation, all forms of taxes and levies on the importation of petroleum products should be suspended to provide respite from the soaring cost of energy. There should also be deeper commitments from stakeholders across sectors to develop a sustainable strategy on the way forward,” he stressed.

PwC analysts note that as manufacturers have a clearer picture of how input costs affect their margins, they will have a better understanding of any price increases for their product and service that they may need. to pass on to customers.

“As prices for energy, raw materials and other commodities rise, manufacturers need to find ways to cushion the impact on cost of goods sold. Many levers can be activated, such as the revaluation of all contracts. Which commodity-indexed contracts should be reconsidered? Which contracts should be fixed price? Has every contract renewal been reviewed for renegotiation? Is your trading strategy in line with today’s price volatility? It may also mean being more aggressive in finding alternative suppliers who offer more attractive prices, or suppliers closer to your operations to reduce delivery costs.

“While future cost fluctuations are unpredictable, it is nonetheless crucial to maintain a transparent and open dialogue with customers to manage expectations and provide visibility. Any price increase should be explained, preferably well in advance of it being made. You may also want to find ways to lessen the pain of these increases, perhaps by reducing service charges or prices for spare parts,” they added.