Bleak 2016 as manufacturers scramble for survival in 2017

While latest official figures from the Central Bank of Nigeria (CBN) may have shown a slow decline in production activities in the manufacturing sector compared to other months in 2016 using the Purchasing Managers’ Index (PMI), activities in the industry have shown a negative assessment with fears of what is yet to come in 2017 if currentt challenges prevail. FEMI ADEKOYA reviews how the real sector fared in the 2016 financial year.

For operators in the real sector, the fears expressed at the climax of 2015 were confirmed in 2016 with greater threats to the continued existence of many businesses, as the year came to an end.

While the Manufacturing PMI stood at 46.0 index points in November 2016, indicating a slowing decline in the manufacturing sector during the review period, a marginal improvement compared with the previous month level, operators’ perception of the report reveals a disparity between data and reality.

For some, the prevailing economic condition has led to a change in operating business models, while for others, it has led to operating below an all-year low capacity utilization level.Indeed, the manufacturing sector is faced with myriads of problems ranging from the scarcity of foreign exchange (forex), high-interest rate and cost of raw materials, unfavorable policies among others, while the bottom-line of the listed equities, especially in the last financial year have remained susceptible to the harsh operating environment facing the agri-business in Nigeria.

The most affected was the share price of these firms on the Nigerian Stock Exchange, which had remained stagnated at nominal value year to date following investors’ apathy that has negatively impacted on the demand of the stocks.The sector is expected to drive the nation’s economy, but as sales revenues and profits decline, manufacturers will cut back on hiring new employees, or freeze hiring entirely.

In an effort to cut costs and improve the bottom-line, the manufacturer may stop buying new equipment, curtail research and development and stop new product rollouts. Expenditures for marketing and advertising may also be reduced. These cost-cutting efforts will impact other businesses, both big and small, increase cost of goods and impede economic growth.

Grappling with input cost pressure and weak consumer purchasing power, many bluechip companies like Nestlé Nigeria Plc, Nigerian Breweries Plc, Dangote Cement Plc, and Lafarge Africa, in the first half of the year, suffered combined profit losses to the tune of N51.86b, while there are indications that other unlisted equities may have incurred more losses during the period.

With the trend prevailing in the third quarter, more financial losses were recorded, as access to foreign exchange remained limited, while the value of the naira continued to depreciate.

A review of unaudited financial reports of many of the firms for the first half of 2016 revealed a struggle between balancing rising input cost pressures and passing the inflationary pressures on already constrained consumers by raising prices of some products during the period.
Some of the input cost pressures being encountered by many manufacturers border on foreign exchange losses on dollar loans, the inability to access foreign exchange, the high cost of production, as well as, poor electricity supply and tariff hike.

Others are prolonged gas supply shortages across Nigeria, which forced companies to rely on the more expensive backup – low pour fuel oil (LPFO), monetary policies and constrained consumer purchasing power.

In its latest Manufacturing PMI Report, the CBN stated that while production level, new orders, employment level and raw material inventories declined at a slower rate, supplier delivery time improved at a faster rate in November 2016.

Indeed, the report showed that 12 of the 16 sub-sectors surveyed recorded declines in the review month in the following order: computer & electronic products; primary metal; petroleum & coal products; transportation equipment; furniture & related products; printing & related support activities; nonmetallic mineral products; fabricated metal products; chemical & pharmaceutical products; textile, apparel, leather & footwear; paper products; and appliances & components. The remaining four subsectors grew in the order: cement; food, beverage & tobacco products; plastics & rubber products; and electrical equipment.

At 46.9 index points, the production level index for manufacturing sector declined for the eleventh consecutive month, but showed marginal improvement compared with the index recorded in October 2016.

Ten manufacturing sub-sectors recorded decline in production level during the review month in the following order: primary metal; petroleum & coal products; computer & electronic products; transportation equipment; furniture & related products; fabricated metal products; nonmetallic mineral products; paper products; chemical & pharmaceutical products; and printing & related support activities.

The appliances & components sub-sector remained unchanged, while the remaining five sub-sectors grew in the review period in this order: cement; food, beverage & tobacco products; electrical equipment; plastics & rubber products; and textile, apparel, leather & footwear.

Following a drop in manufacturing activities, employment level index in the month of November 2016 stood at 40.6 points, indicating declines in employment level for the 21 consecutive month.

In his assessment of activities in the real sector for the year, the President, Manufacturers Association of Nigeria (MAN), Dr. Frank Jacobs said the sector was passing through difficult times and would require manufacturers to be creative to remain in business, while seeking incentives from the Federal Government to encourage local production.

According to him, more than 50 firms have shut down operations with many more struggling to maintain their production schedule.He said the resource-based industrialisation policy, which involves the utilisation of the nation’s abundant natural resources in making products the country needs would not come without a cost, urging manufacturers to retool existing technologies and production processes.

“The absence of a conducive manufacturing environment and basic infrastructure would continue to draw back the sector, except something urgent is done to reverse the situation. Power is a major cost for manufacturers and they will explore opportunities where it is cheaper to produce their goods.

“Conversion of diesel generators to gas is a viable alternative, but it is not cheap for small-scale industries, while gas supply has equally been hampered by continued destruction of oil and gas facilities by militants,” Jacobs added.

The Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA), noted that the real sector was reeling under the burden of rising costs of production in a state of near-economic stagnation, while facing the prospects of being the base by which the government hoped to obtain tax revenue to finance the economy.

The chamber noted that the outlook of the economy had been bleak in the last 11 months, as the rate of inflation had doubled; electricity generation reduced by almost 50 per cent, and the price of petroleum products had also doubled.

NACCIMA’s National President, Bassey  Edem, noted that while the efforts of the Federal Government in addressing the challenges could be acknowledged, they had not translated into measurable positive indicators; rather they had led into recession, which had become a thing of worry to private sector operators.

He noted that business operators and Nigerians were patiently looking forward to the “change” that would bring about the economic turnaround of the country.

The president of the Nigerian Textile Manufacturers Association (NTMA), Mrs Grace Adereti, advocated the revival of the Commodities Board as a measure to ease textile manufacturers’ access to raw materials for production.

Lamenting the current situation, Aderetin said: “When we contacted the farmers, they said that they are not ready to supply to us at the price negotiated by the ginners. Further inquiry showed that farmers based their price on what they will generate from exporting the cotton. They want to sell at 40 cents per kilogramme of cotton.

“If we accede to the price, our output will become uncompetitive considering the infrastructural deficit in the country, which affects the cost of production. We are in a fix. Some factories have suspended production because they do not have cotton for production.

“In the past, there was a market board and government had control over the price of cotton. We want the government to intervene in this matter and save manufacturers. We have the machinery and the workforce and we are ready to produce, but we are hindered by the present situation.”

The Director-General of the Lagos Chamber of Commerce and Industry (LCCI), Muda Yusuf decried the lack of a fiscal policy framework that would guide operations in the real sector.

According to him, if the fundamentals are not right, backward integration will not work as many linkages in the value-chain are missing.
“We need to build capacity of investors in the value-chain for backward integration to be successful. Except for the big manufacturers with huge capacity, it could be too much for industrialists to embark on the process with little or no support. Government needs to embark on a holistic and integrated approach as some of the raw materials are not easy to get as it is being described”, Yusuf said.

While government has assured operators of improved business environment in 2017 as well as a recovery from economic recession, operators have expressed moderate optimism on the outlook for 2017 if concerns raised are not addressed.