Output Drops as Companies Combat Rising Energy Costs

• Output Drops as Companies Combat Rising Energy Costs

Operators in the real sector relying on diesel and gas for production now grapple with higher operational costs amidst drop in capacity utilisation levels. Nigeria’s foreign exchange earning is improving on the back of rising oil prices but manufacturers say challenges abound as energy costs rise above 40 per cent of operating costs.

Cost-cutting measures by firms will lead to job losses and slow down economic recovery. Having explored options of rightsizing and downsizing in the 2016 financial year as part of measures to stay afloat, many operators are considering further reduction in staff profile as they are having difficulty paying existing staff while rationing fuel consumption to cut down on operational costs.

With the ratio of output not commensurate with cost of input incurred by operators, capacity utilisation has dropped below 40 per cent from about 44 per cent recorded in the third quarter of 2016 forcing many services sectors to reduce numbers of hours spent at work.

Firms that had no previous challenges with energy costs have expressed worry about rising cost of operations amid lull in the economy, rising inflation and dwindling purchasing power of consumers.

Although the Automotive Gasoil (AGO) marketing industry, otherwise known as diesel has been deregulated, sustaining operations at N265 per litre for many businesses and $8 for one standard cubic metre of gas for gas users instead of $2.50 has become unbearable.

Already, some operators are exploring alternative energy like solar while those dependent on diesel are cutting back on the number of hours being used for operations.

Acknowledging these challenges, a communiqué issued at the end of the last monetary policy committee meeting of the Central Bank of Nigeria noted that the structural factors driving the sustained pressure on consumer prices, such as the high cost of power and energy, transport, production factors, as well as rising prices of imports are yet to abate.

For instance, latest data released by the National Bureau of Statistics (NBS) showed that there was cross-cutting price increase in all divisions and sectors nationwide, just as it said prices in communications and restaurant, hotels and hospitality sector recorded slowest pace of growth as at the end of 2016, many of whom are dependent on diesel to sustain their operations.

For manufacturers, it is a sorry tale as data from the association showed that capacity utilization is below 40 per cent while cost of providing alternative power, both for gas and diesel hit about N100 billion in 2016 compared toN58 billion in 2015.

With rising energy costs, President, Manufacturers Association of Nigeria (MAN), Dr. Frank Jacobs noted that the productive sector remains troubled due to various challenges in the operating environment.

“The absence of 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.

Explaining the plight of operators in the services sector, the Director-General of the Lagos Chamber of Commerce and Industry (LCCI), Muda Yusuf explained that the Federal Government is caught between managing the joy of rising oil prices and the negative effects of such on the productive sector.

According to him, government must be creative in tackling these challenges. Yusuf noted that businesses are being killed everyday through poor power supply and low purchasing power from consumers.

“Businesses are complaining. Petrol and diesel costs are unbearable at the current rates. It is a suffocating situation and I hope the issues of ease of doing business are addressed before opening markets to other economies,” he added.

Noting that business operators and Nigerians are patiently looking forward to the “change” that will bring about the economic turnaround of the country, the Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA), added that the real sector is reeling under the burden of rising costs of production in a state of near-economic stagnation, even as government seeks tax revenue from the sector to finance the economy.

The chamber noted that the rate of inflation has doubled, electricity generation reduced by almost 50 per cent, while the price of petroleum products has also doubled.

NACCIMA’s National President, Bassey Edem, noted that while the effort of the Federal Government in addressing the challenges can be acknowledged, the efforts have not translated into measurable positive indicators; rather it has led to a thing of worry to private sector operators.

The World Bank had in its latest report on the ease of doing business ranked Nigeria low among other countries.