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Rising Cost of Raw Materials Endangers Consumer Goods Giants

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consumer goods
  • Rising Cost of Raw Materials Endangers Consumer Goods Giants

Top consumer goods manufacturing companies listed on the Nigerian Stock Exchange, NSE, are facing deeper financial difficulties arising from economic headwinds especially foreign exchange related cost pressures and inflation, leading to sharp increase in manufacturing inputs, particularly, raw materials and packaging items.

This is reflected in the audited financial results of four consumer goods giants – Cadbury Nigeria Plc, Nestle Nigeria Plc, GlaxoSmithKline, GSK Plc and Unilever Nigeria Plc – for the financial year ended December 31, 2016, which shows 25 per cent rise in cost of raw materials procurement, from N96.3 billion in 2015 to N132.8 billion. This was coming despite remarkable decline in volume of output, capacity utilization and Manufacturing PMI during the period.

Cost of raw materials

The results also showed that the companies spent more on raw materials when compared to total cost of sales. While in 2015 cost of raw materials accounted for 63.9 per cent of cost of sales, in 2016, despite reduced level of manufacturing activities, cost of raw materials accounted for 72 per cent of total cost of sales.

Whereas all three companies, with the exception of GSK, recorded different degrees of increase in earnings, high cost of sales and distribution, particularly, cost of raw materials and packaging items, including energy cost meant that profit before tax and dividend for the year was constrained.

Though they posted N296.02 billion in revenue, 16.7 per cent increase over N252.71 billion posted by both companies in 2015, it was wiped out by a combination of high cost, unrealised exchange rate losses and high finance cost resulting in significant decline in profit.

Consequently, profit before tax for the four companies fell to N25.28 billion, representing 25.1 per cent decline compared to N33.74 billion achieved by them in the same period in 2015.

Cadbury ended up in loss position during the year, while GSK and Nestle managed to stay their heads above the troubled waters, though they recorded steep decline in profitability. However, Unilever, on the other hand, recorded increase in profitability.

Company breakdown

Cadbury

Breakdown showed that Cadbury posted N29.98 billion revenue but cost of acquiring raw materials and energy & utility pushed the company to N562.870 million loss before tax compared to N1.577 profit before tax recorded in the previous year. Item by item breakdown showed that raw material procurement gulped N12.134 billion as against N8.17 billion spent in 2015, a 48.5 per cent increase and 64.7 per cent of the company’s total cost, which stood at N23.119 billion.

Energy and utility took another chunk of N2.114 billion in 2016 compared to N949.74 million in 2015.

Added to this is high finance cost which rose to N17.798 million and unrealised exchange rate losses of N34.638 million which resulted in zero dividend declaration compared to N1.22 billion paid the preceding year in 2015.

Nestle

Though Nestle Nigeria Plc recorded 20 per cent increase in revenue to N181.91 billion during the year, rising cost of raw material and other consumables which stood at N75.45 billion compared to N57.42 billion in 2015, including N16.29 billion net loss on foreign exchange transactions resulted in 27 per cent reduction in profit before tax to N21.55 billion as against N29.322 billion during the previous year. The cost of raw material stood for 41.3 per cent of the company’s total cost and depleted the revenue by 58.5 per cent. Unlike Cadbury shareholders that are supposed to forfeit their dividend due to the ongoing crisis, Nestle on its part proposed N15.06 billion dividend for the shareholders, 31 per cent decline over N21.78 billion declared in the previous year.

GSK

Though GSK’s cost of procuring raw materials and total cost of sales decreased significantly to N742.7 million from N2.12 billion and N5.42 billion from N9.97 billion respectively, profit before tax fell by 82.6 per cent to N185.9 million from N1.07 billion in 2015.

Unilever

Unlike the rest of the companies, Unilever Plc remained resilient in the face of the negatives that pervaded the business environment during the year. The company achieved whooping 131.9 per cent increase in profit before tax to N4.11 billion from N1.77 billion in 2015. This is despite the increase in cost of raw material and consumables which gulped N36.68 billion from the company’s revenue for the period, an 28 per cent increase compared to N28.64 billion in 2015. The company’s total cost of sales rose by 22.9 per cent to N49.48 billion as against N38.17 billion in 2015.

Local sourcing of raw materials, the way out – Operators

According to capital markets operators, CMOs, most of the manufacturing inputs used by manufacturers in the country, including raw materials are sourced abroad. They stated that there is need for them to develop alternative means of sourcing for their raw material, rather than depending majorly on importation.

“The main reason for the high cost of raw materials can be attributed to the exchange rate”, said Charles Fakrogha, Chief Relation Officer, Foresight Securities & Investment Limited.

He said: “The results of the company would hardly improve except they device a means of sourcing for their raw materials locally. Most of the raw materials are sourced from abroad. The results of these companies will not improve except they begin to be more creative and innovative in terms of their sourcing of these raw materials locally. On the alternative these input can also be substituted.”

He opined that Cadbury Nigeria and Nestle Nigeria, as well as other companies in their sector would remain in remain in business if they are able to device means of reducing their cost and operating efficiently. It is only after that they can add value and operate profitably.

Continuing, he said: “The game changer will be an effective work force motivated to face the challenges imposed by the current harsh business environment and research into the use of local inputs to stop the dependence on imported raw materials.”

Corroborating his views, Mr. Ayodele Akinwunmi, Head, Research, FSDH Merchant Bank Limited, attributed the rise to dependence on imported raw material and other packaging items. He argued that the companies have some ‘local leverage materials that on their own have imported content.

Aggressive marketing strategy

“So, the devaluation in the value of naira which affected the devaluation of the cost of the packaging materials and other raw materials, which they buy in Nigeria here account for that increase in the cost of those things they have. Again, the rising cost of the things we had here last year affected them. So, those two factors affected the prices of the things that they produce,” he said.

On the way forward, Akinwunmi said there is need for them to source some of the manufacturing inputs hitherto imported locally while engaging in aggressive marketing strategy.

He said: “For them to remain very much more efficient, they should continue to look at local sources of raw materials. They should continue to engage in backward integration. Are there any of their products that they are importing at the moment that they can source locally in order to help them conserve some foreign exchange.

“So, what they need to do is to determine how they will remain very efficient in terms of cost cutting, engage in more aggressive marketing to ensure they continue to price their products, while trying cut some cost. As the economy continues to improve, which we think will improve this year, they will be able to sell more, people will have more money, people will go back to their jobs and buy their products because they are selling food.

Is the CEO/Founder of Investors King Limited. A proven foreign exchange research analyst and a published author on Yahoo Finance, Businessinsider, Nasdaq, Entrepreneur.com, Investorplace, and many more. He has over two decades of experience in global financial markets.

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Crude Oil

Oil Prices Continue to Slide: Drops Over 1% Amid Surging U.S. Stockpiles

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Crude Oil

Amidst growing concerns over surging U.S. stockpiles and indications of static output policies from major oil-producing nations, oil prices declined for a second consecutive day by 1% on Wednesday.

Brent crude oil, against which the Nigerian oil price is measured, shed 97 cents or 1.12% to $85.28 per barrel.

Similarly, U.S. West Texas Intermediate (WTI) crude slumped by 93 cents or a 1.14% fall to close at $80.69.

The recent downtrend in oil prices comes after they reached their highest level since October last week.

However, ongoing concerns regarding burgeoning U.S. crude inventories and uncertainties surrounding potential inaction by the OPEC+ group in their forthcoming technical meeting have exacerbated the downward momentum.

Market analysts attribute the decline to expectations of minimal adjustments to oil output policies by the Organization of the Petroleum Exporting Countries (OPEC) and its allies, known collectively as OPEC+, until a full ministerial meeting scheduled for June.

In addition to concerns about excess supply, the market’s attention is also focused on the impending release of official government data on U.S. crude inventories, scheduled for Wednesday at 10:30 a.m. EDT (1430 GMT).

Analysts are keenly observing OPEC members for any signals of deviation from their production quotas, suggesting further volatility may lie ahead in the oil market.

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Energy

Nigeria Targets $5bn Investments in Oil and Gas Sector, Says Government

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Crude Oil - Investors King

Nigeria is setting its sights on attracting $5 billion worth of investments in its oil and gas sector, according to statements made by government officials during an oil and gas sector retreat in Abuja.

During the retreat organized by the Federal Ministry of Petroleum Resources, Minister of State for Petroleum Resources (Oil), Heineken Lokpobiri, explained the importance of ramping up crude oil production and creating an environment conducive to attracting investments.

He highlighted the need to work closely with agencies like the Nigerian National Petroleum Company Limited (NNPCL) to achieve these goals.

Lokpobiri acknowledged the challenges posed by issues such as insecurity and pipeline vandalism but expressed confidence in the government’s ability to tackle them effectively.

He stressed the necessity of a globally competitive regulatory framework to encourage investment in the sector.

The minister’s remarks were echoed by Mele Kyari, the Group Chief Executive Officer of NNPCL, who spoke at the 2024 Strategic Women in Energy, Oil, and Gas Leadership Summit.

Kyari stressed the critical role of energy in driving economic growth and development and explained that Nigeria still faces challenges in providing stable electricity to its citizens.

Kyari outlined NNPCL’s vision for the future, which includes increasing crude oil production, expanding refining capacity, and growing the company’s retail network.

He highlighted the importance of leveraging Nigeria’s vast gas resources and optimizing dividend payouts to shareholders.

Overall, the government’s commitment to attracting $5 billion in investments reflects its determination to revitalize the oil and gas sector and drive economic growth in Nigeria.

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Commodities

Palm Oil Rebounds on Upbeat Malaysian Exports Amid Indonesian Supply Concerns

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Palm Oil - Investors King

Palm oil prices rebounded from a two-day decline on reports that Malaysian exports will be robust this month despite concerns over potential supply disruptions from Indonesia, the world’s largest palm oil exporter.

The market saw a significant surge as Malaysian export figures for the current month painted a promising picture.

Senior trader David Ng from IcebergX Sdn. in Kuala Lumpur attributed the morning’s gains to Malaysia’s strong export performance, with shipments climbing by a notable 14% during March 1-25 compared to the previous month.

Increased demand from key regions like Africa, India, and the Middle East contributed to this impressive growth, as reported by Intertek Testing Services.

However, amidst this positivity, investors are closely monitoring developments in Indonesia. The Indonesian government’s contemplation of revising its domestic market obligation policy, potentially linking it to production rather than exports, has stirred market concerns.

Edy Priyono, a deputy at the presidential staff office in Jakarta, indicated that this proposed shift aims to mitigate vulnerability to fluctuations in export demand.

Yet, it could potentially constrain supply availability from Indonesia in the future to stabilize domestic prices.

This uncertainty surrounding Indonesian policies has added a layer of complexity to palm oil market dynamics, prompting investors to react cautiously despite Malaysia’s promising export performance.

The prospect of Indonesian supply disruptions underscores the delicacy of global palm oil supply chains and their susceptibility to geopolitical and regulatory factors.

As the market navigates these developments, stakeholders remain attentive to both export data from Malaysia and policy shifts in Indonesia, recognizing their significant impact on palm oil prices and market stability.

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