Low demand, rising energy costs, insecurity forcing manufacturers to cut production

May 20, 2022/CSL Research

Based on a Businessday report, low demand and other challenges, including rising energy costs, are forcing manufacturers in Nigeria to reduce production while some are shutting down operations temporarily. Officials of the Manufacturers Association of Nigeria (MAN) noted the decline in manufacturing in Lagos and Ogun states, two states that attract many investors. According to Frank Onyebu, Chairman of MAN, Apapa branch, the manufacturing sector is on the brink of collapse as many manufacturers are struggling with rising energy costs, widening supply gap and increased tax burden.

In the wake of the pandemic, manufacturing activities within the country were severely impacted as the lockdown coupled with existing structural bottlenecks forced many businesses out of operations. Several companies saw demand for their goods plummet on the back of movement restrictions, and consumer behaviour turned towards the search for essential items. However, since the reopening of the economy, we believe gains from exports via open borders and increased credit supply to manufacturing businesses cut the sector some slack from the harsh effects of the pandemic. The Manufacturing sector’s real GDP turned positive at a rate of 3.4% y/y in Q1 2021 following three consecutive quarters of negative growth since the last positive growth in Q1 2020 (0.4% y/y). The manufacturing sector recorded a GDP growth of 2.28% in the fourth quarter of 2021.

However, the low purchasing power of consumers due to increasing inflation continues to affect demand and the recent increase in energy costs has significantly increased the costs of production. Many manufacturers are not encouraged to produce as the demand for their products has been very low especially when they are non-essentials. Energy is a major cost component in the manufacturing process, and currently, some manufacturers cannot keep up with the rise in the prices of gas and diesel which are used to supplement the poor electricity supply from the grid. Again, the availability of forex and access to raw materials remain major problems for many manufacturers who cannot easily access inputs abroad due to forex shortage, congested ports and rising insecurity.

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