Food and beverage makers in Nigeria have a 2017 financial year to look forward to as the price of raw sugar in the international markets is expected to stay high next year.
The price of sugar is already up by more than 200% this year in Nigeria, eating deep into the profit margins of companies operating in the sector.
The third quarter GDP figures released by the National Bureau of Statistics showed the sector contracted by 5.75% in the three months to September.
This will add to the woes of beverage producers already hard hit by currency volatility, rising costs and weak consumer spending.
Weather problems caused by El Nino spurred drought across farms in the world’s largest producer of the commodity, Brazil.
In India, the second highest sugar grower globally, output for the 2016 and 2017 harvest could drop as much as 8.4 percent after scant rains, according to the country’s industry group.
“Raw sugar prices are expected to remain at elevated levels for most of 2017,” said Uwadiae Osadiaye, equity research analyst with FBN Quest, in an emailed note to BusinessDay.
The sweetener has soared 51 percent this year globally, the biggest gain among the 22 components of the Bloomberg Commodity Index.
Prices touched 19.38 cents a pound on Nov. 22, the highest since July 2012.
The effects of the aforementioned systematic risk has shown in the figures of Dangote Sugar Refineries, the largest producer of the sweetener in Nigeria, as rising raw material costs along with volatility in currency dented bottom lines.
Dangote Sugar recorded an 8.83 percent drop in net income to N11.01 billion in the nine months through September, thanks to a 77.35 percent rise in cost of sales as the company imports all of its raw sugar, which accounts for around 70 percent of production costs.
Experts say Dangote Sugar may pass on higher costs to beverage producers in the form of higher price and this may spiral production costs.
However, analysts across board have also concurred that another on-going threat to beverage producers is the possibility of a further devaluation of the currency and a dearth of foreign exchange.
“For beverage makers in Nigeria, the major determinant still remains the direction of Nigeria’s foreign exchange policy. Sustained dollar inaccessibility and possibility of further naira depreciation continues to create headwinds,” said Pabina Yinkere, Head Research Division, Vetiva Capital Management Limited.
“Large companies like Nigerian Breweries (NB) still have an advantage, given that they source sizeable portions of raw materials locally. We also note that NB was able to access about $11 million dollars at CBN’s last FX intervention. All in all, cost performance remains tied to the FX situation,” said Yinkere.
Seven Up Nigeria Plc and Cadbury Nigeria Plc recorded a loss in the nine months through September, while Nigerian Breweries and Guinness Nigeria had profit drop on the back of rising costs and huge foreign exchange losses.
The decision of the Central Bank to peg the currency at N197-N199 for 15 months spurred dollar scarcity because companies were unable to import raw materials and machinery to meet production.
While the Apex bank has adopted a flexible exchange rate to allow the naira flow freely and ease liquidity, consumer goods firms still groan of dollar shortages as they are forced to buy hard currency at the black market rate.
Inflation for the month of October jumped to 18.30 percent, the highest in 11 in years, which means consumer will have less money in their pockets to buy consumer goods.
Nigerian firms have embarked on aggressive expansion with a view to ensuring that the country is self-sufficient in sugar production by 2020 while creating jobs for the country’s teeming young population.
Dangote Sugar Master Plan was to ensure five large sugar factories, 150,000 Ha of land under cultivation, 1.5 to 2.0 million MT/PA of refined sugar from locally grown sugarcane per annual and to generate over 100,000 jobs among others, according to the company’s website. The plans are yet to boost local production.
BALA AUGIE
