"How manufacturing firms are coping with high energy costs"

" \n How manufacturing firms are coping with high energy costs \n \n\n \n As a sector that is at the heart of productivity, employment, and domestic demand and supply, manufacturing is the baseline of any economy. Manufacturing firms in Nigeria are major energy consumers. \n \n\n \n Energy costs vary for manufacturers who operate across a range of sectors, namely, industrial and consumer goods, technology, media, and telecommunication, healthcare & pharmaceuticals, power & utilities, financial services, agriculture as well as oil & gas. \n \n\n \n It\u2019s important for the government to come up with a working plan for Nigeria\u2019s manufacturing sector, so as to encourage growth. In 2019, the Manufacturing Association of Nigeria (MAN) said that it needs about 2,500 Megawatts to meet its needs. \n \n\n \n Steady growth from 2017 to 2022 \n \n\n \n Data from the National Bureau of Statistics reveal that Nigeria\u2019s manufacturing sector grew by 5.89% year-on-year in real terms in Q1 2022, an increase of 3.61% points from the preceding quarter, which recorded a growth rate of 2.28%. In 2021, manufacturing output was at $64.40 billion, a 17.61% increase from 2020 \n \n\n \n As the years go by and the population increases, there is more demand for goods. That is partly the reason for recorded growth in Nigeria\u2019s manufacturing sector. \n \n\n \n There are two main drivers of growth in the manufacturing sector \u2013 mass urbanization and a youthful population. \n \n\n \n Sources at the Manufacturers Association of Nigeria (MAN) told Nairametrics that growth in the manufacturing sector can be attributed to increasing demand. This demand will also increase production and energy costs are a big part of production. \n \n\n \n In order to meet production demand, Nigerian manufacturers have to turn to alternative power sources like diesel generators and inverters. The Manufacturers Association of Nigeria, in its H2 2021 report, said expenditure on alternative energy sources for the production of electricity for its operations hit N45.036 billion. \n \n\n \n Heavy energy costs at Flour Mills Nigeria (FMN) typifies the burden \n \n\n \n The greatest challenge facing Nigerian manufacturers is power supply. In the absence of reliable power supply, most manufacturing firms rely on diesel generators to run their businesses. This impacts production and often leads to higher costs for the end consumer. \n \n\n \n For example, Flour Mills Nigeria, Nigeria\u2019s oldest and largest food and agro manufacturing firm, reportedly relies on a combination of a captive power plant as well as diesel generators and on-grid power to meet production targets. \n \n\n \n Sources told Nairametrics that currently, a single power plant at FMN can consume up to 2100 megawatts which is 2,100,000 kilowatts. FMN uses about N45 per kilowatt for natural gas cost per kW, N65 per kilowatt for on grid power and N175 per kilowatt for diesel generators. \n \n\n \n In a month, natural gas-fired power supply takes the highest consumption rate at 1,092,000 kilowatts (55%). Cost per kW of gas is 45 multiplied by N1,092,000 = N49,140,000. \n \n\n \n In a month, diesel power supply amounts to 630,000 kilowatts (30%). Cost per kW of diesel is 175 multiplied by N630,000= N110,250,000. \n \n\n \n In a month, on-grid power supply amounts to N315,000 (15%). Cost per kW of on-grid supply is N65 multiplied by N315,000 = N20,475,000. \n \n\n \n Total monthly energy costs using current energy rates are N179,865,000. \n \n\n \n According to sources, the energy costs in FMN and other manufacturing companies across the country are higher now than they were before, due to the fact that there is increased production to meet growing demand as well as associated volatility in fuel prices and the Nigerian Naira. \n \n\n \n Also, MAN had stated that high energy costs are hampering progress in the sector. At the end of the day, Nigerians are paying the price for higher energy costs because they pay more for goods. \n \n\n \n Pain of production suspension \n \n\n \n The former director general of Lagos Chamber of Commerce and Industry (LCCI), Dr. Muda Yusuf told Nairametrics that some manufacturers have been forced to close shop after they could no longer cope with high energy costs. He said manufacturing processes differ and some are energy-intensive, so, they face more challenges. \n \n\n \n \u201cEven those who are dependent on natural gas plants are finding it difficult to keep up with the rising costs of gas on a global level. All these challenges affect capacity utilization and the capacity to retain staff,\u201d he says. \n \n\n \n Coping mechanisms \n \n\n \n There is a range of reasons why Nigerian manufacturing firms are still able to function, despite high energy costs. \n \n\n \n Shrinkflation \n \n\n \n Some reduce the size or volume of their products to effectively produce enough goods for customers in a phenomenon called Shrinkflation. Shrinkflation happens when consumer products get smaller in weight, size or quantity while their prices stay the same or even increase. It is a global phenomenon that explains manufacturers coping mechanism with surging energy costs. Nairametrics reported on the phenomenon here . \n \n\n \n According to CNB, the trend is taking hold now as companies face higher prices for gas and ingredients, as well as supply chain constraints , according to Emily Moquin, food and beverage analyst at Morning Consult. \n \n\n \n Cutting operating costs \n \n\n \n Others cut down on operational costs by either changing their suppliers or getting involved in active recycling of waste products as is the case with Eden Moringa, an Abuja-based manufacturing company. \n \n\n \n In a phone interview with Nairametrics, the managing director, Eden Moringa, Dr Ashimashiga Michael said his manufacturing business operates for eight hours on a daily basis. According to him, for six to seven hours, the business relies on a diesel generator to function. \n \n\n \n \u201cAt our factory, we make use of industrial meters for on-grid power, yet we spend way more on diesel generators. We spend over N300,000 to N400,000 monthly on diesel purchases to run the business. Diesel now costs N850 per liter and we have to buy on a daily basis, to keep the business running. \n \n\n \n Dr. Michael, who is also the president, Moringa Farmers and Manufacturers Association of Nigeria, told Nairametrics that in the case of Eden Moringa, the foundation has already been laid when it comes to purchase of raw materials used in the production process, so operation costs are considerably lower than they could be. \n \n\n \n A manager at armoured vehicle manufacturer, Proforce Limited told Nairametrics that the company spends about N36mn monthly on power supply bills from power holding company of Nigeria (PHCN) and diesel generators. He went further to say that the high energy costs is affecting productivity at the company. \n \n\n \n Earning in USD \n \n\n \n Some manufacturing firms are able to stay afloat because they earn in US Dollars, as opposed to earning in a volatile Naira. Dave Ofomata, the chief executive officer at Lagos-based DTO Industries, told Nairametrics that high energy costs affect production, running costs, and profits. \n \n\n \n \u201cBut we still manage to stay afloat because our products are export products so we get paid in US Dollars,\u201d he remarked. \n \n\n \n DTO Industries, which manufactures copper, aluminum, and lead ingots, currently spends N16M monthly to run their factory diesel engine generator as opposed to the N6M monthly that was spent for the same purpose in the first quarter of the year. \n \n\n \n \u201cWe are still using diesel generators to power our plants but with the high cost of diesel which seems like the new normal, we are currently looking at other cheaper and reliable sources of generating power, most likely independent gas plants,\u201d he says. \n \n\n \n Strategizing cheaper alternatives \n \n\n \n Dr. Muda Yusuf, is of the opinion that some manufacturing companies could look at all energy sources available to them and strategize toward utilizing the cheapest energy source alternatives. According to him, manufacturers need to learn to strategize around the situation. \n \n\n \n But, for how long? \n \n\n \n Dr. Yusuf told Nairametrics that manufacturers have been complaining about high energy costs due to the unreliability of power supply in the country. \n \n\n \n \u201cManufacturers are dealing with many instances of load shedding, expensive diesel prices, which have gone up to 200% or more over the last one year,\u201d he says. \n \n\n \n Dr Yusuf tried to draw a connection between these energy costs and their effect on sales and profits. For him, prices of manufactured goods will increase affecting sales and some of the time, manufacturers have to bear costs, which erode profits. \n \n\n \n Increased products prices \n \n\n \n Chemicals manufacturer and founder, MacJames Global Resources, Engr. Chinenye Justin Nwaogwugwu told Nairametrics that his company spends up to N400,000 monthly to power petrol and diesel generators for production at his Rivers State-based factory. \n \n\n \n \u201cThe costs we incur, running our production, have increased the unit production costs for our products, and this has led to an increase in selling prices,\u201d says Nwaogwugwu. \n \n\n \n Likely solutions \n \n\n \n Nigerians need to put pressure on the government to fix the challenges in the power sector, otherwise many manufacturers will remain unproductive. Less productivity breeds products smuggling and the government needs to take necessary steps to bridge power supply gaps in the country. \n \n\n \n Dr. Yusuf told Nairametrics that the government should look at setting up industrial parks or estates for manufacturers, where they have access to uninterrupted power supply as long as they have the capacity to pay for the power they utilize. \n \n\n \n What you should know \n \n\n \n Nairametrics earlier reported that some members of the Manufacturers Association of Nigeria had lamented over some challenges facing manufacturing firms in the country. These include \u2013 poor electricity supply, high cost of diesel, and raw materials. A year later, these challenges still plague Nigerian manufacturers. \n "

"How manufacturing firms are coping with high energy costs"

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