If you are an investor in the consumer goods industry in Nigeria, you probably have every reason to be worried as a spike in the global price of sugar at the international market is about to undermine the profits of these firms.
The supply squeeze was caused by heavy rains disrupting harvest in world biggest producers such as Thailand, India and Brazil, an uncertainty that has put the market in an uptrend.
Raw sugar has jumped 24 percent this year on ICE Futures U.S. in New York. Prices on Monday touched 19.42 cents a pound, the highest for a most-active futures contract since October 2013.
Because Nigeria also relies on importation of sugar to meet its increasing local consumption, importers and refiners of the commodity might have to pay more.
The ripple effect is that consumer goods firms will buy sugar, which is a raw material component in manufacture of goods, at a high price from refiners.
The aforementioned systematic risks will spike the cost of production of beverage producers while suppressing margins.
“Spike in the global price of sugar will feed directly into the input cost of local sugar refiners, forcing margins to compress if it cannot be passed-through to final consumers,” said Abiodun Karipe, analyst with Elixir Investment Partners Limited.
“Consumer will probably have to consume less of the products or rotate into cheaper substitutes where possible,” said Karipe.
Recent earnings release for some these firms show input costs are on the upward swing.
In the first three months through March 2016, Dangote Sugar Refinery (DSR), the largest producer of the sweetener by market value, saw cost of sales increase by 52.09 percent to N25.84 billion from N17.0 billion in March 2015.
Nigeria Breweries, the county’s largest brewer, had cost of sales soar 11.85 percent to N40.27 billion in the period under review as against N36.0 billion the previous year.
For the quarter ended December 2015, 7 Up Bottling Company’s cost of sales were up 10.13 percent to N14.47 percent compared with N13.14 billion in 2014.
The cumulative cost of sales ratio of the three firms increased to 61.60 percent in the period under review from 57.96 percent the previous year.
This means they are spending more to produce each of products. We in Nairametrics believe the volatility in the price of commodities have negative on imports.
This is because the soaring global price of sugar will make sugar refiners demand more dollars. There will be pressure on FX.
For an economy with rising inflation, a jump in global price of sugar will translate into another round of imported inflation.